What Popping Bitcoin Bubbles Tell Us

[benjamindees]

Every time the price of Bitcoin runs up in a short amount of time, and then falls precipitously, it is telling us something about the Bitcoin economy.

The run up tells us that outside interest, and investment in Bitcoin, is growing.  That's a good thing.  You should all be congratulated for it.

But the popping of the bubble tells us something as well.  It tells us that the willingness of the Bitcoin economy to welcome new participants is not high enough.  It tells us that there are too many barriers to entry.  It tells us that, at a certain point, at a certain price, once they have watched the value of Bitcoin increase five or six-fold, instead of waiting in line at Mt. Gox, new participants will find a different way to buy in.  They will mine.  Or they might just give up.

Neither is optimal.  Both are pretty bad, actually.  And we should be thinking about what we can do to fix this.

Turning away new entrants because they can't manage to buy their first few Bitcoins, and get frustrated with the state of the links between Bitcoin and other currencies, does obvious damage to the Bitcoin economy.

But encouraging new users to mine, instead, could be much worse.  The state of mining is pretty terrible right now.  ASICs are in short supply.  There are only a few providers, and they all have their own problems.  Pools are being consolidated.  Meanwhile, the price of Bitcoin supports an army of miners using obsolete hardware.  Difficulty is higher than necessary to protect the network, considering just these GPU miners.  But it is not high enough to make them obsolete.

Just remember, every investment in mining is an investment that is taken from the real Bitcoin economy.  And right now it is mostly going to one company that, as far as I can tell, still isn't even shipping anything.  This situation has the potential to become a public relations disaster for Bitcoin.  We must, somehow, get to the point that we can openly encourage new participants to trade real goods and services, and encourage existing participants to spend some of their Bitcoins to buy them, rather than simply mining, and hoarding.

[Evo]

I just hope that people start using bitcoins in businesses more. Thanks for bringing this up.

[Etlase2]

We must, somehow, get to the point that we can openly encourage new participants to trade real goods and services, and encourage existing participants to spend some of their Bitcoins to buy them, rather than simply mining, and hoarding.

Welcome to deflationary currency, bro. Might not be all it's cracked up to be.