Bitfloor's live price is $210

Currently 1800 s lag time at Mt. Gox.

Yet very few people actually made money on it.  Certainly not the average joe.  99% of those dot-com mania companies don't exist today.  One of the intents of my post is to say that, yes, something can be super-duper awesome, like the internet.  But that doesn't mean there will be a lot of money to be made in it.

I remember the dot-com mania and hope to give some perspective into what happens during a mania.  I was burned by it, too.  I gleaned some powerful lessons from that mania, and my purpose here is to spread the knowledge.

Before I begin, let me state that if you think I’m spreading “FUD”, feel free to leave this thread.  I’m actually long bitcoins, though I’m looking to sell soon (in the next week or two).

During the dot-com mania, the Nasdaq doubled in about 5 months.  Given the recent run in Bitcoin’s price, you may not be impressed, but keep in mind that the Nasdaq market capitalization is on the order of trillions of dollars, a thousand times greater than Bitcoin’s.  Some companies in the Nasdaq did go up a thousand-fold.

Good companies with solid earnings became wildly overvalued.  As an example, Cisco, one of the behemoths of the tech space at the time grew into a crazy valuation.  Analysts extrapolated this exponential trend (that’s essentially the only thing most analysts do: extrapolate) and predicted that in 2-3 years, Cisco’s market cap would be greater than the US GDP.  Yes, they actually did that.

Despite continuing to grow earnings over the last 13 years, Cisco’s share price is basically where it was in 1998.  Overvaluation is a bitch.

Predictions were crazy like that.  People simply assumed in 2000 that the Nasdaq’s level would exceed the Dow in a year.  Keep in mind that the Dow was about 11,000 at the time. 

Henry Blodget became famous in 1998 for making a 1-year price target on Amazon of $400 when the price was $240.  He was widely ridiculed.  Yet, it reached that $400 price in a month, and went on to $1200 two years later.  (It then fell back down to $80, though over the next decade, it would exceed the dot-com peak.)

So lesson #1 is that even good companies can become highly overvalued during a mania.  Lesson #2 is that to jump aboard the train, investors will bid up the price of crappy companies like Pets.com into similar prices, and for the average Joe, it becomes very difficult to separate the wheat from the chaff.  Litecoin’s recent run-up seems reminiscent of that phenomenon (though I admit I’m not savvy enough to conclude that Litecoin is, indeed, chaff.)

The sociology of a mania is fascinating.  There were bearish commenters like Bill Fleckenstein who would warn people that the mania couldn’t last and a lot of people would lose their savings by being reckless.  He routinely got mocked on CNBC and elsewhere.  People with much less insight and experience than him would accuse him of not understanding what was going on.  Yet he was right. 

This was cult-like behavior:  rather than believing someone who was bearish had analyzed the data and come to a different conclusion, and that perhaps you could learn from this person, the bear took on a moral quality.  He was a bad guy.  One might even say he was evil.  He's probably motivated purely by nefarious intent.  If he got enough people to disbelieve, those people would convince their friends, and the whole thing would snowball. 

In that mania, the future took on a mystical quality.  It was called “The New Economy”.  In the New Economy, profits didn’t matter.  Only market share mattered.  So if there was a company with no profits, investors would say, “They’re spending all of the revenues to get more market share!” and justify a high valuation.  The New Economy also threw out the old valuation techniques.  The internet was so big that the sky was the limit.  There were no constraints.

Yet a decade later, really only 3 dot-com companies remained:  Yahoo, Amazon, and Ebay, and Yahoo is a shell of its former stature.

One of the key characteristics is that more people were convinced there was a mania in 1998 than there were in 1999.  Late in the mania, many former skeptics began to believe.  They stopped thinking there was anything out of the ordinary going on.  They bought into the New Economy mysticism.  As the Nasdaq rose higher, fewer and fewer skeptics remained.  Only believers were to be seen.

People who knew nothing about stocks suddenly became experts.  Middle class dads grew to know the balance sheets of the high flying companies and weren’t shy about offering their opinion at the water cooler.  Students boasted of their profits and contemplated dropping out of school because it was useless to be a wage slave when the market was so easy to play.

Perhaps the most vital lesson the dot-com mania taught me is that the market will keep going up until the staunchest bear throws in the towel.  I became a bear on the dot-com stocks in 1998.  The Nasdaq was about 1700.  As the market went up, I grew more disgusted with what was going on.  I saw my buddies become rich overnight and grew envious.  The Nasdaq went up to 2500, then 3500…4000.  Eventually, I couldn’t help it.  I knew it was a mania, but I couldn’t help but try to get in on the action.  My little account grew from about $6000 to $250000 in just a couple of months. 

The market peaked at 5100 very soon after I went in.  And then it all came crashing down.   At the new bottom, it went down to 1200.  I lost everything.  I know most of my friends also lost everything.  Luckily, “everything” was only stuff I invested.  The biggest losers were the ones who quit their job to daytrade, or the ones that took loans to invest. 

It all makes sense in retrospect.  If someone as skeptical as me—if the staunchest bear—buys!—then there’s nobody else left on the sidelines to bid up the price.  The lesson for today is: think of the biggest bitcoin skeptic you know, and when he throws in the towel and registers for a Mt. Gox account, it’s time to sell.

I hope this was informative.  I see similar things going on right now in the Bitcoin world—exponential price increases, outlandish predictions being made about the price, people quitting their jobs and putting all their eggs in the Bitcoin basket, mockery of prudence, cult-like behavior, mystical beliefs, etc—and I worry about the damage this mania is going to do.

great show

The author is not a tool.  He's a smart writer who made decent arguments.

Stop calling anything negative written about Bitcoin "FUD".  For Bitcoin to succeed, it needs to be criticized so that legitimate weaknesses can be improved upon. 

Gavin may be a good guy, but Bitcoin needs to be able to survive even if Gavin was a bad guy.  That's the whole point of Bitcoin.

vanilli's

That's very similar to what I meant in #1. To earn enough commissions to pay everything back in 2 years, he'd need an average trading volume of 10K per day. That's about 4x current levels. 

Having said that, the volume has risen by 4x over the last two months.

I still think if we assume long term increase in BTC prices, converting to dollar debt is a no brainier. If, for example, volume jumps to 10K per day and the price doubles, it would only take 1 year to get back to even.

Suppose the current debt is 23,300 BTCs which equates to $3.27 million at the current price of $140.

He can pay it back in two ways:

1) Build up his commissions, which are in dollars, and periodically pay off the debt in bitcoins.  That means he accumulates dollars, then buys BTCs.  If the price of BTCs doubles to $280, he will still owe 23,300 BTCs which would equate to $6.54 million.  As the price of bitcoins grows, so does the dollar value of what he owes.

or

2) Take a loan for $3.27 million, buy 23,300 BTCs, return those BTCs to whom they are owed.  Then he needs to generate $3.27 million to pay back to whomever he borrowed from.  If the price of BTCs doubles to $280, his commissions will also double, and time taken to pay off the debt gets cut in half for a given volume of BTCs traded.

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If he had taken approach #2 after the heist, he would owe someone $250K, an amount he'll probably make in revenues in 2013.  Instead, he owes close to $3.27 million.  

Who would give him a loan for $3.27 million?  Maybe nobody.  But I think there could be investors out there.  With the growth in trading volume since the beginning of 2013, the revenue growth rate is astronomical.  Correct me if I'm wrong, but I think Bitfloor is the largest US based exchange.  As a user, I think it's fantastic, probably as good as any other exchange, if not better, out there.  There is huge room for growth here.

And he doesn't necessarily need to take a loan.  He could sell ownership of 49% of the company and still keep control.

I hope I've made it clear that these numbers are simplified, just to spur discussion.  I don't expect him to operate without expenses; nor do I expect him to not keep ANY profits for himself.  My message here is that Bifloor is growing like a weed, and there is a way for everyone to win here.  If not now, then very soon as it continues to grow.

Thing is, I don't believe that's true.

Just as an example, there were about 24K BTCs stolen.  If the exchange were to stabilize at today's volume (6,500 BTCs), then every day, it would earn in commission 19.5 BTCs.  That would mean 3.37 years to pay off the BTCs if he converted his commissions to BTCs at the end of each day.  Obviously, that doesn't include operating costs, and today's volume may not stay constant, etc.

But I can wait 4 years.  

It might even be less time if the BTC debt is converted to dollar debt and the price keeps rising.

Shtylman started the exchange 1 year ago.  He could pay the debt off in 4 years.  Imagine starting a startup, and not earning much for the first 5 years, but then earning millions after that.  Wouldn't that work for you?  That's the situation he's in.  (A simplified scenario, obviously).

So far I haven't even talked about outside investors, but that's a way to pay off the debt even faster, whether via equity or bonds.  There are multi-million dollar investment houses looking for a way to get on the Bitcoin trade without enough liquidity at the exchanges to get on board.  Buying equity or debt in Bitfloor on a 3-4 year horizon might be an attractive alternative.

I don't really want to argue about this since nobody I've seen, Shtylman included, makes your argument.  But just for the hell of it:

1) The value of the missing bitcoins has grown by X*10.  That's a huge difference in what I'm missing.  For me personally, if those coins hadn't been stolen, I'd be contemplating retirement right now.  It's like a fork in my existence that decides what kind of life I will have.

2) Shtylman made the decision to allow cash withdrawals after the heist.  He could've said that everyone who had funds on the exchange, both dollars and BTCs, would take a haircut.  But he made a clear differentiation between cash holders and BTC holders.  He let cash holders withdraw their funds while BTC holders would
have nothing in their accounts.  By that decision, he's owes us BTCs, not cash.

3)  As I said originally, it can work out for all parties involved, Shtylman included, if the next time there's a stabilization in prices, he converts the BTC debt to dollar debt.  Everyone benefits in that scenario provided Bitcoin flourishes in the future (and if it doesn't, everyone, Shtylman included, loses whether or not the debt is paid back).

According to Bitcoincharts.com, Bifloor traded nearly a million dollars in volume today.  That's a daily commission of $2,700, and over a year, that totals $1 million dollars.

Now granted, this was an unusually high volume day, and the exchange can't be expected to match today's activity every day, especially not the weekends.

So to take a more conservative estimate, over the last month, nearly $5.1 million has been traded no Bitfloor.  Over a year, that yields commisions of $184,000.

Couple these estimates with two more observations:

1) The volume on Bitfloor has been rising very fast, much faster than any of the other exchanges over the last few months.

2) There's a lot of angst over Mt. Gox's performance of late.  People are looking for an alternative.

Granted, the debt it owes is growing just as fast, but exponential spikes like this are temporary and the price will settle down soon.  As one of the people who lost bitcoins in the heist, I'm hoping volume stays strong when the price wanes.

What I'm getting at is:

Bitfloor is making some serious money, and is growing very fast.  From a cash flow perspective, it's thriving.

The next time the price settles, the best thing for both people like me who are owed bitcoins and for Shtylman is to convert the BTC debt to dollar debt.  The debt will be paid off quickly the next time the price spikes, and Shtylman will start raking in some serious profits after the debt is cleared.

You should be able to wire from BB&T to Bitfloor.

The special relationship between BoA and Bitfloor is that you can make anonymous cash deposits from BoA to Bitfloor.

Hello,

I have been a lurker for almost two years and would like to be whitelisted.

I've been speculating for over 15 years, and I lived through the Dot-com bubble.  The anecdote above is not reassuring, but rather, worrying.  That is the kind of thing that happens near tops.  The wild frenzy over the last week in which "elevator boys" give Joseph Kennedy investing advice says we're very close to a top, at least time-wise, if not price-wise.

As you state, there are benefits of saving, something that modern economics overlooks.  Saving is prudent for most people.  It allows capital accumulation, something necessary for future investment. 

The current economy, based on inflation, forces everyone to speculate.  Even at 2% inflation, in a generation, savings are cut by half.  Why save?

The problem is not everyone is cut out to be a speculator.  Only a select few are.  Speculation should be their domain, not the domain of everyone.

The balance between saving and spending should be determined by a free market interest rate.  Unfortunately, none exists today.

In a bitcoin economy, the value of money would grow with time.  Only those who are cut out for speculating and investing would do so.  The average joe would be content to save, and they would be able to capture the growth of the economy through the rise in the value of bitcoins, not through speculation.

Exchanges, like all websites, cannot operate perfectly 100% of the time.  Sometimes, @#$# happens.

Bitstamp has provided me with nothing but great service.

In a bubble, the news is very positive.  That was true for both the dot-com bubble and the real estate bubble.

The bubble happens when people are convinced the rally is real and laugh at the bubble talk.

This tells me we're still early in the rally.