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Comment by martythemaniak | Hacker News Reader

My problem with BTC (and I say this as a supporter) comes from a pg essay - you make what you measure. The BTC community measures BTC/USD exchange rate so it ends up optimizing for that, but I can't understand how focusing on that is a good thing. It already produced one massive crash and we're in the middle of another one.

The actual number (BTC/USD) is mostly irrelevant, but volatility is quite bad for people who actually want to perform transactions with BTC. I hope BTC is able to get over this and continue growing.

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It already produced one massive crash and we're in the middle of another one.

Why do you believe a crash is forthcoming?

The actual number (BTC/USD) is mostly irrelevant,

Why do you believe it is irrelevant? The market capitalization is only 500 million dollars. Can you imagine operating an entire economy with only 500 million dollars? It's a proxy for adoption, although that is muddled by price speculation and so on.

but volatility is quite bad for people who actually want to perform transactions with BTC. I hope BTC is able to get over this and continue growing.

The bitcoin economy is very tiny. Google probably makes more money than the entire bitcoin economy in a year several times over. Of course, it's going to be volatile. That's because we are growing. It would be a more legit concern if that the economy is worth 100 billion dollars or a trillion dollars.

1. Because it has jumped 3x in 2 months. Either the bitcoin economy has exploded over the last 2 months or speculators are feeding the hype machine. I see no evidence for former, but plenty of the latter.

2. It is irrelevant because you can use any sub unit down to satoshis to transact. If you want to use BTC as a currency and perform transactions, the exchange rate number is irrelevant, because it doesn't matter if a widget costs 1BTC and the rate is 1 BTC/USD or if the widget costs 1 satoshi and the rate is 10,000,000 USD/BTC. If you're a currency speculator OTOH, yes the rate matters immensely. Which goes back to my point - is BTC there to provide an alternate currency and associated economy, or just an easy way to gamble?

3. You're using the terms "market capitalization" and "economy" interchangeably. The economy implies the size of goods and services produced in the BTC universe - this number is important but seems largely ignored by the BTC community (in fact, it seems to not exist). Market Cap here means # of bitcoins multiplied by the USD exchange rate. This number is closely followed by the BTC community, but is large meaningless. It has spiked 3x in two months, but what has happened to the BTC economy itself? It seems to have grown, but can anyone say definitively?

1. Then you are not looking very hard. All the numbers indicate that there is increased spending and increased economic activity: http://news.ycombinator.com/item?id=5296889

There is of course hype but the past few months do represent real growth: see [here](http://blockchain.info/charts/n-unique-addresses). Now obviously that's a very gameable graph but there is little incentive to do so (and I was trying to pick something that would remove services like SatoshiDice from the equation since that heavily skews transaction count etc.

There's the fact that the Euro is in trouble. There's the fact that provable odds gambling has been implemented (a powerful factor in the US). There's the fact that ASICs are coming out. There's the fact that it's becoming countercultural and hip to accept them (see Mega and Reddit) There's the fact that every time the price goes up more mainstream articles are exposing people to it's concepts, driving demand by more. Now it could well be bubble mark II and I DEFINITELY expect a correction: it's a volatile market. But there's certainly some massive growth underneath the massive speculation.

I could be wrong, but this looks like an ASIC fueled bubble to me.

Avalon, the first ASIC producer to market, require payment in bitcoin. I believe BFL require payment in bitcoin for orders outside of the US.

This created demand for bitcoin, which raised the price against the dollar. Others saw the rise and were encouraged to buy in or order ASICS, rinse and repeat.

As far as I know the only service that is turning over serious numbers is Silk Road. I guess you could also count Satoshi Dice, but I am sceptical about their long term future.

Due to the nature of bitcoin, it's entirely possible that the black market and wealth transfer functions of bitcoin have grown to support the current value, but the arrival of ASICS is too big of a coincidence for me.

People buy BTC to buy ASICs, but then the ASIC vendor immediately sells the BTC to cover their costs. It should have no net effect on the exchange rate.

Depends. If the buying comes before the selling, it might bootstrap the price to something positive.

1. Or – third possibility — many people have recently raised their expectation of the future value of the Bitcoin economy. If you're familiar with stock trading, this is analogous to having a high P/E ratio.

There is a lot of uncertainty here. Intelligent, rational people disagree wildly on the future of Bitcoin. There are all kinds of risks: legal, technical, and competitive.

If the exchange rate crashes, and takes a long time to recover, you'll feel justified in calling all buyers "speculators feeding the hype machine", when in actuality many of them were simply wrong, or early.

2. False dichotomy. Some people are speculating. Others are using it to exchange value. Inventions don't need teleologies.

Your concern, if I'm understanding you, is that speculators are harming Bitcoin's potential as an alternative to the current economy. I wouldn't worry about that. The exchange rate is either going to $0 or $1000+, and the behavior of the community short-term isn't going to affect that.

Obviously, I'm long Bitcoin. See this blog post from 2011: http://andrewbadr.com/log/10/bitcoins-and-why-im-buying/

I just read though your link and I hate to break it to you but bit-coins are the opposite of antonymous every account and every transaction is public. Also, from a technical standpoint it's horrible for fast transactions like a store or vending machine, so either it needs to be fixed, another layer built over it which makes it no more useful than cash, or some other digital currency is going to take over.

It is designed to be attack resistant. Having to validate transactions across many nodes in the network, and having to maintain a valid transaction history amongst the network, makes it really hard to be fraudulent. You can register as many sources as you want in wallets, and you can give away your wallet.dat, so in practice wallets are tied even less to people than IPs are.

The volatility of bitcoin prices is a huge strike against using bitcoin as a unit of account, and makes it complicated to use as a store of value, but that really doesn't matter much if you're just trying to use it as a medium of exchange.

http://en.wikipedia.org/wiki/Money#Functions

Bitcoin is still pretty new and volatile, but it is slowly but surely becoming more stable over time, in my opinion.

I haven't thought about this as much as you, but I see the recent increase in Bitcoin's value related to the recent rise of gold value - people are starting to lose faith in the USD and wanting to put their money somewhere else. Gold has been sharply increasing in value since 2001: http://i.imgur.com/PTyNacP.png

I do remember that there was a Bitcoin crash around November 2011, though, so maybe you are right that it will happen again.

> The market capitalization is only 500 million dollars.

Emphasis mine. That seems crazy high. How many million dollars would you pay for all of the existing bit coins?

(You can't pay any million dollars for all bitcoins because unknown scores of thousands have been lost or otherwise become inaccessible.)

That's somewhat of a silly question for bitcoins, since the value would change after that transaction.

For stock market valuations, though, that question is much more productive.

Arguably Bitcoin may have never been adopted at all if not for the enrichment of early adopters. As much as I dislike bubbles there is a real benefit to creating them.

It's unrealistic to expect that a thing could grow from a project on a hobbyist's computer to a major international currency without some volatility along the way.

I think Bitcoin could have been designed to be less volatile (by making the mining reward based on some closed loop), but that change would also likely enrich early adopters less which might have caused Bitcoin to never take off.

Eventually the mining reward will be almost completely be based on transactions fees. That should make for different dynamics, than mining being paid almost exclusively from new coins.

If you're "certain" that there will be a bitcoin crash, you can make money by shorting. Why don't you put your money where your mouth is?

Out of curiosity: how does one short Bitcoin?

Bitcoin Derivatives Market: https://icbit.se/

You could take a Bitcoin-denominated loan and convert the principal into another currency or commodity that you believe will outperform Bitcoin over the period of the loan.

Out of interest, are there any services offering loans of Bitcoins?

I now know that there is: https://www.bitfinex.com/

> The BTC community measures BTC/USD exchange rate so it ends up optimizing for that

First, I wouldn't call bitcoin user base community. It is like saying the dollar user community.

Secondly, it is definitely not true that everyone in the bitcoin userbase focuses on the exchange rate. There are lots of people with different and varying goals.

First, I wouldn't call bitcoin user base community. It is like saying the dollar user community.

Bitcoin users meetups, non-profit organizations dedicated to supporting bitcoin, bitcoin related community, miner consenus and voting, are not evidence of a "bitcoin userbase community"?

Please, that's because the hacker / DIY community took to it first.

Would you say investment clubs are dollar user communities?

What would you call a group of people that have banded together, all owning stock in a very specific company, trying to increase usage of that company so it can remain in business and their stock values can remain where they are or grow?

"First, I wouldn't call bitcoin user base community. It is like saying the dollar user community."

The dollar is not modeled to meet a specific philosphy or technical implementation nor does it have the same degree of novelty. There most certainly is an enthusiast community for Bitcoin.

> we're in the middle of another one.

Can you back that up somehow? It seems like we're in a rally based on the price.

That's what bubbles often look like before they pop..

How does a currency market "optimize" for an exchange rate? What does that even mean?

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