Bitcoin Forum

Here is an interesting article about the Tulip Mania of 1637.
http://mises.org/daily/2564

The explanation essentially comes down to the idea that in 17th century Netherlands there was a relative free market in money, which causes lots of money to flow into the Netherlands, causing a mania. Assuming the Austrian school explanation of the Tulip Mania is the correct one, are there any parallels with the Bitcoin Mania of 2011?

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Bitcoin is a little different.

I don't think the amount of useful things you can currently buy with Bitcoin can support its high valuation for very long. I think a crash is coming.

How much do you think a Bitcoin is "really" worth, and why?

Everybody keep saying these things but the only way you can find out is by waiting.

You could also help pitch in by offering services and goods instead of worrying about a bubble.

see here's the thing, bitcoins are digital currency...tulips are flowers...

There's more to the explanation of the tulip mania.
People used gold and silver at the time as money. There was a huge inflation of these metals in Europe after Spanish invasion of South America. Basically they've stolen a lot and all ended up on the dutch banks. The reasons why it ended up there to be used as credit are explained in the article, I think.

In the end, it is yet another application of the austrian theory of business cycles. It's just a peculiar one because inflation came out of massive theft of precious metals instead of money printing.

Less than it is now. Gut feeling based on the number of things I see for sale with Bitcoins.

The Tulip crash.

It is the oldest known example of a financial meltdown.

People did use gold and silver as money, but there was also a lot of trading of "tulip-papers", tulip-bonds, tulip-options etc. you name it.

At the end just before the crash, people would set their house as security to buy a tulip option for one single tulip that wasn't even an onion yet.

So they built up a lot of artificial money, just waiting for the bubble to burst.

The tulip mania has a lot of parallels with the dotcom crash, krueger crash and quite a few other well-known crashes.

Not impossible that the bitcoin will create a similar hysteria, but that will take place if you trade in derivate papers of bitcoins yet to be made at a speculated future price.

As long as you have the coins themselves I think it's safe value, just as gold and silver was during the tulip mania.

haha, I missed that bit about the gold robbing in history class apparently.

The analogous scenario here would be a fork into several bitcoin systems, making more and more useless cash :-)

I think that smaller or bigger versions of "tulip manias" are happening a lot on Bitcoin market - it's simple matter of overspeculation.
But complete destruction of currency is not likely to happen as with the tulips.

I mean even if Bitcoin's value drops 10 - fold due to enormously massive overspeculation, it will still be a usable currency. It will still have all the means to be a currency and drop in value is not going to change that.

OK ...

It's a fact that the number of things for sale with Bitcoins is increasing, and has increased every month for the past year. So would you agree that, even if Bitcoin is valued too high right now, its "true" value is trending upwards?

I would agree its "true" value is increasing. I just don't think going from $.05/BTC at the beginning of September to $1.00 right now - almost a 500% annualized rate of increase - is at all realistic. The goods-for-BTC market is not increasing at that rate.

The number of people aware of bitcoins and interesting in buying them has not such a strong link with the amount of goods and services offered on BTC.

Here is the thing that I find shocking... the Bitcoin economy is $5 million or something, right? (per bitcoinwatch.com, I'm using an assumption of parity for simplicity)

If you look at the volume of trades that have been swinging the market 10 cents at a time, they are nowhere close to any meaningful fraction $5 million.  At best, they are $10k-$15k USD.  Each 10 cent change in the price supposedly changes the value of the whole Bitcoin economy by over $500k USD...

which leads me to believe that something's just not right.  There is a huge disparity here.  Someone should not be able to create or destroy $500k worth of "wealth" by moving only $15k.  That is as unrealistic as throwing $15 worth of coins in a mall fountain surrounded by a hall of mirrors, and then believing the illusion that suddenly there is now $500 under the water.  The money is just not there.  Can anyone even buy 1 million BTC on MtGox right now?  How about even 100kBTC?  As soon as you take the $15 out of the mirrored fountain, the entire illusion disappears.

Is the BTC economy really worth $5 million?  How did it get that way?  Seems to me, three or four big buy transactions around $15k each, and the rest is pure hot air.

What seems to me to be happening, is that at best, only a couple percent of the whole volume of coins is actually even participating in the market.  There is a very artificial scarcity right now, probably while everyone who got BTC for pennies is waiting for them to become $100 bills... artificial scarcity which creates high prices, but not any real value.

The risk that goes along with that, is that even if BTC became worth $50 each, if that value is established by a small chunk of change with only 1 or 2% of the coins, the value is largely hollow.  Only 1-2% of the holders of BTC would be able to cash it out and get anything.  The remaining 98-99% would not get even a fighting chance at a piece of the pie, except perhaps unless they were the first to cash out.  For the value to be real, the Bitcoin economy will need a huge influx of goods, services, or at least capitalization that actually represents most of the BTC out there.

$5 million is just the nominal value of the issued bitcoins. The figure is as hypothetical as when someone quotes the total market capitalization of the NYSE. But you understand that already, as the rest of your post showed.


What you say is correct, but it misses the point. The value of Bitcoin is not to enable 100% of investors to profit from a rise in the exchange rate.

But you need that rise in the exchange rate to enable the other uses of Bitcoin. If the average person has 100 bitcoins, and a pizza costs 100 bitcoins, then the Bitcoin market is fairly useless as each person can only afford one pizza, and people won't buy pizzas.

Now "fast forward" to the point where the average person has 100 bitcoins, but a pizza costs 0.1 bitcoins. Now people will start to buy their pizza with bitcoins instead of fiat, and the Bitcoin economy will become truly vibrant.

The exchange rate needs backing value to be real.

What happens if I order a pizza, and on the way to go pay and pick it up, POOF, the cost of my pizza just rose 1000 times and the value of my entire last 2 weeks paycheck just fell by 99.9% because 1% of the market decided to "cash in".

That would be the cost of volatility, and is antithetical to the interests of BTC being adopted.  I would not be surprised if one or two people own 50% of all the BTC out there.  It would be a far different scenario if everybody out there delivered $1 in goods or services in exchange for the BTC they have, versus people holding onto them purely for the sake of getting something for nothing.

Volatility will naturally decrease as more people use Bitcoin, and as liquidity at the exchanges improves (when it gets easier to move money in/out of the exchanges).

The exchange rate isn't going to get "backing value" from anywhere else.

The only thing that will decrease volatility is when more of the currency starts moving.  If 98% of the currency is sitting somewhere like a sleeping tiger, the rest of us trading the remaining 2% are at the mercy of those 98%.  That would be true whether Bitcoin had a hundred, or a thousand, or a million participants all trading the 2%.

Given that 2% is only 1/50th of the whole, when the other 98% started moving at some point down the road, the result it would be no different than if the Federal Reserve started printing money and increased the money supply by 50 times.

We all know that 98% isn't going to just wake up all at once...  but when even just 2% of that 98% started moving, that would be like the Fed merely doubling the money supply.

No point worrying about it, casascius, as neither you nor I can do anything to change it.

None of us knows how many are being traded each day. MtGox is the biggest market, but there are others and there are surely off-the-exchange transactions happening all the time.

Would the US economy be more healthy if every dollar was being spent every week or day or faster? How much would I have to sell on the forex market to make the total value in EUR of all USD drop by $10B (what would this be .1% drop or less?) If I just slam it I bet it's less than $1B. This is a total guess, I really don't know. I just don't think Total Number * Price is meaningful in most context, and not this one in particular.

Just out of curiosity.

Can a currency be backed mostly or completely by another currency ? Has anything like that ever happened in history ?

I don't know, I'm seriously asking a question - this is not sarcasm or anything.

Gold was being used as a currency then FRN were created and backed by that currency, then that backing was removed and they kept being used out of habit and/or force. Does that count? And now some nations currency are backed by FRNs.

I am not sure, but i guess yeah.
However that wasn't "clean case", because FRNs were also "legal tender" so that kind of adds purchasing power the the currency.

I dont understand fully, but I've read that several other countries back their currency with the US dollar.

So it is possible for a currency to be strong without the need for a lot of goods to be traded with it ?

I suppose, if the currency is backed by another currency that does have a lot of goods traded with it.

Bitcoin is a medium (or currency) to trade hard private currencies with. So this is good for the private currencies, because they will be used more.

When I first made the statement, what I meant (and probably should have said) is that it should be backed by a diverse base of goods and services so that the value doesn't just implode next time somebody sells a few.

It looks like we crossed parity just by someone making what looked like a $30k buy all at once.  Then somebody sold off a few, being past parity vanished just as quickly as it started.  A couple more sells like that would have the disastrous opposite effect, since nothing but hope is holding the value there, hope only gets you so far.  Look what hope is doing for real estate.

If someone sold as few as 80000 BTC today (well less than 2% of total BTC...somebody generating coins has GOT to have this in their couch, there's 5.3M of them out there!) they would capture that $30k for themselves, plus the few big buys others have made to bring the price so high.  And BTC would be trading under 50 cents again.  The only thing would bring it back up would be a line of suckers willing to put their $30k's on the table while the price was artifically high, where the same people could swipe it again...

It would be different if there were thousands of merchants all offering $1 worth of goods and services per BTC... someone liquidating 80000 BTC would be nuts, people would be snapping it up to turn around and get cheap groceries.  That's nowhere near the case today.  The true rate of growth of BTC is directly related to what you can buy with it... it's growing... but it's still mainly VPN's and porn.

On the one hand, I can see coin generators not wanting to liquidate their stash, as they too wouldn't mind the value of their coin going sky high.  But then, perhaps one of them sees there's a pretty sizeable pot out there, understands it's a mirage, and would like to be the first to take it in exchange for only a small percentage of their holdings.  To buy BTC right now is to leave money where someone can take it anytime and we just hope they don't.

Don't sweat the individual trades or the short-term moves. Look at the all-time chart and see that there's strong underlying interest in Bitcoin.

With all due respect, this is coming from someone who makes no secret of generating and holding Bitcoins as a major investment:


I agree that there is strong underlying interest.  Is the interest in Bitcoin in a concept, or the present block chain and distribution of coins as we know it?  How well placed is that interest if the value of one's coins can implode anytime an "investor" wants to cash out?

Compare to a Federal Reserve that somehow has a magic constraint and verifiably can't ever print money past a pre-defined limit.  That would be good for the USA right?  But then imagine this same Fed makes less than 2% of the currency accessible to the public, and those who created the Fed collectively save 98% for a rainy day.  If there is USD $14 billion out there, and tomorrow there is 1.5 or 2 or 4 or 50 times that, will it make any difference if the fed says, "We didn't just print this yesterday - we've just been saving it this whole time".

Don't get me wrong - I bought a small chunk of coins too, and I will be highly enthusiastic if I can sell them for 1.5x or 2x or 4x or 50x what I paid for them, though I doubt I'll be able to retire on them.

Well exactly. I don't know what you're imagining, but I just said "some retirement income", I didn't say I'd be able to retire on them alone. I also didn't say "major" investment; you made that up.

Sure, the price of a bitcoin varies a lot in the short term. So don't worry about the short term price, just look at the long term price trend.

There's no way to make the short term price more stable while Bitcoin is in its early phase. As you've pointed out, the short-term price fluctuations don't mean very much, so why worry about them?

Casascius, let me return to your first post from this thread:


Wealth is not created by moving money through an exchange. Wealth is created in the productive economy outside of the exchange. (Well, actually the percentage fee charged by the exchange is part of the productive economy, but that's beside the point.) So it is not the case that a 10 cent change in the price changes the value of the whole Bitcoin economy.

What the exchange rate provides is an approximation of the perceived value of the items being traded. It's an approximation because it only reflects the value as perceived by those who are carrying out the exchange. Nevertheless, it's a data point that can be useful for some purposes.

In addition, the bitcoin exchange rate depends on what the traders think will be the future value of the productive bitcoin economy, based on the time preference of the individuals carrying out the trade.

So if the "real" value of the bitcoin economy doesn't come from the exchange, but is just approximately reflected by the exchange, where does it come from?

Sure, some of that value comes from people who are trading in bitcoin today. There are some people using Bitcoin to pay for ads, tips, servers, hosting, Amazon purchases, gambling, porn, auctions etc. But the level of direct trade is not enough to account for the bitcoin exchange rate.

There are also a lot of Bitcoin-related assets being created. Every piece of software written to handle bitcoin transactions; every new service being designed and implemented; every new idea being tried out; these things are all building assets that can provide a bitcoin income in the future. And that's where the rest of the value comes from.

No doubt 90% of the Bitcoin business assets that are now being created will eventually fail. But some of the remaining 10% may become spectacularly successful. It's a "wild west frontier zone" for people who want to try out new and interesting business models.

When someone trades bitcoins, they (perhaps subconsciously) take into account many factors including the current level of the bitcoin economy, the potential future level, the psychology of others, and their own psychology (e.g. time preference and adversity to risk).

Every trade has a buyer and seller. So every time someone buys bitcoins (because they guess that the bitcoins will be worth more to them than the dollars), someone else is selling bitcoins (because they guess that the dollars will be worth more to them than the bitcoins).

Therefore the rising price of bitcoin on the exchanges doesn't mean that Bitcoin is a "sure bet". It just means that for the two people conducting that trade the agreed price is somewhere between the two people's estimation of the value.

Maybe there is a bubble, maybe there isn't a bubble.  The best way to prevent a bubble is to use your own judgment and not listen to everyone else.

There is always some bubble, smaller or bigger. Bubbles lies in the nature of speculation.
But i guess that it is normal and one trading bitcoin just needs to take the risk into account.