About the Bitcoin ‘bubble’
m.washingtonpost.com
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Just because something is highly valued doesn't mean it is in a bubble. It just means it is in demand. A single share of Berkshire Hathaway is worth $173,201 at the moment. Is that company in a bubble? Most people would say no - it is worth so much because the market bears that price, because Berkshire Hathaway has generated an enormous amount of value for its shareholders by investing in companies that are themselves inherently valuable.
If BitCoin is capable of being traded for valuable goods and services, that means it is exactly as valuable as the market says it is. The real problem we have to contend with is the fact that it makes more sense to hold on to BitCoins than it does to spend them. And this will be the case until the BitCoin reaches some kind of plateau of value.
Also...Berkshire Hathaway is worth $170k+ because it owns actual, valuable, real-world assets, most of which produce income. The BH stock price reflects the value of those assets, plus the expected future value of the income that those assets will produce. Bitcoin does not own assets, nor does it otherwise generate income. Thus, a comparison to BH is entirely misplaced.
...but I find the section on how credit card overhead is a big factor in lost technological productivity very ironic in a bitcoin thread.
While it's true that there is a limited number of bitcoins, it's a misleading claim since they can continue to add decimal points. According to FAQ on the bitcoin website, they can do this as needed, infinitely.
BTC simply sits at a greed cross-section: it appealed to a certain group in terms of technology, and greed to convince people to buy in with real money - but the same properties which get those people in fundamentally kill it as a currency, since no one's who's out has any reason to accept a currency where they will be permanently impoverished, and there's no external reason for them to do so (i.e. you don't pay taxes in BTC).
I don't see how accepting bitcoin impoverishes the accepting party (an permanently, wtf?). In fact, I guess most merchants who have accepted btc and hold it to date have probably gained some pretty good value from that to date. Of course that might change.
Furthermore, I don't think it's as easy as implied there. The protocol could be modified fairly easily, but then every piece of Bitcoin-related software in the world would have to be updated to handle the extra decimal points. By the time we need extra decimal points, Bitcoin would have to be so widespread that the difficulty would be comparable to fixing all software that uses 32-bit Unix timestamps, or switching everybody from IPv4 to IPv6.
This right here is the heart of the problem. What we need is a way to incentivise merchants to accept bitcoin, and make the payment process from the consumer end easier, safer, and cheaper than using a credit card.
What would need to happen for your locally owned restaurant to accept bitcoin?
Separately there are also online ordering systems like Eat24, NetWaiter, and GrubHub, which can act as payment processors for online orders.
The main area where I could see potential adoption of Bitcoin are some business models, where it's currently very hard to get merchant contracts for credit card (due to the high fraud risk). If I'd found a startup in that area, I'd probably just use Bitcoin (via Coinbase or Bitpay) for the early prototype, instead of spending considerable resources trying to get credit card processing to work.
That's not true. There used to be clauses in the contracts prohibiting merchants from charging an extra fee for credit card transactions. However, these clauses were recently (this year) removed by the credit card industry as a result of litigation. Also, it has always been possible to give a discount for non credit card transactions. You're right, it doesn't make sense, but it's true.
Since merchants usually eat the credit card fees themselves instead of passing them on to the customer, they have a big incentive to encourage consumers to switch to bitcoin. It will lower the fees they pay, which probably means discounts for bitcoin users. Merchants will also like the lack of chargebacks. On the other hand, consumers like chargebacks. There's no reason why a payment processor couldn't implement a chargeback-like system on top of bitcoin. The next Visa might be something like that, in fact.
Well, let's see. Easier - the credit card process is already about as easy as is possible given some authentication requirements, but bitcoin could certainly tie that process. Cheaper - the credit card process costs the consumer nothing, so you can't be cheaper, but you could tie that as well. Safer - the credit card process has substantial fraud protections for the consumer, but bitcoin by design does not have those fraud protections, so I don't see any way bitcoin could ever be safer.
So, the score at best can be: TIE-TIE-LOSE. And IMHO, TIE-TIE-LOSE vs. a heavily entrenched technology used around the world is not going to win, except for those rare items where credit cards cannot be used - purchasing drugs, or child pornography, or donating to Wikileaks.
Credit cards requires giving a physical card to someone when ordering offline, or typing a series of numbers when ordering online. There's a lot of room for improvement with Bitcoin.
In addition to that, Bitcoin can make some less standard payments easier, like splitting a payment between multiple users, using an arbiter for the transaction, micro payments, etc
> Cheaper - the credit card process costs the consumer nothing
Perhaps the consumer doesn't pay for it, but there's significant cost for the merchant that can be saved with Bitcoin.
edit: which could also effect the total price the merchant is asking for, giving some of the cost reduction to the consumer
> Safer - the credit card process has substantial fraud protections for the consumer, but bitcoin by design does not have those fraud protections, so I don't see any way bitcoin could ever be safer.
Bitcoin doesn't have fraud protections because its outside the scope of what Bitcoin is. Its like saying that the US dollar doesn't have fraud protection. Companies can be built around Bitcoin to provide that service for a fee.
In addition to that, its actually much harder to steal (locally stored [1]) Bitcoin private keys than it is to steal credit cards. When an attacker breaks into a service that accepts credit cards, he can easily copy and re-use the credit card numbers because the one accepting the payment has everything needed to make more payments. With Bitcoin, the one accepting the payments can't make more payments. An attacker has to gain access to the consumer computer that stores the private keys.
In other words - gaining access to a website that has 100,000 credit cards gives you a lot of power. Gaining access to a website that received 100,000 Bitcoin payments gives you nothing. You'd have to break into 100,000 individual computers.
[1] I'm assuming here that people either use local Bitcoin clients or m-of-n transaction where one key is stored locally. There are online wallets that stores private keys that creates significant security risks, but at least I have a choice as a Bitcoin user.
I would think it'd be extremely difficult for a bank to offer a bitcoin system. It'll be confusing for many users, and open a security problem (once BTC is sent, that's it, whereas intra-bank payments can be reversed). I'd also bet there's some regulatory stuff regarding buying and converting virtual currency.
At least in my jurisdiction if any of those things happened to my bank, I would be paid out of government mandated and controlled insurance.
But the hoarding rationale is exactly the mechanism quoted for the reason why deflation is ruinous. The great depression in the US was not singularly a deflationary experience, in fact, after the initial deflationary contraction, the entire period was marked by several attempts by the government to goose the economy through inflationary meddling.
But once that happens, investment banking with Bitcoins is inevitable and the times of "constant money supply" are practically over, for better or for worse.
- China making remarks in that direction, enhancing the role of SDR etc.
- Liberalizing currencies in general, from Airmiles to Whatevercoin with simple decentralized exchange mechanisms? (The Ripple/Bancor idea)
Following Izzy Kaminska at FT Alphaville (http://ftalphaville.ft.com/tag/bitcoinmania/ free signup & highly recommended), but more interested in stuff by nerds within central banks etc.
"Removing the gimmicky God hypothetical doesn’t change the basic insight: if market participants become convinced that “the price of a bitcoin is on a steady upward trajectory,” they’re not going to hoard their Bitcoins for weeks or months waiting for the price to rise. They’ll bid the price up right away."
This is incomplete thinking. It is true that if people internalized the deflationary aspect of bitcoin they would automatically bid up the price but there are two aspects of this the author ignores.
One, the deflationary effect is small and continuous. Not at all like his "God analogy" of a one-shot increase. And for the most part that is exactly what we have been observing with bitcoin - with the occasional exacerbation of this through old fashioned human irrational exuberance thrown in for good measure (April 2013 and now).
Second, at the same time as the deflationary effect which serves to increase prices, there is another force pushing prices down (slightly). That is the need to use bitcoin for purchases either illegal or legal. This obviously requires both the buying (if one does not have bitcoins) and the selling (after one has acquired them whatever means, either mining or purchasing in an exchange transaction).
The conclusion is that there are several forces or layers of push/pull at work at the same time on bitcoin prices. This does not magically remove or nullify the fact that a deflationary force exists! Nor does it mean that the deflationary force is not the major one.
This is Mencius Moldbug's Bubble Theory of Money[1], one of his many fascinating contributions to the world
[1] http://unqualified-reservations.blogspot.com/2013/04/bitcoin...
Bubble everything!
It's very sadly ironic that the author who mentions Menger forgets that value is intangible and subjective. Value isn't physical. People value things for different reasons be they physical characteristics or not. (e.g. sentimental value)
The BTM asserts that money and a bubble are the same thing. Both are anomalously overvalued assets. Both obtain their anomalous value from the fact that many people have bought the asset, without any intention to use it, but only to exchange it for some other asset at a later date.
It's not anomalous. People value it because they can use it as a medium of exchange. That's how they value it. The notion that value is a physical characteristic of something is what causes one to believe that valuing money is irrational. There is no such thing as "underlying" economic or material value. There is only subjective value.
Prices arise by the auction mechanism; people bidding on things, which causes commodities to converge somewhere between the bit-ask spread. This is the price, (objective) which is not to be confused with value. (subjective)
ATM, 1 bitcoin is worth ~350 times more than one Federal Reserve Note, making Bitcoin the most valuable currency in the world. I expect demand for Bitcoin will only rise elsewhere in the world even if the USG tries to make it difficult for its own citizens to use.
Until we are in the matrix you need the physical world. And there governments are dominant.
If Bitcoin is going to be not fringe it will need wide state support of at least 51% of the world GDP. There is not a single economic bloc that could endorse the loss of the ability to manipulate its own currency.
It is an awesome real time payment system, but crappy as a currency.
Unlike the US, a hundred million+ internet users in China are already accustomed to digital money through the use of the now defunct Q coin.
It makes no difference to me if Bitcoin stays fringe or goes mainstream. It's value will continue to increase as long as it finds uses all over the globe, with or without the blessing of the USG.
Step 1: make Bitcoin exchanges illegal to operate. There is no Step 2.
All the supposed uncensorability of BitCoin doesn't matter once you do that, because no one conducting legal business activities is going to bother with it after that. Al Capone was arrested for tax fraud.
Step 2 is moving my Bitcoin business to a country that's not afraid of Bitcoin.
Again: if you can't buy BitCoin in your native currency legally, no one would bother trying to do it except if they had a compelling reason.
My native currency is now Bitcoin. ;)
The value of the M1 money supply (all the cash) of USD is $2.5 trillion. The value of the BTC money supply in USD is $[handful] billion. Calling BTC more valuable because it happens to be denominated in a large chunk is missing the point.
Also, the accumulated transactional value of Bitcoin is increasing. All of the fees and other costs associated with moving money are being lost by banks and other agencies.
We trust the USD because everyone we have ever met in the US has trusted it for their entire life, and their parents, and grandparents, ... . And the network effect is so large that people growing up in countries with weak currencies trusted it more than their home currency, it was stable and everywhere.
Bitcoin is a protocol for money. Protocols, once they have acceptance have a pretty great shelf life. See http, tcp/ip. So long as they get the job done, there's a disincentive to replace them once established.
This statemetn is rubbish. If the USD were to rapidly devaluate, military force would be USELESS to protect its value. It is the Fed, through its policy, that can help influence deflation. But even then, its influence is limited.
On the contrary, you could probably write a function that estimates the value of bitcoin that included public-trust-of-Fed indicators.