Watching amateur finance types flail

[Nagle]

I'm John Nagle, the person behind Downside. Over the last decade, we predicted, well in advance, the dot-com crash (company by company), the oil spike, and the mortgage crisis. We've also explored some financial scams - Enron, Madoff, and their ilk. Downside was written up in Business Week, CNN, Fortune, etc. Our track record speaks for itself.

I've been looking at the Bitcoin world. It's amusing watching the classic forms of financial trouble happen in miniature. I have no financial position in Bitcoins, so I'm looking at this neutrally.

So what's wrong in the Bitcoin world?

First, it looks like a bubble. Here's Bitcoin before the Mt. Gox debacle:



That just screams "bubble" to anyone who's seen one. Bear in mind that the Bitcoin system generates no revenue. All funds must come from new investors. This is not like a startup company. This is a zero-sum game. If you've been in the game for half an hour and you don't know who the patsy is, you're the patsy.

Second, Bitcoin is supposed to be a currency, but it's actually a speculative vehicle. If Bitcoin were a successful currency, there would be many merchants using it for small transactions, with perhaps some speculation on the side. In practice, the speculation dominates.  This is the real problem with Bitcoin. If it had been launched as the payment system for something like music tracks or smartphone apps, it might have worked out better.  Or not; "Digicash" and "Beenz", the two previous rounds of this idea, also tanked.

Third, the organizations in Bitcoin's ecology are very flaky. Mt. Gox is two guys in Tokyo who are in way over their heads. We don't know much about Tradehill, which is somewhere in Chile. Neither of these "exchanges" has a published business address, a Dun and Bradstreet rating, published audits, or regulation as a bank or money transfer firm. Yet they're acting as depository institutions for sizable funds belonging to others.

It's amusing watching the Bitcoin community flail around. Most of the classic financial disasters are being re-enacted in miniature. We have pyramid schemes, tulipomania, bucket shops, pump and dump... This would be fun if it were an MMORPG.

[bitbot]

an MMORPG

why does everyone make this mistake when it's clearly a

[CurbsideProphet]

John, I agree with most of your points.  The only point I would question is if Bitcoin is truly a zero-sum game.  While it does appear that way, I think the aspect of mining or creating ("minting") bitcoins means it is not a zero-sum game.  It will be once all Bitcoins are mined, but not in the meantime.  

[digdugg67]

I'm going with 'It sure looks like some profit taking after each substantial run-up.
Looks like standard hard asset trading to me.

BUT what do i know. I'm just a miner.  Keep loosing them in your lost wallets. I'll mine more for ya.

[Obrzin]

I agree for the most part: yes I think bitcoins are overvalued, they will go back down in price, most of the recent increase is speculation, etc.  However, I think you fail to take into account the rabbid 'fanboy' nature of many people involved in bitcoin.  They are so zealous about seeing bitcoin succeed, they often do irrational things to try to 'keep bitcoin alive', eg. mining at a loss, holding bitcoins to artificially reduce supply, buying bitcoins to keep the price afloat, accepting bitcoins for items at less than market value, etc.  So while I think the price will come down perhaps significantly, I think there is a core of fanatics that will keep bitcoin afloat to some degree despite any rational reason for doing so as compared to stocks, etc. where people are merely in it to make money.

[TraderTimm]

I see you have the ability to post a candlestick chart, any other analysis besides the usual newbie - "It's a bubble"?

You'd think you were just parroting people in the forums, honestly. I look forward to your next post filled with fundamental and/or technical analysis.

[hugolp]

This comic could not have a better timing:



On a more serious note, how do you explain that TradeHill has been trading for days after the MtGox hack, and both volume and price are rising.

[nazgulnarsil]

sorry but bitcoins have a use.  Because of bitcoins I have a capability I did not have before. I can easily send money to someone in a random location on earth with NO logistics troubles other than getting their address.  If you don't think that this marks a major turning point you are simply small minded.

Bitcoin is still an infant, there are big things to come.

[Piper67]

There a couple of other "values" to bitcoin as well... it's naturally deflationary, uncounterfeitable, decentralised...

We can all predict bubbles that have already happened. Few of us can predict them before they do.

[FlipPro]

People are so stupid. No one cares about your pathetic analysis. You know nothing about this technology, and the reason for the speculation and market bumps is because people like YOU.AKA People who don't understand what this is, and will probably never will. Just keep "speculating", god knows that's what you do best.    

[wareen]

First, it looks like a bubble.

kiba, we need you!

Bear in mind that the Bitcoin system generates no revenue. All funds must come from new investors. This is not like a startup company. This is a zero-sum game.

Of course, Bitcoin does not generate revenue - but neither does gold, right?
Bitcoin has unique properties that make it useful in some contexts (just like gold) and that is its baseline value. Everything above is speculation or hope of growing use in the future (again the same as with gold).

Bitcoin is a new web-technology that enables people and startups to do new things which were previously impossible. Nobody can accurately determine the true value of this, but we all place our bets and that's what makes up the price.

I personally would not underestimate the creative potential of the community which Bitcoin has managed to gather.

[Clipse]

Hi Mr. Nagle, I dont think you should own a computer, being IT illiterate and making claims about something that revolves around IT experience is very important.

On a more genuine note, you are no different from alot of other so-called experts who are making claims about something that isnt even remotely provable.

[billyjoeallen]

Bear in mind that the Bitcoin system generates no revenue. All funds must come from new investors. This is not like a startup company. This is a zero-sum game. If you've been in the game for half an hour and you don't know who the patsy is, you're the patsy.

The U.S. Dollar doesn't generate revenue. Gold doesn't generate revenue. Oil doesn't generate revenue. Are they worthless?

Anything that reduces transaction costs has monetary value. The patsies are the miners who sell cheap.  

[Oldminer]

Bitcoin is still a 'baby' in its development stage. It would be folly to judge where it will stand in even 2 years from now.

[tymothy]

That just screams "bubble" to anyone who's seen one. Bear in mind that the Bitcoin system generates no revenue. All funds must come from new investors. This is not like a startup company. This is a zero-sum game. If you've been in the game for half an hour and you don't know who the patsy is, you're the patsy.

Your criticisms could be levied against gold or any commodity as an investment vehicle. Yes, Bitcoins are not stocks, but that doesn't mean they aren't worth investing in. Or are you suggesting that every non-revenue generating asset is a zero-sum game for patsies?

[aral]

For a guy whose entire raison d'etre is dooming everything to failure, this is a piss-poor example of the art.

Money has to have revenue?  What are you on about mate?

[ElectricMonk]

I have no financial position in Bitcoins, so I'm looking at this neutrally.

Not possible.

If you're in, you're in and if you're out, you're out.
Nobody is neutral.
Next you'll be telling us that there are no absolutes.

[zby]

The counterpoint to this is that all money is in a state of permanent bubble - the value of money is always higher then it's substrate - that's like the very thing that defines money.  Also that additional value comes from speculation - the source of money value is the speculation that in the future someone will accept it as a payment for something else.  Historically (as it is very well explained in http://szabo.best.vwh.net/shell.html) this additional value was gained gradually.  It was growing from real barter value of things and from how easy it was to use something as money.  But this small steps process is only the way evolution works - it is reasonable to think that we can also 'engineer' money and leap over the many evolutionary steps.  It is also plausible to think that the appreciation we have of art (and of gold as something used to make it) is the evolutionary effect (or co-effect) of the fact that it is useful as money.  Of course all of this is very risky - and there is no guarantee that the value of bitcoin will not drop down to zero very quickly (due to it's bubbly nature) - but this is fair for a 'startup' currency.

Another possible counterpoint is that bitcoin in it's core is also a money transfer mechanism that can be used in all the places where PayPal is now used.  Sure it is not yet there - but again - this is the startup phase.  A $1.5 billion evaluation for a system like that is not unreasonable - as we have seen.

[CurbsideProphet]

Gold is tangible.  Bitcoin in intellectual property.  More specifically, intellectual property with no patent.  

For Bitcoin to be successful, it must not only provide a service that differentiates itself from other payment mediums, it must also protect it's business model or concept.  You can't create gold, alchemists have tried for thousands of years.  You can create an exact copy of Bitcoin and just slap some other name on it.  That's the real problem here, some of you are so amazed by this idea that you can't see the simple fact that while it may have been a really ingenious idea, it can be copied to infinity.

Gold has value because of its scarcity.  Everyone is so hung up on the fact that Bitcoin is naturally deflationary when in reality it's exponentially inflationary because anyone can copy this idea at any time.

[[Coins!]]

John, if these problems are as classic as you claim, then surely their solutions are also classic, and will be straightforward to implement.

What then is the issue here?