As a new user, problems I see with bitcoin

[jasonjm]

1) I thought about accepting payment for real work with bitcoin: will never happen at the moment. Reason why? way too volatile. How can I expect a client to change $20 000 into bitcoins for an invoice, and then by the time they have to pay maybe 24 hours later, bitcoins exchange rate has moved 10%

2) I have been trading for 15 years, and whenever there is extreme volatility as you are seeing in bitcoin, its dangerous. What it means is there is a LOT of hot money in bitcoin. this might be great for a dotcom boom stock or similar, but if you are trying to introduce a medium of exchange its not good


that being said, I accept that points 1 and 2 may become invalid, when lets say bitcoin stabilizes at price X (once the hot money is gone)

3) for the value of the market at $700 million, the bids and asks are CRAZY thin. Just one big user (I see some with 50 000 bitcoins or more) can literally drive bitcoin down from where it is now in a few seconds. That makes no sense. Until you realize there are lots of people just holding bitcoins, no bids, no asks, no transactions. This is a bad situation because when the selling comes (and yes it will come, whether here or at $250 or $2000, it will come) there is going to be nothing to catch the market. There are no breakers, no market maker, no options, no bids, no anything. Not good. There is no stock on the stock market that has $700 million market cap that could be moved more than a few % with $3 million. A $3 million sell in one shot would drive bitcoin down approx 50%. And that assumes its a one shot sell. If someone with $3 million starts walking the market down, the bidders will have time to see this and pull their bids, making the fall much greater than 50%.

You gotta understand this is a major weakness. I work with a lot of hedge funds, and for them attacking something with a $700 million market cap with only $3 million is a wet dream. One of them IS going to do this.


4) finally, the hardest thing to wrap my mind around is the following: lets say we reach $21 million coins, the max ever. Lets say you decide to pay your employees in bitcoins because it is such a success. so your employees wages are 2 bitcoins per month. Now lots of other companies agree its a great idea, so they also start paying their employees in bitcoins. BUT there are only 21 million bitcoins, and now much more demand for them. How is it possible that you can convince your employees that their wage is now 1 bitcoin per month, or maybe 0.5 bitcoins per month? as bitcoins are now in more demand, so more difficult and costly to obtain, so you will not be able to get the same amount of coins back each business cycle. Human nature will not accept this. Or even worse with a loan: lets say you take out a loan at 10 bitcoins. payable back within 1 year, 10 + 1 interest, for 11 bitcoins. but during that year bitcoin becomes even more popular, and its at the max coins. It will be FAR harder to repay those 11 bitcoins now.  And this is where the deflationary nature of bitcoins is a major problem unless someone can explain this away?


I think bitcoins is a great concept and idea, but implemented in a very idealistic "best case" way.

[1715332925]

1715332925

[linuxnewbie]

How can I expect a client to change $20 000 into bitcoins for an invoice

While fiat still exists, in most businesses it makes sense to allow the option of paying in fiat.

Whenever there is extreme volatility as you are seeing in bitcoin, its dangerous

A $3 million sell in one shot would drive bitcoin down approx 50%.

How is it possible that you can convince your employees that their wage is now 1 bitcoin per month, or maybe 0.5 bitcoins per month?

None of these are a problem if prices, wages and salaries are quoted in fiat.

[tutkarz]

What OP said is true but when more people will have some bitcoins, and more businesses will accept it then less people will have huge amounts of BTC to manipulate market.

Besides dont forget 1BTC = 100 000 000 satoshi, so when BTC value will be high, people will start using mBTC, nBTC or satoshi.

[Fuzzy]

[fear and doubt]

Who's forcing you? No one? Then GTFO.

Seriously, this is why we have a n00b section 

[rickowens69]

Excellent post.

However, such concerns would only be valid in the long-term. They should not over-ride what is possible in the short and medium terms.

One thing to always consider, on it's own, is that the ubiquity of the internet is still in its VERY early stages. Regardless of volatility potential, BTC seems to fit the explosive growth of the internet which we will increasingly see as time goes by like a hand in a worn glove.

[DeathAndTaxes]

On the employee/salary angle give there are a lot of options.  The simplest would be to price the salary but give them the option to take some/all of their take homepay in BTC.  Actually in the short/medium term this is really the only option.  Taxes need to be collected, payroll deductions like healthcare and life insurance need to be in fiat.  Until there is a scenario where every aspect of employment can be paid in BTC some component of wages needs to be fiat.  So the solution is easy.  Your wage is $100K.  What % of your takehome pay would you like sent to ACH (DD) in USD and what % sent as BTC transfer.  BTC fanatics could pick 100%, BTC skeptics 0%, most would pick something in the middle.

Most people are more concerned with the purchasing power of their wages not the nominal number.  You could be a trillionaire in Zimbabwae dollars but I am guessing you neither elected to receive your salary in Z or move there.  Smart employees will (either initially or over time) realize that although they get less nominal BTC the go further and their standard of living is better.  Dumb employees will happily take fiat and your company saves money (hold their salary in BTC and convert smaller and smaller amounts of it into fiat each paycheck).  Still there is a psychological aspect to it so don't force your employee (what would be the benefit).  Give them the option and if they want tired rapidly devaluing fiat ... let them.  Freedom is about choice, even the choice to do dumb things.

As for the other points which all can be simplified to "Bitcoin is too volatile".  The market will get deeper.  If there is so much profit to be easily made pushing it around with mere millions then lots of people will dump mere millions into the market and the market will get deeper.  100 or 1000 people chasing the same "easy money" will boost those walls real quick. It really comes down to a fundamental question ... do you believe in free markets?  If you don't then Bitcoin will fail and there really is nothing that could be done to fix it.

[MadAlpha]

1)

I agree, right now Bitcoin is too volatile for anything with a time-value associated with it. E.g. agreeing on a price now and doing the transaction later.

2)

Bitcoin should stabilize with time as you suggested. The larger the market cap and exchange volume (mtgox etc.) grows, the harder and harder it should be for someone with $3 million to create big moves.

3)

For me, the best part of Bitcoin is the freedom, what I would call very close to a 'free market'. I think that is only a good thing. Someone can manipulate the market if they want to, sure, but that is part of a free market. And every participant holding or exchanging Bitcoin takes a risk (that they're hopefully aware of). The very reason why I like Bitcoin is precisely because there is no regulation or central authority to create artificial bottoms or 'stop trading' if the market starts to fall.

4)

This has some valid points, if you look at things mainly from psychological perspective.

[Stephen Gornick]

1) I thought about accepting payment for real work with bitcoin: will never happen at the moment. Reason why? way too volatile. How can I expect a client to change $20 000 into bitcoins for an invoice, and then by the time they have to pay maybe 24 hours later, bitcoins exchange rate has moved 10%

That's where something like Coinbase works well.  It is essentially like using a USD credit line so you can lock in the price now and the USD funds settle (when the ACH is completed) a few days later at which time the buyer gets the BTCs.  All for a 1% fee.  (The main problem is the maximum per-day amount that you can buy, until you've passed the 30-day probationary period).

if you are trying to introduce a medium of exchange [volatility is] not good

But since a merchant can use a payment processor to insulate from volatility, the exposure to exchange rate risk is then the consumer.    If the consumer can only purchase the item with bitcoins, then they are going to be acquired right at about the time the purchase is made, so that person doesn't have much exposure.  Those who have bitcoins but don't wish to be exposed to the exchange rate risk can convert those to USDs at an exchange (without withdrawing) and then simply buy bitcoins back right at the time they are needed for purchases.

No doubt, price discovery is a brutal for bitcoin's role as a medium of exchange.  10% day-to-day moves have not been that common so don't assume every day will be like this.   They will happen, but not day after day, and not all in the same direction.  In the meantime, fortunately bitcoin has other things going for it as well (user-defined anonymity, non-reversible transactions, low fees, no restrictions on usage, etc.) that it will continue to be used widely in commerce, and the currency will continue to spread such that 10% moves will someday be very rare.

[xan_The_Dragon]

Excellent post.

However, such concerns would only be valid in the long-term. They should not over-ride what is possible in the short and medium terms.

One thing to always consider, on it's own, is that the ubiquity of the internet is still in its VERY early stages. Regardless of volatility potential, BTC seems to fit the explosive growth of the internet which we will increasingly see as time goes by like a hand in a worn glove.

Dead on

[the joint]

I liked your post.  Point #3 is the most concerning to me.

I expect there to be several future instances of ridiculous flash crashes caused by a single individual holding a substantial amount of coins.  All it takes is a few people with the mentality, "Hey, one million, two million...eh fuck it I'm a millionaire [sell],"  to cause this to happen at any given time.

However, every time this happens, coin redistribution also happens which makes the event less likely to occur in the future.

[jasonjm]

i guess i can buy these counter arguments

A) that BTC will not replace fiat but work alongside it, BTC would more be a store of value you can convert your regular currency into
B) that people could agree to take equivalent pay to BTC when converted from their fiat based on that moment, therefore skirting the deflationary issues of having a fixed BTC price
C) that the market will get deeper as more people join the market. but right now this thing is so thin its just begging for manipulation on a grand scale.

so yeah in a best case this could work out.

I guess the last wildcard which could be a major pain in the ass is if governments deemed bitcoin a threat and acted to ban / block it.

And then of course there is the issue of trying to explain bitcoin to an average human being, someone who cannot remember a password like "potato" nevermind actually understand currency exchange, wallets, encryption keys, digital transfers etc etc. I guess the bitcoin idea was certainly never meant to appeal to the entire planet, so that's fine.