While not intending (I am sure) to be a pyramid scheme (artificial value from short term demand) this is how it will/has inevitably turned out. The concepts underpinning Bitcoin however have a future - as long as the mining is done where wealth is accumulated and not on a GPU.
I think the term “speculative bubble” better describes value being primarily driven by short-term demand. A pyramid scheme is described as: A non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public.
Now, if you needed to pay $100 to become a Bitcoin miner and you received $50 from every other person you recruit to mine Bitcoins, this would be a pyramid scheme.
All a currency really needs to be valuable are two people who have faith in it and who have resources they want to trade with each other.
Also for the record the only reason backing is important at all is because backing means there's a finite amount of currency that can be created. Bitcoin has, in theory, an equally valid limiting factor
Not true. They have the backing of their government's tax payers. Backing doesn't need to be a hard asset like gold, it can merely be the full faith and credit of said government.
> Also for the record the only reason backing is important at all is because backing means there's a finite amount of currency that can be created.
Again, not true; backing is important because you want to know your money is safe, not because it's impossible or difficult to inflate.
This is why a government is so tied to its currency. In some sense it isn't a true cause and effect relationship, both the stability of a government and the stability of its currency is tied to the same third factor, its credibility.
"All a currency really needs to be valuable are two people who have faith in it"
Which is an equivocation game, in that "have faith in it" must itself be motivated by something at least locally rational or it won't work. I have faith in the ability of a dollar to buy off the men-with-guns who will come and take all my stuff and ruin my life if I don't pay my taxes.
All government fiat currencies are thus in fact backed by something real. I don't entirely disagree with the BitCoin community that that is a more tenuous backing than one might abstractly like, but I do not see anything in practice that would be better; value stores are intrinsically ephemeral and there is nothing you can do about it.
The reason why BitCoin is crashing is that it was built on the false premise that currencies have no backing, so we might as well create a cryptocurrency with no backing. But that's false. BitCoin is actually special in having no backing of any kind, and that is why failure is and will continue to be inevitable. The whole thing was built on a false foundation.
I've considered a strategy of buying gold post-collapse on the grounds that on the 30-year business cycle, gold will probably be spiking again in the next financial crisis at right about the time I'd be retiring, but that's 100% pure speculation, not buying for "intrinsic" value... but then, I scare quote the term since there really is no such thing.
I also think investing in gold in the case of total collapse is a bit bizarre, because in the event society totally collapses, the only gold that will be worth anything is the stuff in your physical possession, not numbers in your bank account, which the government trivially confiscated (shortly before it discovered that doesn't prevent collapse either, because the government's problem was never having enough numbers in computers). (They can confiscate physical gold too, of course, it's just not trivial.) I know that's not the motivation of every gold bug, though.
Currency at its most basic level is a representation of the value generated by the society it is used in. So the number of U.S. dollars represents the entire value of what U.S. citizens produce at any given time.
What makes commodities valuable as currency is they are finite. There's only so much Gold, Silver, and Bitcoins in the world. Since all these commodities can be used as currencies (i.e. they can be converted to paper currency) they represent value beyond just its practicality because it stays consistent as the amount of each fiat currency available grows.
So Gold goes up in value because it isn't really going up in value. Everything else is going down.
That's not even close to correct under any theory of economics, I don't even know where to start explaining that.
"What makes commodities valuable as currency is they are finite."
No, that just means they happen to exist in the real universe, in which everything is finite, which is hardly a way of distinguishing between "currency" and "not currency" (in information theory terms, that has no information in it). What makes currencies valuable, and what makes things valuable in general, is that people want them. People want the government not to smash their doors down and haul them away and put them in jail, or freeze their assets, etc. The rest of the value of a dollar recursively emanates out from that. There's a value to having a dollar beyond just the goods and services that can be obtained, it prevents Uncle Sam from destroying you. There's no value to a BitCoin; the base case of BitCoin is "zero", unlike a dollar or any other government fiat currency, unlike gold (which has industrial and decorative uses which may not stay constant but won't drop to zero for a long time), unlike anything else called a "currency". Currencies aren't arbitrary numbers.
(Not being jailed/fined/killed by something may seem like a bizarre base for a currency if you think about it, and I wouldn't disagree. I do rather wish people understood the gravity of treating "government" like a silver bullet and just firing it every which way to solve every problem, especially when turning everything into a criminal law offense. However genteel we've made it over the centuries, it's still pointing guns at people, and I'd prefer to reserve that for truly important things.)
Gold is still valuable as a medium of exchange largely due to historical reasons but the problems of moving gold, storing gold and using gold for very small transactions outweigh its benefits for anything other than a store of value, gold is simply too crippled to be used as a currency.
Bitcoin aims to fill that gap by having similar properties to other successful stores of value, (durability, reasonable finiteness) along with medium of exchange properties like fungibility, but at the same time being digital and thus adding properties like near instant transfers (on a global scale) and near infinite divisibility.
Its not certain if Bitcoin will be successful, something better might turn up to replace it, but IMO a purely digital currency definitely has a future.
So, how about if someone would get a farm of computers mining bitcoins, at a rate where the bitcoins pay for the electricity etc, but then they also rent out this computing power for anyone to use for whatever purpose (like Amazon), but for this accept payment only in bitcoins, being the exact amount of bitcoin that would have been mined otherwise with the computing power rented out.
Would that work?
Then you back it with something else of value, namely computing power, but you only accept bitcoin as payment.
Just a thought, though.
There's at least two major problems with your particular proposed backing: Computation power isn't actually worth that much, and the value of a given amount of computation power is sinking fast, and will continue to do so for the forseeable future. This creates practical problems in providing enough backing to power an economy. And a couple of "bonus problems": Allowing people to perform arbitrary computations on your hardware can have certain legal problems, and the process of solving this problem may raise nontrivial overhead. Backing your currency with a service rather than a good has interesting implications in a "run" situation because you've added an unavoidable temporal component to the process of cashing out the currency, which is the sort of thing you could probably squeeze a PhD thesis out of describing the precise effects of that, but I doubt they're very good. But at least it would provide a non-zero backstop to the currency, which would be a start.
(Interestingly, if we ever hit a final equilibrium on the price of computational power, note my two major objections go away. While some practical problems remain, one could imagine the rest could be worked out. Could a computation-backed BitCoin variant be what powers Economy 2.0 in Stross' Accelerando?)
But what happens if you do business entirely with an unofficial currency like BitCoin, do you have to pay taxes based on some arbitrarily converted USD value? Or can you escape taxes altogether?
When you win A New Car! on the Price is Right, you better believe the IRS and all relevant local tax municipalities express no confusion on how to tax you for it. BitCoin would not be particularly different. Without a rigid wall completely separating the BitCoin economy from the greater global economy (in which the USD is only one player), the greater global economy will tend to efficiently price a BitCoin. ("Efficiently price" is a technical term, what it means in this case is that the conversion rate in some sense has a real existence and isn't just a polite fiction, though there's a couple of simple logical steps betwixt the raw definition and that conclusion.)
There is basically no escape from taxes, other than any that may be explicitly laid out in tax law.
http://www.wolframalpha.com/input/?i=price+gold
A graph that looks like that is nature's danger siren. As they say in prospectuses, "past performance does not guarantee future results."
http://blog.thomsonreuters.com/index.php/graphic-of-the-day-...
But you're right, not as stable as the US dollar. Still stable enough that people buy it as a store of value though.
Not that it really matters. Right now, people aren't buying it because it's stable. Quite the opposite: People are buying it because the price has been increasing rapidly, and this world is sadly full of individuals who confuse what a thing costs with what a thing is worth, and who have neither the imagination to contemplate the possibility that whatever is happening right now might not keep happening indefinitely, nor the attention span to remember just how quickly and radically it can fail to keep happening indefinitely.
Consider this: just a few short years ago, people were arguing that real estate was a very sound investment. They did so on the grounds that the price of real estate had been increasing rapidly for years, and that everyone else was buying it too.
- no transaction fees you would normally pay to an intermediary
- works internationally, anywhere the Internet is, no exchange rates for cross-country transactions
- anonymizable
- cryptographically ensured trust (solved the Byzantine Generals problem)
All these things can create demand, not too dissimilar from the way gold's luster does, or the Dollar's reserve currency / oil currency / US tax currency status does.
Currencies fluctuate, BTC is no exception. But rumors of its death due to total lack of value are exaggerated.
Gold or dollar are not supported by anything but people's desire to have them. Well, gold is also limited, at least on this planet.
Bitcoins have more value to me than gold. It's digital (no need to store a brick of gold in a safe), it's almost anonymous (very hard to track to a real person), transactions are free, it's limited in quantity (like gold).
How is a bitcoin different from a Dollar? A Dollar is a piece of paper denoted with an acceptable value. Bitocins are mined on a GPU, Dollars are printed on paper.
You cannot guarantee that dollar is indeed backed by a piece of a golden bar, since it is very much not the case.
Legal tender is, of course, a fluid concept. If the Fishdollar becomes legal tender in a country with a microscopic economy consisting of two people, it's not very useful because you might not be able to cash out your collection of Fishdollars: The citizens might not have anything that they'd like to trade for Fishdollars. What you really want in a currency is an issuer which has a really big economy with lots of money moving around. That's one reason why everyone loves US Dollars.
If tomorrow the US economy flops, US Dollars plummet in value. In a fictitious world where government-controlled money lost all value, bitcoin is the alternative. And sure, bitcoin has yet to prove significant adoption.
But please don't preach that bitcoins are useless just because they're 'mined on GPUs'.
The USD dollar is not going to plummet because the economy "flops". (We've tried that.) In the end, what we consider a "flop" is really just a very small adjustment in growth rates, generally temporary. It's painful, but it has relatively little effect on overall economic productivity.
At the end of the day, people have to pay taxes in USD. They have to pay their rent or mortgage in USD. They're only going to be interested in bitcoin if they can dependably convert it back into USD at a moment's notice, and there isn't large amounts of volatility in the exchange rate. That only happens if you've linked the value of the currencies.
Otherwise, you're asking people to do currency speculation, which not only isn't advisable, it generally isn't possible, since they have an ongoing stream of income and spending to match, not a huge pool of cash that they're holding onto. There may be some short term arbitrage as prices move up or down, but it will still end up being largely neutral to them, since only a small % of their annual income will be in bitcoins at any one moment.