Cryptocurrencies are the tulip mania of the 21st century
devolutionreview.com
devolutionreview.com
https://en.wikipedia.org/wiki/Tulip_mania#Legal_changes
Many bubbles are caused by government actions. Our own housing bubble was fomented by numerous bad policies.
Bitcoin is not a creature of government but is actively opposed by many of them.
Tulip Mania gets referenced because it's ridiculous on its face, but what about the Dot-com Bubble or Railway Mania? [1]
Economic systems are a combination of markets and regulatory frameworks, and you can't always blame regulations when the economics say things you don't want them to. It's flatly impossible to isolate the two: the market is shaped by regulations and visa versa.
Nowhere does OP says that a Bitcoin bubble is impossible. He merely explains that it is interventionism in free markets that has historically been the root cause of many bubbles. Government intervention for which government intervention is required to correct the nefarious effect, in return begging for even more intervention, and so on... ad nauseam. There's a big difference between this thesis and the one you comment.
>Economic systems are a combination of markets and regulatory frameworks
That's a useless definition of an economic system because it grounds itself into a narrow category excluding others when instead it you want it therefore excluding others instead of being as general as possible. A better one would be simply: "an economic system is a configuration in which the five factors of production interact".
> you can't always blame regulations when the economics say things you don't want them to.
Again, that's not what OP says. He never said that free markets are precluded from doing harm. Only that government intervention is even more inefficient and harmful but in ways which are far greater to anticipate until it goes boom. Why? Because artificially changing the parameters of a complex systems creates tons of side effects, including hidden incentive feedback loops which prompts some actors to adopt behavior that are locally optimal but takes us into directions we do not want.
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should be:
That's a useless definition of an economic system because it grounds itself into a narrow category excluding others when instead you would want it to be as general as possible so as to be the common denominator between different economic schools of thoughts, or even eras.
And yet, OP just provided evidence of a case where, previously, we assumed a specific asset bubble was caused by "human nature", but in fact it looks like it was created through the government inadvertently creating risk-free speculation in options contracts for this very asset.
> If the price rose above 100 guilders, the speculator would pocket the difference as profit. If the price remained low, the speculator could void the contract for only 3½ guilders.
The Dutch government enabled risk-free speculation in tulip options contracts (formerly futures contracts). How could the price of such a contract not rise under these circumstances?
Do we know about how much Bitcoin trading is done on leverage? I suspect it's relatively low (as securities go).
This is obviously wrong: even accepting the premise of Thompson's paper, the popping of the bubble is blamed on what you've referred to but the mania (the inflated asset prices) existed for a very long time prior to that. In retrospect, the method of popping the bubble is really the least interesting part of that whole phenomenon (it's a given that those prices were going to crash) although I'm sure the people who experienced it did not feel that way.
http://www.thebubblebubble.com/wp-content/uploads/2012/05/Tu...
(I agree with your more important point that tulip mania and bitcoin are quite different)
If the "government action" in question is deregulation that allows the market to blow itself up, do you want to chalk that event up to market failure or government action?
And even without such special-purpose institutions government can cause market bubbles by nothing more than its "monetary policy" and artificially induced inflation.
I don't.
The same thing has happened with Chinese buyers driving up the price of random short domain names.
https://qz.com/581248/chinas-latest-investment-craze-is-shor...
By the way, this is a really interesting argument. I’m surprised it hasn’t be pointed out before.
Paper link: https://link.springer.com/article/10.1007%2Fs11127-006-9074-...
in these cases, bitcoin could be an example of that
https://en.wikipedia.org/wiki/MacGuffin
I don't know about cryptocurrencies in general, but ICOs seem to me to be mostly foam.
Fully agree - I don't agree however with how the most popular (which is the reason they're popular)a and how they are incentivized to transfer wealth unreasonably, wealth transferred weighted to the earlier you're an adopter. It's a global, decentralized Ponzi-like scheme. The banking sector are 'adopting' them as any large institution has a budget to try to understand something. All Fortune 1000 companies have money to play around and they'll need to be prepared for blockchain - however don't confuse that with a vote specifically for Bitcoin or Ethereum's Ether.
I've seen it likened to the Dot com bubble. Sure several groundbreaking titans of the Internet were founded during that time. They are valued as major players in the world economy. But there were many more that were inflated and the sector as a whole was inflated.
Now, if you're a savvy enough investor to be able to pick the eventual winners during a bubble, you'll come out great even after the crash. But if not, then you're just gambling. And the house will eventually win.
Yes, the hype is overwhelming but I think tulip mania is bad comparison, a better comparison would be AI winters or tech bubbles.
[0]: https://en.wikipedia.org/wiki/Bitcoin
The last time this happened with bitcoin about 4 years ago the surge only lasted a couple of months.
It rolls off the tongue though, and praise Hollywood for spreading another misconception.
Digital currencies address a real problem; government and institutional manipulation of money. Traditionally, everyone has been forced to drink from the same pond; world governments decided what the economic environment would be in any given country - Because of this, some generations or specific groups of people have been set up for failure.
If you're born in a country whose monetary policy or economic environment is working against you; cryptocurrencies provide an idealistic escape hatch; an alternative way of valuing your labour and your potential.
The traditional fiat financial system has been corrupted by an army of traders, venture capitalists, investment bankers, bureaucrats, lobbyists and corrupt politicians; their actions have damaged the public perception of fiat currencies and have been devaluing them.
Fiat currencies are no longer seen as the product of meritocracy; but as the product of luck or corruption.
Regular people are not the ones driving up the price of cryptocurrencies; they're driven up by rich people who are (perhaps inadvertently) voting against the same system which made them rich in the first place. Maybe this is what Karl Marx had in mind when he suggested that capitalism could destroy itself.
Bitcoin is not a bubble; a true bubble grows until it pops; then it stops growing. Bitcoin has popped many times in the past and has always recovered.
There is no ICO that has not raised way more money than necessary.
Then you add that most ICOs are little more than a white papers with some pedigree and you have the makings of a bubble.
Another important difference is that part of the community is self sustainable and doesn't depend on external funding.
The main problem with ICOs is that there are not many independent auditing organisations. I know only of ICOrating, but even this seems inadequate.
That is right but we are talking about a "thing" that is completely new. Future ICOs will have more due diligence, that is natural and it is unfeasible that they can continue with just a whitepaper in place. BTW, one sector in my company works specifically with ICOs and we are working with some real companies, doing and selling real products, and they plan to launch their ICOs in the next 6 months.
As with the Internet company scenario, the tulip forecast short-term is partially correct. Long-term, as with the Internet, what comes next will be far, far more valuable and globally so. Blockchain technology will touch, essentially, every person on the planet. It doesn't matter if the successful rider is Bitcoin or CoinX, just as it didn't matter if it was Sun Microsystems or Webvan or Dr Koop.com or Lycos that made the most off the potential of the Internet.
Eg if ETH starts being used for most transactions, and BTC started crashing in value would anyone feel a need to keep it?
Edit: The above is a rhetorical question.
So, if you invest in Euros in the US, and the dollar falls relative to the Euro, you owe money to the IRS — and vice verse for the Euro in Euro-countries. It’s difficult for competing currencies to gain traction when you owe money if the legal tender drops in value (relative to the competing currency).
I don't understand your point. I can understand we will have multiple crypto currencies, but if there are unlimited number of currencies, why would any of them have any value?
A. A dollar bill represents an accounting entry in a bank account. Banks are the third party that facilitate trust and the rules by which 2 actors trade. B. Dollar bills are legal tender for the payment of taxes. They are enforced by government, which is the sole legal arbiter of coercive action. Taxation requires every citizen to hold a reserve of state currency. C. Due to the specialized printing process dollar bills are, at least theoretically, hard to counterfeit. D. Ubiquity as trading mechanism, barter requires double coincidence of wants (rare) or interpersonal credit (lack of third party oversight to guarantee fair play). When holding assets, these can deprecate (or appreciate) in value, and would need to be converted in cash holdings to avoid the impracticalities of barter exchange. E. They are an convenient way of turning digital entries into tangible user objects, since they hardly take any space.
I'm sure you could keep the list going. Notice how cryptocurrencies satisfy a lot of those conditions. Also notice how bitcoin in particular fails at a number of them.
That's not the whole story though, some of these other cryptos also serve as a testbed for new concepts & improvements, differ in particular ways to better suit a specific purpose, target different markets, have different core values or are alltogether alternate technical implementations.
Each one of those nuances adds some deegree of value. As with any stock or other economic asset, their price today is not necessarily reflecting the value it has for practical use today, but rather the possibility that it will become necessary or more dominant in the future.
2) Economics. Bitcoin is deflationary. There will only ever be 21m Bitcoins. Ethereum does not have a hard cap on the max number of Ethers. Each coin has its own economics. Smart investors will understand the economics behind each coin they buy into. Otherwise you end up buying Ripple at 40 cents each thinking its a bargain...
So much so, that when trading other crypto currencies you're usually trading via BTC.
BTC holders, at least.
Commodities have value because they are useful. A pear is useful because I can eat it. A shirt is useful because I can wear it. Gold is useful because I can use it to conduct electricity or have my tooth filled.
Since gold is portable, uniform, divisible and durable, it makes a good currency too. Up until 1971, people carried around little pieces of paper (even more portable than gold) redeemable for gold as a kind of currency.
Cryptocoins are worthless. They have no value. The proponents of cryptocoins cast about the world looking for commodities with value to compare cryptocoins to and found none.
But then they came across the post-1971 dollar/euro. It is not immediately clear why these pieces of paper are being used post-1971. Seizing on this confusion, the cryptocoin advocates point to the one thing in the world they could find without obvious value and say "we're just like this - but better".
Another gulf of confusion they exploit - they tell us technical people that this has value for financial reasons we wouldn't understand as technical people. Then they go to the financial people and tell them this blockchain technology is too complex for them to understand, but it's valuable. As few people have a foot in both worlds, it's a gulf for this scam to walk into.
The market cap for Bitcoins, Ethereum, Ripple etc. is $137 billion which is absurd. Dogecoin is supposed to be worth $100 million despite its creator coming out and saying it was a joke and this valuation is absurd. Charlie Munger, Warren Buffett, Jamie Dimon all have noted how Bitcoin is, as Munger puts it, "rat poison".
I witnessed the subprime mortgage bubble in 2008, the dot-com bubble in 2000, and now we have another one. Whereas Pets.com or a suburban development had some value, albeit overinflated, the $130 billion crypto"currency" market cap is absurd. It is going to crash to near the $0 mark at some point. As Keynes noted though, markets can remain irrational longer than you and I can remain solvent.
See for instance Money by Eric Lonergan; Debt by David Graeber; Money, The Unauthorized Biography by Felix Martin; Theory Of The Monetary Circuit by Augusto Graziani; Soft Currency Economics by Warren Mossler; Creating Economic Order by Michael Hudson; Debt and Economic Renewal in the Ancient Near East by Michael Hudson.
These argue that accounting systems (and even writing, according to some) grew out of interpersonal debt/credit relations. Money then grew out of these accounting systems, as a token representation of the abstract accounting entries. In this view, money is fundamentally a kind of social contract, rather than a representation of some stored potential trade-good.
Are crypto-currencies over inflated? Yes.
We can see the path from commodity currency, to paper, to fiat was a long and messy road history makes this clear. While in all likelihood crypto may very well supplant fiat the likelihood it'll happen in 1-2 generations is slim.
Furthermore if history is a guide the replacement of Fiat by crypto will likely happen by mistake, or in such a small way few will notice.
A strong argument can be made the USD (and most the world's curreines) are backed by oil as oil may only be exchanged for USD.
Furthermore inflation tracks oil sale perfectly since the petro-dollar started.
Ignoring the price of BTC, I would bet against Bitcoin purely on technical grounds. If the transaction fee history is correct [1], then it would suggest that the economic feasibility of Bitcoin as a payment service diminishes as it scales, and, with a peak mean transaction fee of nearly $9 USD last month, the blockchain cannot even support its own current popularity.
[1] https://bitinfocharts.com/comparison/transactionfees-btc-eth...
*sigh
I'm bearish on Bitcoin yet bullish on Ethereum because of other factors besides their valuation such as roadmap, potential and usability.
Usability is also the biggest complaint of the author. It's one of the biggest factors preventing mass adoption.
- DASH (Digital Cash)
- Vertcoin
- NAVcoin
Of those, DASH is probably the most likely in my opinion to eventually challenge bitcoin or ETH.
In many ways this is worse. There is a lack of competence in executing on the single most important feature of Etherium: it's ability to home other cryptocurrency.
And without this, what exactly is the value eth adds? To me, this is an attempt to control and force the ecosystem. It's there to facilitate overvalued and underveted ICos and sidecar it as a revenue stream.
It's not there to build something sustainable, it's there to extract value. If they cared about sustainability, the lack of rigor and correcness in eth contract building tools would be seen as a crisis and it would be much closer to resolution.
[0]https://www.ethernodes.org/network/1
[1]https://www.coindesk.com/30-million-ether-reported-stolen-pa...
David Karpeles admitted at trial to running bots on Mt. Gox, and such bots were implicated in the rise of Bitcoin's price up to $1000 in 2013. Bitcoin has experienced a similar jump in value over the past year. If Mt. Gox successfully manipulated the price of Bitcoin using bots in the past, how do we know other exchanges aren't doing the exact same thing right now?
Don't get me wrong, I think there is potential value in Bitcoin as a distributed/frictionless method of money transfer, however as an asset/investment I think it's extremely risky and I'm not necessarily sure the run up to $4000 reflects its underlying value: the ecosystem is largely unregulated and as such there is a greater risk of fraudulent activity and manipulation that would not be permitted under a regulated market. Especially if the pseudonymous nature of Bitcoin transactions makes such manipulation harder to detect.
I am curious if anyone who has recently put money into Bitcoin has thought about this, and if so, what made them to decide to invest anyway? Am I just being paranoid?
One thing to note is that the vast majority of "mainstream" interest and institutional investment came about because of the surge in pricing caused by the willy bot[0]. People saw this and interpreted it as broad-based interest and demand for btc, while the actual situation was more about a French Jewish Japanophile, deploying some shenanigans in an unregulated market trying to get the head of his embattled exchange business back above water.
So in a way the willy-bot situation has triggered all the subsequent irrational exuberance.
[0]https://willyreport.wordpress.com/2014/05/25/the-willy-repor...
It's very simple. Before 2013 MtGox was the largest Bitcoin exchange in the world with the most volume (something like 80-90% of the market—I don't remember the exact numbers). They effectively defined the price and the bot could control it.
Nowadays there are dozens/hundreds of exchanges around the world. One bot trying to increase the price on one exchange would get severely arbitraged through other exchanges, and the cheating exchange would be quickly driven into insolvency.
Also Mark Karpeles was a sole proprietor of a private company. He had free reigns and no one to answer to. It was easy for him to decide to run this fraudulent bot. The chance of the same illegal manipulation happening at very high profiles exchanges like Coinbase/GDAX or Gemini who are VC-funded and run by respectable executives is very low.
> The chance of the same illegal manipulation happening at very high profiles exchanges like Coinbase/GDAX or Gemini who are VC-funded and run by respectable executives is very low.
Yeah, I don't expect this to be occurring at US companies who presumably could be prosecuted for fraud. But what about other companies that are based in countries with less regulation (or with regulators that could be paid to look the other way)?
You seem to be confusing legitimate bots (written by traders to use an exchange's API) with the MtGox fraudulent bot (which was using fake dollars injected in the trading engine by Karpeles). These are 2 very different things. Of course legitimate bots exist, but I don't believe that any big exchange today (including Bitfinex) runs fraudulent bots capitalized with fake money.
This guy simply needs more patience. The social & economic changes that cryptocurrencies sparked are barely beginning. They will take decades to fully unfold. Just because "it" hasn't happened yet doesn't necessarily mean cryptos are worthless and will all crash to zero.
It is true, however, that there is a bubble. But there are always bubbles at various points of the development of most revolutionary technologies. And Bitcoin's bubbles are becoming tamer over time.¹ In fact they are becoming tame enough that Bitcoin's returns are sometimes beaten by blue chip stocks: in 2016 AMD went up 420% but BTC only 170%.
¹ It took 1 month to go 10× from $120 to $1200 in Nov 2013, but 1 year to go 10× from $490 to $4900 in Aug 2017.
cache:devolutionreview.com/bearish-on-bitcoin/
Now what?
I did not realize Bitcoin was actually a Plant or more specifically a flowers bulb. I have been using computers my whole life, I had no clue I could run flowers on my machine, also flowers would allow me to create value using electricity, and send value over TCP/IP without a trusted third party.
Go ahead and sell your bitcoin or whatever the fuck you want to do because your clearly too dumb to understand a protocol, or the abilities a protocol can provide.
Wait a minute Bitcoin can't be a flower, I mean it doesn't die during the winter, also my cat has never tried to eat it.
If you want a parallel to Tulip Mania, you have Beanie Babies. It was pure asset inflation for the sake of asset inflation. There was no innovation (except in markets for distribution of the asset), just wild speculation on things that were almost completely useless.
I do think cryptocurrency is in a bubble, but I see it far closer to Railway Mania or the Dot Com bubble. In both cases there is a clear cut demonstration of potential utility even pre-bubble, meaning there very likely a post-bubble future for the technology, even if the landscape changes drastically in the meantime. Railway mania in particular had plenty of failures, but it also had many companies that were viable but just overvalued, and even beyond that, there were plenty of companies that thrived post bubble.
I have my own speculations as to who will come out alive when the bubble crashes, and it certainly wont be anything tied to "smart" contracts, which has been the source of most of the ridiculous market behavior as of late (ERC20 especially). Others will survive on their merits, and I'll say this much: If it isn't low latency, low energy consumption, highly liquid, and traceable, it's as good as dead.
What are a few things that pass those criterion and hence have a chance at living in your estimation?