Watching amateur finance types flail

[bitcoinBull]

I also recently posted the core problem of BTC again(i.e. someone has to keep propping the thing up with his own real world cash to continue the merry go round) in a thread that remained pretty much unaddressed.

Yup - an economic carrier needs to derive its value from the rest of the world (unless it grows in complete isolation).

Its a core problem BTC shares with every other asset: dollars, houses, gold, silver, sugar, gasoline, etc..

[elggawf]

If it helps - there have been people (me, e.g. but obviously also others, but I don't have their nick or posts atm) bringing up the same arguments (about lack of backing, ponzi nature, bubble look, no economy exists etc) BEFORE the 30$ => 10$ "pop".

The "no backing" argument doesn't really fly with me, because it's voluntary participation. You should understand all the things you mentioned about Bitcoin before you part with any hard earned cash (haha) for some - if you didn't go in with your eyes open, you're just another chump. About the "ponzi" thing, I don't think it's the same thing - to my knowledge no one authoritative is claiming any type of guaranteed return in the way ponzi marketers do. Everyone I see promoting it in a big way is saying the same thing: this is a huge risk, with the potential of a huge reward. Disregard Rick Falkvinge being authoritative on Bitcoin.

About the "no economy" - well of course there's a scarce economy (it's not accurate to say there's no economy, it's just paled by the rampant speculation). It's a currency without inherent worth, with no authority telling you you must accept it. Businesses are rightfully nervous about entering into it, particularly with the demonstrated ability to swing wildly in value in a matter of hours.

It's a bit of a catch-22 that most of the speculation revolves around it having a useful economy, and that useful economy is being strangled by the speculation. Many of the heavy investors seem to simply want to buy as many as they can to hoard, expecting that someone else will do the heavy lifting of bootstrapping an economy.

I still think the project has merit as a currency, but I'm not going to hold any long term. I will leave it to others to speculate, though I have been having a pretty good time being a wannabe day trader. I'll keep accepting it in manageable amounts, liquidating it as I get it (or trading it off as quickly as I can for something else of value) and only gambling with what I can afford to lose.

[relative]

Well, miners were installing hash power long before BTC even had a price.  And difficulty rose faster than the price.  There will always be some miners willing to hash at a short-term loss for the potential reward of long-term gains.  That's how all business works.

History does not show the hash rate to be a one-way function of BTC/USD.  They are correlated indicators demonstrating two-way causality.

people do all sorts of irrational stuff, or might even just have been investing for the future in this case.
this doesnt make the hash rate a fundamental of bitcoin.
this is a fallacy you see quite often here and in articles about bitcoin. people think that bitcoins are created from computing power and that's what gives them value because computing power is expensive.
even if bitcoins were created from hashing this wouldnt give them value. and they aren't.

[phillipsjk]

If coins were somehow generated by doing useful work, that would be better.

This line alone shows you don't fundamentally understand the currency. The Cryptographic hash of the transaction block exhibiting specific, tunable properties (matching a number less than 'x'): was not chosen at whim. You should read the first reference in Shatoshi's Paper:
W. Dai, "b-money," (1998)

It explains that you can't do useful work while protecting the integrity of the system. The requirement to do "useful work" would allow dishonest participants to "cheat" by not actually doing the "useful" part of the computation.

[bitcoin0918]

Yup - an economic carrier needs to derive its value from the rest of the world (unless it grows in complete isolation).

Its a core problem BTC shares with every other asset: dollars, houses, gold, silver, sugar, gasoline, etc..

Exactly. What a stupid, stupid argument. There is no other way to describe it. To say bitcoin needs more dollars to keep it going is to ignore the purpose of bitcoin. What bitcoin needs is more people willing to accept BTC in exchange for goods/services. It is not a "flaw", and it is not specific to bitcoin. It is a simple economic fact.

[Nescio]

an MMORPG

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

The rules for "A" and "An" are not based on the actual letters, but on whether your mouth starts open or closed on the following word (which USUALLY corresponds to vowel/consonant), and in this case, since you say "Em Em Oh Are Pee Gee" not "morpig" (or something), it is "an MMORPG".  There are some other examples, but they don't come to mind.

EDIT: Also, wow, I'm late to the party, I totally didn't realize this was 7 pages long and that I was responding to something from ages ago.

And I've just been reading this highly entertaining thread thinking that bitbot got cut off in mid sentence until your post The whole ensuing grammar discussion became a kind of fascinating ongoing cognitive dissonance.

[Nescio]

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.

You do realize the irony in your nick though, right? Dig Dug blowing up and popping monsters like a bubble, er, balloon

[relative]

Exactly. What a stupid, stupid argument. There is no other way to describe it. To say bitcoin needs more dollars to keep it going is to ignore the purpose of bitcoin. What bitcoin needs is more people willing to accept BTC in exchange for goods/services. It is not a "flaw", and it is not specific to bitcoin. It is a simple economic fact.

right. and if you take into account that there is a monetary inflation of bitcoins of 40% this year alone, or an (exponential) 18% each year for the next 5 years, you can make your own judgement whether the "bitcoin economy" grows accordingly (after it started existing) to maintain bitcoin's value relative to other assets.

[HappyFunnyFoo]

Finally, someone with common sense.  Nagle put so elegantly into words what I've been thinking more and more this past week.

I call bitcoin more of a "digital commodity" as opposed to a "currency" and most of its value is speculative.  It's not being used for purchasing goods.  It's being used to generate more wealth.

[FooDSt4mP]

Finally, someone with common sense.  Nagle put so elegantly into words what I've been thinking more and more this past week.

I call bitcoin more of a "digital commodity" as opposed to a "currency" and most of its value is speculative.  It's not being used for purchasing goods.  It's being used to generate more wealth.

I use it primarily to purchase goods.  I have some savings, but I spend as many as I can.  Being able to buy food for bitcoins has moved a significant portion of my spending into the bitcoin economy.  I just buy replacement coins with the fiat I would have spent.  It is sometimes a little more expensive (<5%) but it helps the value of my savings to encourage the real economy.  Quit complaining no one does it and join us.

[freequant]

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.

I recognize in OP's argument my original doubts about Bitcoin.
But there is one major thing OP seems not to have considered : the demographics behind Bitcoin, and its motive.
People at the core of Bitcoin are not your average gullible Joe.
People at the core of Bitcoin are geeks, and many are also traders, scholars, hackers, businessmen or a mix of all these traits.
And they know what they are doing when they decide not to drop Bitcoin at the first occurence of the usual financial troubles.

This is the kind of demographics that has, countless times in the past, taken over huge slices of power from the hands of the establishment.
Free software that was seen as an amateurish nerd hobby, and an economical non-sense, is now the new paradigm that dominates the industry.
Peer-to-peer file sharing, this phony and illegal extension of private copy, is now maintream and on the verge of abolishing copyright.
Blogs may be perceived as amateur journalism, but they effectively shreded the business of major newspaper.
Hacktivism left the underground and is acting openly in the wild, leaking state secrets, crusading against liberticid laws, pushing transparency and accountability in government agendas, and triggering revolutions in despotic countries.
Influent black hats are in crontrol of armies of machines in the tens of thousands, that can lay waste at will in the digital economy.

Finance and monetary policy have remained surprisingly untouched... until now.
What you are seeing here is the first sizeable attempt by the geeks to take over the banking system.
That may sound unrealistic, but past occurences of such bottom-up revolutions show that this is a very possible outcome.

OP, you are right when you tell Bitcoin is a bubble.
But what you fail to understand is that unlike natural bubbles driven by greed, and broken by fear, Bitcoin is a programmed bubble driven by logic rules that guaranty a steady deflation for the years to come. We all know it, and we all know that this built-in mecanism gives us a few years to push Bitcoin into mainstream before it reaches the critical point where it can not anymore sustain alone its expansion.
If we fail to push Bitcoin in the mainstream, the bubble will burst before it gained enough momentum, and all we will have left is exhilarating memories of an epic ride (which in the end may account for more subjective value than the money that was lost).
If we success, the bubble will merge into the real word economy and stabilize before it has the time to burst.

Bitcoin may not generate value, but there is a huge slice of the real world economy at stake.
That is more than enough potential value to keep everyone on board until the end.

[proudhon]

Do you agree or disagree with this line of argument?

P1:  If something's exchange-value is derived from what enough people believe it's use-value could be in the future, and enough people belief it will be more useful in the future, then it's exchange-value is greater than it's current use-value. (i.e. price is largely determined by speculation).
P2:  Bitcoin's exchange-value is derived from what enough people believe it's use-value could be in the future, and enough people belief it will be more useful in the future.
C1:  Therefore, Bitcoin's exchange-value is greater than it's current use-value.

agree.

And:

P3:  If something's exchange-value is greater than it's current use-value, then it is probably bad*.
P4:  Bitcoin's exchange-value is greater than it's current use-value.
C2:  Therefore, Bitcoin is probably bad.

don't agree.
my whole argument is that these prices are ridiculous. whether bitcoin as a technology holds any merit (aka is "not bad") remains to be seen. we still have railroads even though there was a mania.

my guess is that bitcoin isn't even the myspace of e-currencies but one of its predecessors.

Wait, then I'm not sure I see any practical conclusion.  You say that your "whole argument is that these prices are ridiculous", so, then, is this your argument:

P3':  If something's exchange-value is greater than it's current use-value, then it's exchange-value is ridiculous.
P4:  Bitcoin's exchange-value is greater than it's current use-value.
C2':  Therefore, Bitcion's exchange-value is ridiculous.

If that's your argument, then here's my question:  So what?  Even supposing I accept the argument, and therefore accept the conclusion, how should I then behave with respect to bitcoin?  Should I not participate?  Should I participate?  Should I expect it to fail?  Should I not expect it to fail?  If something's exchange-value is ridiculous should I expect it likely to significantly decrease in the (near?) future?  Besides attributing ridiculousness to the exchange-value, should your readers conclude anything else?

[HappyFunnyFoo]

Finally, someone with common sense.  Nagle put so elegantly into words what I've been thinking more and more this past week.

I call bitcoin more of a "digital commodity" as opposed to a "currency" and most of its value is speculative.  It's not being used for purchasing goods.  It's being used to generate more wealth.

I use it primarily to purchase goods.  I have some savings, but I spend as many as I can.  Being able to buy food for bitcoins has moved a significant portion of my spending into the bitcoin economy.  I just buy replacement coins with the fiat I would have spent.  It is sometimes a little more expensive (<5%) but it helps the value of my savings to encourage the real economy.  Quit complaining no one does it and join us.

usoundmad.  99% of bitcoin activity is speculation, obviously.  I personally can't use it for day-to-day stuff because no business in town accepts bitcoin and I do business locally, with the exception of big-ticket purchases at shoppes such as NewEgg, who also don't accept bitcoin.

Link me to a gas station, laundromat, grocer, hardware retailer, hospital, college, etc., that accept bitcoin.  ....... ustillmad?

[relative]

If that's your argument, then here's my question:  So what?  Even supposing I accept the argument, and therefore accept the conclusion, how should I then behave with respect to bitcoin?  Should I not participate?  Should I participate?  Should I expect it to fail?  Should I not expect it to fail?  If something's exchange-value is ridiculous should I expect it likely to significantly decrease in the (near?) future?  Besides attributing ridiculousness to the exchange-value, should your readers conclude anything else?

I don't have to tell you what you should do, do I?
my own conclusion is that I don't want to time a market, especially not a bubble market. so I personally don't buy and would get out as soon as possible.
you might be a trader who wants to profit from the psychology of other people during a mania. your choice.

I'd expect the trade value to significantly decrease if no other significant changes appear, yes. bubbles have lasted for years in the past, so again, this is hard to time. but given the high inflation of bitcoins during the next couple of years I'm guessing it's sooner rather than later.

[proudhon]

If that's your argument, then here's my question:  So what?  Even supposing I accept the argument, and therefore accept the conclusion, how should I then behave with respect to bitcoin?  Should I not participate?  Should I participate?  Should I expect it to fail?  Should I not expect it to fail?  If something's exchange-value is ridiculous should I expect it likely to significantly decrease in the (near?) future?  Besides attributing ridiculousness to the exchange-value, should your readers conclude anything else?

I don't have to tell you what you should do, do I?
my own conclusion is that I don't want to time a market, especially not a bubble market. so I personally don't buy and would get out as soon as possible.
you might be a trader who wants to profit from the psychology of other people during a mania. your choice.

I'd expect the trade value to significantly decrease if no other significant changes appear, yes. bubbles have lasted for years in the past, so again, this is hard to time. but given the high inflation of bitcoins during the next couple of years I'm guessing it's sooner rather than later.

Of course you don't have to tell me what I should do.  But, that's what an argument is - i.e. an attempt to tell people what they ought to think or do if they accept the premises of the argument.

[unk]

This line alone shows you don't fundamentally understand the currency. The Cryptographic hash of the transaction block exhibiting specific, tunable properties (matching a number less than 'x'): was not chosen at whim. You should read the first reference in Shatoshi's Paper:
W. Dai, "b-money," (1998)

It explains that you can't do useful work while protecting the integrity of the system. The requirement to do "useful work" would allow dishonest participants to "cheat" by not actually doing the "useful" part of the computation.

incorrect. whether the computation is 'useful' is an externality; it has no direct bearing on its suitability for use in bitcoin.

a thought experiment: suppose computing sha-2 hashes below certain values were discovered tomorrow have a very important benefit to the progress of applied mathematics, or (more fancifully) to curing a disease or searching for extraterrestrial life. would that undermine the use of sha-2 in bitcoin? the answer is that it obviously wouldn't.

likewise, it is not possible to rule out more 'useful' substitutes for sha-2 hashing as proof-of-work - i.e., substitutes that have more positive externalities. some good analysts in the development thread have occasionally proposed alternatives (like the computation of mersenne primes) that seem at least potentially workable.

what a lot of people fail to understand is that mining is a cost of bitcoin. it may be a necessary cost, but someone in the system has to pay for it. it is unclear in future whether the costs of bitcoin's mandated proof of work will outweigh the benefits of the currency. for example, the costs may be so great that the transaction fees that need to be paid to miners will be greater than the transaction fess of paypal or mastercard. that future comparison is, among the developers, an open question.

bitcoin was designed to be entirely decentralised, and decentralisation has substantial costs. it may also have substantial benefits. time will tell.

[relative]

what a lot of people fail to understand is that mining is a cost of bitcoin. it may be a necessary cost, but someone in the system has to pay for it. it is unclear in future whether the costs of bitcoin's mandated proof of work will outweigh the benefits of the currency. for example, the costs may be so great that the transaction fees that need to be paid to miners will be greater than the transaction fess of paypal or mastercard. that future comparison is, among the developers, an open question.

thats a little OT but an interesting question. if the official client makes no default minimum of a transaction fee and keeps relaying all transactions that means everyone sending a transaciton decides what transaction fee he pays. miners might reject some transactions, but only if there are enough other transactions that do have a high transaction fee.
eventually that will be the only income of a miner, and by mining the miner makes it less likely that the bitcoin network can be attacked, so he is a benefit to the entire network.
but network security isn't a benefit to the 1 guy who is right now sending a transaction. so why would there be any significant transaction fees as a whole?

why doesnt the mining community dry up and a large number of transactions are secured by very miniscule computing power?

I guess(!) initially the network was supposed to be secured by each client doing some mining and specialized hardware wasnt anticipated. correct?

[phillipsjk]

My view is that the money spent on "security" (mining) will closely follow the stored value of all Bitcoins. If Bitcoin displaces the US dollar, large corporations and governments will dedicate datacenters filled with computing clusters to the problem. If Bitcoin crashes due to (for example) a widespread security compromise, forever tainting the blockchain, Bitcoin mining will only be carried out by a few hobbyists once again.

The problem with doing "useful"  work like looking for large primes is that discoveries are more unpredictable. If you reward people for doing "shares" of work, dishonest participants a can say "nope, didn't find anything" without actually doing the difficult computation.

The use of hashes also guards the transaction block against corruption: a single-bit error, deliberate or not, will be detected. The hash function also allows the difficulty to be lowered if needed. Any task involving otherwise "useful" work can be pre-computed. This is very bad from a security point of view. With the problem changing every 10 minutes or so, it takes about 50% of the total network computing power to successfully take over the network. If the "useful work" can be pre-computed, somebody with only 10% of the network computing power can toil away in isolation for 20 hours for every hour they spend attacking the network.

[relative]

My view is that the money spent on "security" (mining) will closely follow the stored value of all Bitcoins. If Bitcoin displaces the US dollar, large corporations and governments will dedicate datacenters filled with computing clusters to the problem.

why? maybe governments but that's a longshot.
large corporations don't have a history of spending big money on something that benefits all instead of themselves. only
there is the same lack of motive as with the sender of an transaction.

this might be the best argument for (unlimited) inflation of bitcoins so far.
(I don't see a deflation spiral happening)

[phillipsjk]

Corporations control a lot of capital. It make sense that they would want to act as their "own bank." If nobody else, the banks will turn to Bitcoin mining to get the transaction fees. They may even refuse to process "no fee" transactions.

Edit: To be clear, I don't think will happen unless Bitcoin replaces a major world currency.
Edit: Bitcoins can't inflate indefinitely: There is a hard limit of 21 Million (The value of each can't pass 0). Over the last two years, Bitcoin has experienced hyper-deflation.