The Bitcoin Report 2 [pdf] | Hacker News Reader

The Bitcoin Report 2 [pdf]

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75 pointscalciphus94 comments

"There is no capital nor wealth creation to speak of; only as much money as was put in. While somebody may buy a bitcoin for $1 and then sell it for $200, no value was added in this process, so it is simply a transfer of wealth. The people who profit will do so by taking from those who lose.

As the deflationary feedback amplifies the desire to hoard, the exchanges will become illiquid. Eventually, buyers will give up while waiting in absurdly long queues, and demand will loosen. Soon after, things will turn pear-shaped as the world's fastest liquidation occurs. The exchange rate will fall faster than orders can be fulfilled, so that less than $2.5 billion is recovered. After all, it was never really there anyway."

Nailed it.

"As the deflationary feedback amplifies the desire to hoard, the exchanges will become illiquid."

The rest of it makes perfect sense, but why would we think this, rather than that market forces will drive prices up, and people will sell as a result, fulfilling demand?

market forces will drive prices up, and people will sell as a result, fulfilling demand?

I'm no economist, but I'm pretty sure this state of affairs is not guaranteed.

I am an economist, and I have no idea what that means. Sounds to me like confusion over two things: (i) the difference between "supply and demand" and the "quantity supplied" or "quantity demanded" and (ii) equilibrium. The circular logic is a tell tale sign. Price goes up, so people demand less, so price goes down, so people demand more... That's the whole point of equilibrium. Where does all of that net out.

I think they are trying to say that demand forces supply.

Exactly, that's a huge mistake. Shifts in demand cause shifts in supply? That's not obvious at all. The whole point is that supply and demand have different determinants, but they mutually determine quantities and prices.

If you see it going up, why would you sell? In the deflationary spiral scenario, it'll just keep on going up, so it's in your interest to hold on.

We see people selling at $100 and $200; would we expect people to not sell at $10,000?

Sure, some people will sell, the question is whether or not the amount of selling is large enough to keep the price from spiraling upward. If you predict that there will be lots of selling, then you're assuming that people aren't (on average) responding to the incentive to hold.

> The exchange rate will fall faster than orders can be fulfilled

Is that possible? In the event of a crash all buy orders will be fulfilled, ordered by price/time. The exchange rate can't move if there are no orders being executed.

Well, here's Mt. Gox today: http://bitcoinity.org/markets/mtgox/USD

And here's what happened on another exchange while Mt. Gox was down: http://bitcoinity.org/markets/btce/USD

This describes what happens in the short term, probably repeatedly. But what happens in the long term? Traders learn; they adjust with respect to risk. People will become acquainted with the volatility of the BitCoin currency and adjust their buying and selling practices as a result. People will hold onto the currency longer because they've seen it crash before and recover. The curve will flatten and become a slope. As the rate of deflation steadies and shrinks transactions will begin again. As more and more users flow into the BitCoin economy mass-sellings will have less and less effect because most people who hold the currency will not be responding to short term blips in the price - i.e., day trading. As the volume goes up the chance that a small number of people can destabilize the currency will shrink. There will still be bubbles but they will become cyclic on a longer period, happening on intervals of years as opposed to hours and days, much like in national economies.

>Traders learn; they adjust with respect to risk.

Ha ha ha ha

No. Traders learn, and then they die, and are replaced by new traders, who haven't learned.

Or perhaps the masses will never adopt a currency that requires them to become "acquainted with the volatility of the BitCoin currency and adjust their buying and selling practices as a result", especially when the current status quo offers none of these pitfalls.

Long term? People stop using bitcoin.

You theorize that the boom/bust swings will diminish in intensity until eventually bitcoin becomes stable.

Others theorize that the boom/bust cycles will grow in severity until eventually everyone just gives up on bitcoin.

So far there's very little evidence for the stability option and a lot of evidence (and economic theory) for the speculative bubble theory.

Do you have any evidence of the "market share" of bitcoin users who are in the market for purely currency reasons growing relative to that of those who are in the market for purely speculative reasons? From everything I can find out it seems as though the reverse is true.

This is exactly right. The problem is in some respects worse than stated. After the last bubble, it appears as though speculators did leave. However, every time the demand increases sharply for bitcoins, they return. After all, who could resist such a fantastic arbitrage opportunity?

I've very rarely seen something with a > 1 Billion market cap and millions of users simply disappear. (To use an unrelated example, even MySpace still exists :)

Very simply, the more users are in Bitcoin the more vendors there will be who accept BitCoin. The more goods and services can be bought in Bitcoin during the relatively smooth periods the greater the proportion of people who like to have the currency for currency purposes, because it can be used to buy goods and services. There will be 'induced traffic', a network effect - more roads into Bitcoin will pop up because there's an incentive to start an exchange (you make money off of each transaction, after all!). More roads = greater demand for more BitCoin. It is the fact that some buying power of BitCoin still exists even given the boom/bust cycles that will support the currency in the long run, and that this buying power will on average be higher on every contraction than the previous contraction. The fact that an anonymous, decentralized currency that prevents double-spending is desirable (i.e. has inherent value) to a lot of people will also support this buying power, and support the currency in the long run.

Geocities, lycos, CompuServe, Excite@Home, so many others.

Those were all companies which sold at a billion dollars or many billions of dollars and have sense been shut down or are worth a tiny fraction of that amount today.

And those are just examples from the last 20 years, we could go back to nearly countless examples of other speculative bubbles going back centuries.

If ever there were a textbook example of apples/oranges, this would be it.

The example is helpful, though. In each of those cases something very much better came along to replace it.

The same thing could very well happen with BitCoin. Someone mentioned forking BitCoin and tweaking the algorithm to remove the artificial ceiling of 21 million units, and replace it with an algorithm which monitors all the transactions taking pace and adjusts monetary policy in response to them, in order to produce a steady inflation rate. Such a currency might very well be more desirable than one with deflationary tendencies.

Bottom line - unless someone figures out a way to replace BitCoin with something better, I see no reason to believe BitCoin is going away anytime soon.

Oh, the memories seeing those names bring back.

So happy to have been there for the through the 90's.

The Zimbabwe M1 was worth $2.4 billion in 2001, and millions of users are forced to use it. (Zimbabwe professors, teachers, etc. etc.). And of course, that entire money chain is practically worthless today.

There is no guarantee that BTC will survive. Larger currencies have fallen before it.

What a false dichotomy. So people are either buying Bitcoin purely for its use as a currency or purely speculating? You're missing the forest for the trees.

Do you want to see real political and economic change in your lifetime? Campaign finance reform: not the answer. Term limits: not the answer. Voting Libertarian: waste of time. "Balance the budget": too little, too late. Political activism: occupy my asshole.

The only solution: flip societal power structures upside down, and let us geeks take the reigns.

Now, you may argue that everything is Hunky Dory like tptacky, but I'd beg to differ. We need real social and economic change, right now, to ensure our continued prosperity into the forseeable future, and we're just not getting it from Washington. Make excuses or justify a Big Brother Statist tyranny driven by propaganda and ignorance all you want, ultimately none of that shit works long term and meanwhile we have a lot less freedom.

Let's play a different game now ...

You are so full of yourself and living in a fantasy world it's sad to watch. Bitcoin isn't a revolution, you've been duped. It's just another pyramid scheme being used by those with more power, more money, more information, and fewer morals to take advantage of folks like you who just want to believe.

Do you really want to change the system? Write blogs. Write books. Start a business. Do investigative journalism. Speak at rallies. Work on a campaign. Run for mayor. Run for congress.

There are a million ways to empower yourself and others, using bitcoin isn't any of them.

Imagining that bitcoin is the answer is about as naive as imagining that hitting "like" on your facebook feed is going to magically feed some starving child somewhere.

To be fair, bitcoin has a number of interesting technical promises. The economics of bitcoin are... probably going to be bad, for many reasons.

But some decentralized digital coin in some form seems like a good idea. The concept of a transaction log that tracks your money from start to finish is also interesting.

Bitcoin will remain a pyramid scheme due to its deflationary nature. But maybe a future coin can be invented that solves the problems with bitcoin?

To be truly decentralized you need something like "digital cash", but nobody's been able to come up with a good way of implementing that, yet. Also, I'm not sure people are prepared to mix the problems of cash and electronic transactions just yet, there are some advantages to the banking system we have now, such as the ability to reverse fraudulent transactions.

I think the example from fiction, Cryptonomicon, is actually very helpful, because they understood they needed a big honking pile of gold to kick-start the legitimacy of the whole thing, if it's just free floating then it too easily becomes a pyramid scheme and you have people who just do currency exchanges but who never actually use the new currency as money. You want people to hold onto money because it's money, not because they think the money can go up in value, that's precisely what you don't want.

Unfortunately, there are now a lot of people in the bitcoin world who do what the exchange rate of bitcoins to go up, because they view bitcoin's as an investment and they still view dollars as "real money". And in most ways they aren't wrong. But they're also making it harder for anyone else to use bitcoins just as money.

>Long term? People stop using bitcoin.

Long term? People stop using Weimar Deutschmarks, Austro-Hungarian Whatevers, French Francs, shells/wampum, doubloons, US dollars ...

I think it does describe what happens in the long term. Basically, if the thing can never get off the ground in the short term, then it will never get off the ground in the long term. Every surge in popularity has the high likelihood of setting off a speculative bubble. As the rate of increase in the stock of bitcoins decelerates, this problem will only get worse.

Long term someone takes the core technical advances and detaches it from the libertarian economic* ideals and creates bitcoin ++ with a fixedish rate inflationary money supply and maybe some limits on trade volumes to limit volatility. Oh, and you don't use a fucking magic card exchange as the primary way people get into or out of your currency.

*you may or may not agree with those ideals but it probably wasn't the best idea to try a new technical solution to currency and a economic philosophy about currency/central banks at the same time)

Two quick remarks. First, there already are many virtual/digital currencies, some of which simply peg their currencies to the dollar. But nobody really cares. Why? Well, what's the point? It's just a slightly less convenient form of a dollar.

Second, we all already do use digital currency. Actual, physical currency (and deposits at the Fed) are called the monetary base or "high powered money". However, most people transact goods using debit cards, which is called "inside money". These are privately created dollars, and they change hands digitally. So, we're already there. (I'm avoiding credit cards since those are technically loans, not money).

Im general I agree with you and I'm not sure bitcoin++ will work either. But I think it has to happen and fail before the idea is really and truely dead.

I think no one cares for a large number of reasons but one of them is because you'd need to trust the people who run most of those currencies(i'm ignoring the bitcoin clones) and if you are going to trust someone, might as well trust a regulated entity like a bank.

Just look at how paypal screws people? Why trust someone else even more sketchy. However, precisely because pay pall screws people it might end up being the case that there is some market for a non centralized online payment system. But it certainly can't be deflationary and it ought to avoid rampant speculation.

I wonder what would happen if every 30 minutes the currency inflated by 100% percent. It would make sure no one ever held inflatcoin. You'd just use it as a transaction medium.

Here's the problem. You're talking about traders, but where is the capital? You can't have a financial market purely based on currency speculation. If we're going to talk about bitcoins as though it were an asset (store of value), rather than a money supple (unit of account or medium of exchange), then we need to verify which properties of an asset it possesses.

Do bitcoins provide a consumption utility stream? Do they yield dividends. What sorts of productive risk-taking do they represent? When I buy a stock, it will perform well if the risks it takes in providing mutually beneficial exchange with business and households are successful. For bitcoins, there is no systematic market risk, because there is no capital stock. Why? The same reason as always. Deflation increases the burden of debt which decreases investment, even though the economy is awash in savings.

Our national economies do not possess cycles as you describe them. Here's a good article about macroeconomic business cycles: http://noahpinionblog.blogspot.com/2013/02/is-business-cycle.... While the level of inflation fluctuates in our economy, it does so on a much smaller scale: http://en.wikipedia.org/wiki/File:US_Historical_Inflation_An.... What really jumps out from that graph is how the best economic prosperity the world has ever seen coincides with fiat currency ending the threat of deflation.

Did he? Time will tell. Every article that portends doom via deflationary measures trots out the same 'ol tired arguments and examples (great depression, hoarders, etc.) You have to admit this is new ground. There are a lot of new ideas here (i.e. divisible to 8 decimal places, de-centralized, etc.) The charts were interesting, but the headline is pure bunk. No one knows -- but one thing is for sure: this is disruptive technology. Bitcoin may not survive, but finance won't be the same hereafter.

> Every article that portends doom via deflationary measures trots out the same 'ol tired arguments and examples (great depression, hoarders, etc.) You have to admit this is new ground.

In what relevant sense to deflation and its effects is it new?

> There are a lot of new ideas here (i.e. divisible to 8 decimal places, de-centralized, etc.)

How are any of these relevant to the incentives created by deflation?

Bitcoin is an infant. Hoarders will happen, sure. We'll see what happens in the long term. Gold as a fixed medium may not be practical to slice to 8 decimal places, but then again...the central authority that is in charge of deciding that never tried. They just gave up and Keynes won. Let's see what happens.

Continuing to repeat "Bitcoin is new; Bitcoin is sudividable; Keynes bad; central bank bad" isn't actually an argument as to how any new features of Bitcoin, including its subdivisability, change any of the incentives related to deflation.

If you've got an argument, make it, but as far as I can see there's just conspiracy theories about the status quo and wishful thinking with no coherent basis for Bitcoin.

Sure, you can continue to try to discount the things I've already said, and tell the world none of it matters according to you, and yet here we are in an endless loop.

I am not discounting them, I am asking you to provide reasons to believe that they have some substance. I am interested in knowing whether there is any substantive reasoning behind the "but Bitcoin is new and different" response to deflation concerns, but from what I can tell from the responses of proponents of that position when asked for a rationale, it amounts to a bare article of faith, rather than a position with any rational support.

I'm always peeved by this reference to Keynes. This is a topic that is universally recognized by almost all economists, with the exception of a few Austrians. In fact, the main proponent of this concept was a conservative economist from the University of Chicago named Irving Fischer. Because the Great Depression was a period of absolute deflation (falling prices and falling output), this was a central concern to Keynes as well. However, it was none other than Milton Friedman, a lead figure in the resurgence of neo-liberal (libertarian) thought in the mid 20th century. In fact, Milton Friedman's most famous work (the work with Anna Schwartz), was all about how the Fed caused the double-dip in the Great depression by enforcing the gold standard and contracting the money supply. See? Friedman (a libertarian) rose to fame for his claim that the Fed destroyed too much money during the Great Depression!

Edit: One quick thing I forgot. Keynesian economics is all about the idea that, if prices are "sticky" and cannot fully adjust in real time, then that leads to drops in output. The flip side of this, which is evident in the current crisis, is downward nominal wage rigidity. The fact that prices are slow to adjust partially mitigates the threats of deflation. So if anything, Keynesians have less to worry about from deflation than other factions of macroeconomists.

It isn't entirely clear to me what you're trying to say. With respect to Friedman and the Great Depression, he drew the conclusion that the Fed a) failed to act as a lender of last resort (i.e. they could have adjusted the price of gold -- which they never tried), but more importantly b) the crisis would have never occurred, and the economy as a whole would have been better off if the Fed were never created in the first place [1].

[1] http://www.fee.org/the_freeman/detail/the-great-depression-a...

Anyway, this is all taking a left turn here. It has been fun, but there are probably better forums than HN for discussing macro-econ. Maybe I'll see you in one of the subreddits, and we can debate it in more depth there.

Looks like the title has been changed. For anyone curious it was something along the lines of "Why bitcoins will fail"

"You have to admit this is new ground."

No. It's always "different" ground, same outcome.

I don't get this argument. Bitcoin lets you do things you can't do without it. That's not zero sum, that's creating value that wasn't there before. And we are only at the beginning. Pretty much no one understands what can be done with it in the future. Smart property, oracles, etc.

Such as?

I listed two examples, not sure what you're looking for. But, this page has more: https://en.bitcoin.it/wiki/Contracts

I'm pretty sure I explained the value of use of bitcoins as a medium of exchange in footnote 2. The convenience and ability to facilitate transactions on the black/grey market might cause bitcoins to trade at a slight premium. On the other hand, volatility, concerns over hacking, exchange lag, and the threat of future government regulation may overshadow this and cause them to trade at a slight discount. I split the difference and assume that prices in the bitcoin economy adjust relative to the spot price, so that the real exchange rate is one-to-one. The problem isn't with the utility of a crypo currency in the abstract. It's that this will never come to fruition with built-in flaws like deflation, which inevitably lead to bubbles.

But you seemed to leave out an important component of valuation, unrealized capability. The protocol supports more than has been implemented.

> Nailed it

Can you point to a specific event in history where this actually occurred? Because so far all I've seen are people theorizing what will happen in this situation. Your argument would carry more weight if you backed it up.

So people haven't priced their knowledge of the limited supply of bitcoins into their bids? They're too stupid to realize growth will slow asymptotically despite this having been announced years ago and built into the protocol?

Are you the kind to suggest "hey, I know how to make money! Invest in hot dogs like, right before the 4th of July, and then sell right after!"?

>There is no capital nor wealth creation to speak of; only as much money as was put in. While somebody may buy a bitcoin for $1 and then sell it for $200, no value was added in this process, so it is simply a transfer of wealth.

So like 90%+ of what the stock market does then?

Sure, lots of the stock market is arbitrage. While bubbles form in different markets, they are all eventually followed by a correction. The problem with bitcoin is that there is no fundamental asset underlying the currency. So when there's a correction, there's no sense of where the bottom is.

The value of BTC just doubled from 60 to 120 in 40 minutes.. wtf is going on there? (looking at btce/USD)

(disclaimer: i'm not trying to hype, I expect it will come back down again shortly, it just seems weird to change that much that quickly)

Edit: yup.. back down to 80 20mins later.. can anyone tell what kind of volumes were traded in this period? ..I wonder if anyone was able to double a serious amount of money in 40 mins(!). Or how much money would have been needed to shift the price that much?? I suspect trading volumes are lower than normal due to mtGox being closed.. I really am having doubts that closing to let things 'cool down' is really going to work out (side: why should that even be a role for MtGox anyway?!).

Anyone have any thoughts on what will happen when it comes back online? Presumably a lot of people are only registered to trade with mtGox so have been prevented from buying/selling while the price has continued to fall.. it would seem to me we're either going to see a significant worsening of the crash or a recovery. ??

spits out coffee

I just went to https://btc-e.com to copy/paste the value and show you how you were wrong, and that the price has been stable at $65USD (I've been watching it for an hour) - But, when I got there - had jumped up to $115USD.

I can only imagine this must be what it was like during the Tulip Bulb Craze.

Mt Gox went back online about 80 minutes ago. So about 40 minutes before your timestamp.

The volatility is there because people are panicking, don't know what to do: buy or sell. Some think the bubble is imploding. Some believe in the long term and are buying coins on the cheap. And in between you have traders like me: I sold at $190 2 days ago. Re-bought at $70. Re-sold at $120. We are making money hand over fist... I love the volatility.

It's really low volume. Check out the crazy spreads on https://tradehill.com/

I think we'll stabilize around 100 over the next 48 hours but with crazy degrees of volatility.

Interesting statistic- Bitcoin Days Destroyed skyrocketed during this crash.

http://blockchain.info/charts/bitcoin-days-destroyed

BDD measures how many "old" coins are being moved around, so it seems likely that a lot of early adopters cashed out this time. Will be interesting to see what that means for the future of the BTC itself.

It provides some information about the dwell time of coins. It's hard to see through it and say much about just how old the coins trading are. It doesn't take all that many old coins to get to 50 million BDD (~ a weeks worth of 3 year old coins...)

My rough calculation is that there are more than 5 billion bitcoin days outstanding, so there is still plenty of room for a wild stampede.

Does it even make sense to consider Bitcoin as a separate economy containing "no real value"? I see it more as an alternative banking system, the money it contains comes from real-world value and gets converted back into real-word products; it's not a virtual currency.

It's only a separate economy to the extent that it isn't instantly being converted back into some other currency.

There is a genuine bitcoin economy, and it is centered around the trade of goods that are illegal: child porn, weapons, viruses, credit card numbers, and most important of all: illegal drugs.

The question is not whether there is potential for a non-government backed digital currency. The question is whether bitcoin will be effective in that role given the design of the currency.

If a better currency is invented that includes some kind of inflationary mechanism, perhaps the drug trade/etc will take up that currency. In that case bitcoin truly will die.

I think this is a hugely important distinction. The linked-to analysis seems to assume that BTC are bought with USD, sit around in a wallet, and then come back out as USD.

When in fact, BTC's usefulness is its frictionless-but-secure, anonymous transactional nature. Its anonymity is even stronger if you mine coins yourself (or acquire coins directly from a miner for favors or whatever).

You can probably make the case that BTC must be deflationary, in order to draw in traders/investors, who actually provide necessary market liquidity to proxy BTC as USD, backing the worth of BTC-for-goods transactions...

It's not really anonymous though, transactions are publicly recorded for all time. It's also not 100% frictionless. There are fees and though they are currently low, they are there.

I know there are transaction fees. I meant friction as--once you have BTC in a wallet, you are absolutely free to spend them as you wish. There is no way for anyone to prevent a transaction.

Bitcoin addresses are public but anonymous. But yes, you can analyze the public ledger to tie known data (publicly-posted donation addresses, etc) to try to de-anonymize someone. There are coin tumblers/mixers in place in some markets, although it's hard to tell how effective they are.

Bitcoin is not anonymous.

(http://anonymity-in-bitcoin.blogspot.co.uk/2011/07/bitcoin-i...)

(https://en.bitcoin.it/wiki/Anonymity)

What a bunch of nonsense. The report makes extreme predictions without any backup or weighting of arguments. There is no reason to believe that the network should crash.

The author has no clue about economics, so please.... (not that Ben Bernanke or Mario Draghi have, but anyway).

There will always be a use for Bitcoins. Think about other countries than you yourself are living in. Think about people who have to pay 20% for cross-border transactions.

The market is capitalized at $2.5 billion, but what does that mean in an economy with no production?

Does the author define "production" as manufacturing where the exclusive currency used (for raw materials, wages, utility bills, etc.) is bitcoin? If so then I'm not sure of the relevance.

One could make all sorts of clever but offtopic points about a fiat paper currency when viewed through the lens of a P2P currency like bitcoin. "The Canadian dollar is supposedly worth more than the USD today, but what does that mean when the Canadian network has zero nodes?" The wrongness of such a statement leaps out since fiat currencies are familiar to us. In contrast, bitcoin doesn't need a manufacturing base, but this is less obvious since P2P currency is a new idea that people (myself included) don't well understand.

No, production is not exclusive to manufacturing. It means valued-added. For example, if you bought a dvd from amazon using bitcoin (I have no idea if this is possible), then very little of what you paid would count in bitcoin GDP. All of the costs of production (warehouses, delivery, labor, servers, etc.) are done in the US economy using dollars, so that basically doesn't register as bitcoin GDP.

On the other hand, let's suppose someone is buying a bag of... something. Well, everything that got that bag to the dealer was done in some other production economy. So the only value added, that would count as a service in bitcoin GDP, would be the dealer's profits, measured in bitcoins.

To my knowledge, there are no investment projects being financed in bitcoins. If there were, then they probably just defaulted on their loans, which increased tremendously under deflation. Therefore, it's best to think of the bitcoin economy almost entirely as pure exchange, with very little value added and very little wealth created.

As for fiat currencies, why is everyone so interested in the nominal exchange rate anyway? This was a peculiarity that I noticed a while ago. In college, I went on a study abroad program to Mexico. When we arrived, we all exchanged our dollars for pesos. Everyone was carrying on about how strong the dollar was, because one dollar could buy ten pesos. But then I noticed something. I went to McDonalds, and instead of a "dollar menu", they had a "10 peso menu". Who cares how many pesos you get for a dollar? It's about how much you can buy with that dollar worth of pesos, and that's measured by the real exchange rate. I realized at that moment that purchasing power was much closer to parity than most people think, because they put so much weight on nominal rates.

A "report" not covering the greatest current use case for the currency - namely anonymously buying weed through the Internet tubes? Not saying it is a good thing, just that there's actual value creating going on. Right now.

Hi there. Actually, I did cover value of Bitcoin in use as a medium of exchange in footnote 2. Because there is no production in the bitcoin economy, or very little to be entirely accurate, the real exchange rate should basically be one. Why? Because most users of bitcoin live within very large production economies. Why would buyers pay more or sellers accept less, if they would be better of transacting in the domestic economy?

You might imagine a slight premium for bitcoins because they facilitate transactions that would be difficult in the domestic economies, such as money laundering or black market trade, but you could just as easily argue that the real exchange rate is less than one due to the relatively lower number of people to trade with, concerns regarding being hacked, and uncertainty regarding future government regulation of bitcoin. That's why I decided the most neutral approach would be to assume purchasing power parity across bitcoins. Admittedly, this assumption may not be great as speculation runs rampant and everyone runs for the exits, which would imply a heavy discount in the real exchange rate.

money laundering or black market trade

Moving money across borders is an use for Bitcoin as well. If you're living in Iran (or North Korea or Syria or Palestine) Bitcoin could very well solve your liquidity problem, in the same way the TOR network helps to solve a government-imposed-firewall issue.

How many ways are there for the people accepting the currency in country to get their hands on bitcoins?

I guess they could also act as an intermediary for people that want to send money in. Might need some deep currency reserves to play at that though.

> [...], sudden and large increases in the user base cause dramatic increases in the nominal exchange rate. This is because the money supply is exogenously fixed by the mining algorithm.

I think the reasoning here is too specific. Most currencies are only inflationary long term. If during a 10 day window a trillion euros flood into the US dollar market, I doubt the Fed will be able to respond fast enough to keep the prices fixed.

First of all, if our actual markets started to experience this kind of volatility, circuit breakers would kick in.

Second, even if they didn't the Fed could easily respond in real time. It's not as if the Fed actually, literally "prints money". They would just go onto those forex markets and sell people dollars, transferred digitally and made up out of thin air. And their servers wouldn't crash while doing it.

Edit: I should add to this that, at least to a first approximation, the Fed is not terribly concerned with the nominal exchange rate. They are charged with maintaining full employment and price stability within our own economy, while the nominal exchange rate is allowed to float against other currencies. Because have have our own production economy, there are good fundamental reasons for fluctuations in the real exchange rate that should be permitted to occur.

It appears Bitcoin's primary function, namely to perform anonymous transfers of US dollars for goods and services, is being eclipsed by speculation.

Welcome to the world of foreign currency exchange.

Background - despite the absurd name, a friend of my posted this (relatively anonymously) to Reddit last night. Unfortunately, it got downvoted into oblivion for not possessing enough cute memes.

The data shows what happens to a currency like this is very predictable, and the behaviors we're seeing (deflation, currency hoarding, stagnation of real bitcoin output) are great predictors of crashes like this.

Nice article--I like that it's concise and sticks to the data to make its point. This article last week from Forbes makes the same point with Paul Krugman's babysitter's co-op column: http://www.forbes.com/sites/pascalemmanuelgobry/2013/04/05/k...

The deflationary aspect is only important for currencies backing an economy - if you just use bitcoin for quick anonymous transactions, say dollar-->bitcoin-->purchase, then you don't care what the value is doing over time.

It is interesting to consider alternatives though - bitcoin could be the Friendster of crypto-currencies.

As an anonymizer and common middle currency for different economies, with that process, I can see the value. It could be particularly useful for making online purchases without giving buyer credentials.

> The deflationary aspect is only important for currencies backing an economy - if you just use bitcoin for quick anonymous transactions, say dollar-->bitcoin-->purchase, then you don't care what the value is doing over time.

What the value is doing over short periods of time (particularly, volatility and liquidity in BTC markets) will affect the transaction fees that will need to be associated with that kind of transaction in order for anyone not to go broke fulfilling them.

if you just use bitcoin for quick anonymous transactions, say dollar-->bitcoin-->purchase, then you don't care what the value is doing over time

If you expect the value of bitcoins to keep going up, why would you only hold them for short periods of time? You're suggesting that people would wait until the last possible moment to change their dollars into bitcoins. But by doing that, they're losing money if the value of bitcoins is going up relative to dollars. In that case, the best strategy is to switch into bitcoins as early as possible, and hold them as long as possible.

You wouldn't hold bitcoin if you're not interested in currency speculation.

I'm arguing that despite likely wide swings in the value of bitcoin, it's value as an anonymous transaction currency will prevent it from going extinct.

People hoard it, driving the price to $10,000 and driving speculators to tears of joy, still people can make quick transactions in fractional bitcoin. It goes bust and the value dives to $10, yet the people using it for transactions could care less.

If they transfer $500 over to buy some computer hardware parts on newegg but can only get a mouse pad by the time the transaction takes I think they'll care less.

BTW, it's "could not care less" as in "I could not possibly care less than I actually do". If you could care less that would mean that you do care. Sorry, personal pet peeve.

> BTW, it's "could not care less"

Oxford recognises "could care less" to mean "couldn't care less".

"I couldn't care less" is pretty new, first seen in mid 20th century. "I could care less" is newer, but has been in use since at least 1969.

This page has some interesting talk about Yiddish stress patterns. When you think about it you can imagine someone saying, sarcastically, with palms up and arms spread, "I could care less", meaning "As if there's anything in the world I could care less about".

(http://www.worldwidewords.org/qa/qa-ico1.htm)

Because most people are risk averse (and past performance is not an indicator of future results), 'lazy' and dislike complexity.

If I were European and wanted to buy some stuff from China later in the year, the rational thing to do (given an expected Euro fall) would be to change to Yuan today. If you take this to it's logical end (extreme) then I would be changing all my money, and become a currency trader.

To me, the dual functions of BTC as an asset and a transfer mechanism are almost unconnected, often with opposing interests. I often hear how much BTC would be worth if it were used for X% of trade; it's rubbish, that only applies IF people hold BTC for any significant amount of time, which is at least not a necessary part of the equation.

This seems spot on to me. Now the question is; is there a way to make money on the coming collapse?

That's too bad, it's very convincing. It's important for interested parties to pay attention to this stuff. Ignoring it is just being ignorant in the connotative sense.

It's not absolutely convincing though... I can't succinctly describe all my objections but I will say this though: the correspondence to tulip mania just doesn't hold for me, as the the tonic that drives up the price of BTC is the same tonic that gives them any value at all (simply because it has two attractors, zero and, as the link points out, something huge.) I am of the belief that tonic will remain modulo biases against, so unless that reaches critical mass the push will still be greatly upward.

So the data looks similar in places and for similar reasons in most of those places, but the foundations work differently in many ways. None of what I've said above applies to the tulip situation, and all of it has to do with how it is valued. Consider the attractor(s) for the price of tulip bulbs. When it's going up it's open-ended, where BTC has a closed end. (How well that closed end approximates infinity is a cause for concern of course.)

``Reddit'' is worthy of bashing in many ways, but you are bashing it for the wrong reasons; the reason why the article was downvoted there most surely wasn't because of the lack of image macros, but rather that it ran against the locals (he probably posted it in a pro-Bitcoin subreddit) religious fervor.

You still see them swearing allegiance to Bitcoin and deriding those who sold during the crash, all the while holding on to their, at least temporarily, worthless Bitcoins.

Your friend goes to columbia? It's pretty good. Not perfect, but what is. Great Job!

Ha, um no... That would be nice.

looks like a high school homework assignment to me.

Checkmate, bitcoin doubters!

So post a response where you address the issues raised and refute them with sound theory and provable hypotheses.

Until then you're just waving your arms.

Would you prefer I write in in LaTex and using fancy graphs from Matlab, R, or Matplotlib? Or are you just being mean?

Please, at least attempt to prove some of the wild predictions you are making. Science is about proofs, facts, etc. ... not just assertions.

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