Why I'm Wary to Invest (Change my mind and I'll give you 1 BTC)

[m0w3r]

For 300 years there has been a central bank located in the world financial capitol.  Since the Bank of England's founding in 1694.  America took over the title of world financial capitol after WW1, and continued with the same central bank modeled after the BOE.  Challenges to the western central bank's dominance over the control of money and credit have been met with force.  Be the challenge from other countries, individual currencies, or strict gold accounting the central bank has survived - for 300 years.  The role of the central bank in the wars, genocides, etc especially of the 20th century is well documented, and many of these things would not be possible if not for it.  A distributed currency, like bitcoin, is the latest challenge to the central banking model.  It could be the best one in that 300 year span.  I hope it can fly under the radar and grow for as long as possible, we'll see.

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[mpfrank]

...Bitcoin in unpatented intellectual property.  Everyone who has ever taken an Econ 101 class should understand the law of supply and demand.  Lets say BTC gets this $30 million investment per year, that sort of money is going to spur competition.  As long as there is demand and profit to be made, competitors will come.  The primary protection against competition is patents, trademarkets, etc..   Lets look at a company like Pfizer for example and their immensely successful drug Lipitor.  Lipitor is patented resulting in Pfizer being the only drug manufacturer allowed to produce the product.  Once that patent runs out, generic brands of the drugs will come online and Pfizer will no longer be making large gains on the drug.  They know this, everyone knows this.  ...

I personally don't think this is an issue, because the success of the existing Bitcoin network creates a very strong barrier-to-entry for competitors.  Who is going to participate or invest in a competing cryptocurrency when Bitcoin already has such a long head start?  Why would anyone switch over when Bitcoin is already so well established?  It would take significant, compelling new features in any competing cryptocurrency to convince people to switch over to it.  Maybe it will happen someday, but I personally don't think it will be soon...

[Alex Thornton]

In order to sustain that price over a year period, NEW money would have to be injected in excess of $39 million per year.

Where does this money come from?  

Your premise is incorrect. For every BTC created, dollars and other currencies do not need to be "injected" to support Bitcoins current valuation.

The market cap of BTC is $106 million according to Bitcoinwatch.com at the moment. This does not mean that $106 million of currency has traded hands. If you were to add up all the currency from every exchange (and on IRC and in the forums) you would not get $106 million after accounting for people trading in and out of the market.

Whenever BTC are created only a small portion of them are sold for currency on the exchanges. Many miners hold or trade their BTC.

In short, only a small amount of currency needs to be brought in to sustain current valuations.

I hope that helps explain why monetary injections will not be a problem.

[Bloody Bell]

Where does this money come from? 

The money does not have to "come from somewhere" in form of dollar denominated cash. If people trust the system, goods/services can be bought with it, it will work. A deposit of backing money for the full capitalization isn't neccessary. Try to ask the same for gold: "where does the money come from to cover the price of the newly mined amount"? Doesn't make much sense, does it? If (rather big if) bitcoin becomes a universally accepted commodity, no money will need to be brought in.

Bitcoin in unpatented intellectual property.  Everyone who has ever taken an Econ 101 class should understand the law of supply and demand. 

I think money supply and demand is out of scope of Econ 101 But it is a bit more complicated than the market of goods.

There is nothing to stop a competitor from coming in, copying the model, maybe even improving on it, and bring it to market. 

Same could be said for Facebook, yet Facebook is dominating the net since years. Not because of patents. Because of the network effect rewarding the first one.

[Havoc]

Where does this money come from?
Based on the number of Mt. Gox accounts I would be very surprised if there are more than 50k users of bitcoins at the moment. That is extremely few. Even if bitcoins never even get close to mainstream acceptance it is not hard to imagine many times the current user base. The $1,000 transaction limit is just something voluntarily imposed by one excange. There will be many more exchanges and some of them bigger operations than the current ones. If the interest in bitcoin continues to be high the money will have no problem to come. And as many others have already explained the huge numbers you mentioned are not needed to sustain the value.

Bitcoin in unpatented intellectual property.
While it is easy to make a competitor to bitcoin, being first is a big advantage. Try making a site like Facebook but a bit better and see how popular it will become. Sure, if google made something like it bitcoin would be in trouble, but there are many reason to belive that no large actors will dare to until much later, and then Bitcoin will be established. The open source nature is one of the main strengts of Bitcoin.

The bottom line.
Bitcoin can fail. Of course. Most of us only invest a little in bitcoin as we understands it to be a high risk project. But there is also a chance it will be the next big thing. I would imagine your situation is similar to mine and this was my reasoning:

I have now spent considerable time reading up on Bitcoins. I like the concept and would love for it to suceed. I would love to be a part of that success story. If I consider investing a sum I can afford to lose, for example $1000, there is four extremes that could happen:

a) I invest and bitcoin fails. I feel a bit bad for betting on the wrong horse, but even more because I would liked it to suceed.

b) I do not invest and bitcoin fails. I will be pleased for making the right decision but still sad to se it fail.

c) I invest and bitcoin suceeds. I could have earned quite a lot and even better I have been part of something great, someting that maybe changed the world.

d) I do not invest and bitcoin suceeds. I will feel very bad for missing out on this. After all I was one of the first that saw the potential but decided not to take the risk.

From these four I myself decided that not investing at all would be a bad decision. I have treated Bitcoin like you should any high risk business venture, that is only make a limited investment.

[Prze_koles]

Lol, I bet there would be like 0 ppl in the project if it were not open source.
And before you invest, read.
Don't listen to people. Just read the info, analyse it, wait a week or more before investing (if you're doing it for long-term). Or just don't invest if you think it's risky.

[kiko]

From the FAQ, "in the first 4 years of the Bitcoin network, 10,500,000 BTC will be created."  So 2,625,000 BTC's per year.  BTC's fluctuate in price but lets use $15 per BTC as a baseline.  In order to sustain that price over a year period, NEW money would have to be injected in excess of $39 million per year. 

Stop trying to use market cap. to make decisions.

Prices are set at the margin.  This is a fancy way of saying that despite the whole town owning Bitcoins, just two guys can go into a room and exchange a single bitcoin back and forth between with each other for escalating amounts, perhaps tripling the value overnight. How much net money had to flow into the economy? None. Yes, in your model the market cap would increase immensly, but it would be a mistake to assign any relevance to it and assume that's how much money 'flowed in'. Let the concept of market cap. go, it has no relevance in a zero sum scenario like a currency.

Market cap. assumes that just because there was 1 buyer at a particular price then everyone is willing to pay that price. The Bitcoin flash crash last week should be proof enough that the premise is false.

Market cap is the upper bound of what you could get for an asset provided you only sell an infinitesimally small portion of it, in other words its purely academic and has no use in the real world.

[/rant]

That may not help you to decide whether to invest in bitcoin, but I hope at least it will help steer you away from basing the final decision on a bogus valuation. My advice is to pull the trigger; based on the fact that nothing focuses the mind like having skin in the game. Once in then decide whether to stay in or not.

Edit; While I was typing I see other people have picked up on this theme, but I'll post anyway.

[RomertL]

If you think any of this is even remotely likely to happen in the not too distant future you should probably invest:

1: The Bitcoin gets adopted by a (likely third world) country with very inflationary currency due to its deflationary nature

2: The Bitcoin gets adopted of a large part of the online-merchants and become a serious competitor to Paypal due to lower fees, anonymity, ease of use, lack of chargebacks, tax-benefits etc  

3: The Bitcoin gets popular in the criminal world due to combining the best of online-banking/paypal +clones (wordwide transfers of wealth without transporting anything physical) with that of cash (anonymity). Will probably be used for money-laundering.

If any of this happens the Bitcouin will go up a LOT, so even if you think the likelyhood is a lot less than 50% it would be worth throwing in some $. And if you, like me, think it's more than 50%, well, buy as much as you can afford

[Frozenlock]

Oh boy... here I go! 

Let me start by saying that I do not know all of the facts, which is the reason for this topic.  The person who can provide the most convincing argument to my concerns will be given 1 BTC should I decide to invest.  That incentive is just to put out there, really what I would like is a civil and hopefully mostly troll-free discussion. 

From the FAQ, "in the first 4 years of the Bitcoin network, 10,500,000 BTC will be created."  So 2,625,000 BTC's per year.  BTC's fluctuate in price but lets use $15 per BTC as a baseline.  In order to sustain that price over a year period, NEW money would have to be injected in excess of $39 million per year.  Perhaps slightly less as not all will go to market, so lets say, $30 million.  First problem I see:

Where does this money come from?  We have very small scale exchanges, and the largest one has been hacked and isn't even open yet.  A further barrier is the $1,000 transaction limit.  How do you get $30 million a year in with that sort of limit imposed.  Yes, that limit can be removed by providing verifying information, however, the scale we're talking about is going to take institutional investors.  Will these institutional investors be willing to lose their anonymity to invest here?  And even so, the next is my biggest concern....

Everything you have said there is true, but might lack some important information, or rather deductions.
For the sake of argument, I'm willing to assume the daily 1000$ limit will stay the same in a worldwide competition of exchanges, each of them in a different jurisdiction. (I hope you see how this is hard to believe.)
Even if the amount of bitcoins to be sold was as high as you think (which I doubt, many are simply saving them), exchanges are only one method of getting BTC. I got all my BTC by buying directly from miners.
Another method, which will not be shown when you look at numbers on MtGox or TradeHill, is to sell or work for BTC. This is at the moment wrongly overlooked, because it is way easier for a merchant to accept BTC than any other currency. Once again: a merchant can setup is own business and start accepting payment without a single call to a bank. You want to try a little website project? Use Bitcoin! So in response to your first concern: you don't literally need new money to come in, but rather new value. What is the value of a monetary system without the need of a middle man? No overhead, no paper to fill, no delays, no frozen account. This is a good news for everyone producing something of value. 

Bitcoin in unpatented intellectual property.  Everyone who has ever taken an Econ 101 class should understand the law of supply and demand.  Lets say BTC gets this $30 million investment per year, that sort of money is going to spur competition.  As long as there is demand and profit to be made, competitors will come.  The primary protection against competition is patents, trademarkets, etc..   Lets look at a company like Pfizer for example and their immensely successful drug Lipitor.  Lipitor is patented resulting in Pfizer being the only drug manufacturer allowed to produce the product.  Once that patent runs out, generic brands of the drugs will come online and Pfizer will no longer be making large gains on the drug.  They know this, everyone knows this. 

Bitcoin has no patent and in fact, is open source.  There is nothing to stop a competitor from coming in, copying the model, maybe even improving on it, and bring it to market.  Look at it this way, if you're an investor would you really invest multi-millions of dollars worth of capital in something that can be copied today?  Why not create your own?  Whose to stop Google from coming in and making Googlecoins?  Any profitable venture will result in competition.  This may be good for P2P currency's longevity but I'm strictly talking about BTC from an investment standpoint.  If it were legal to make an exact copy of Lipitor and bring it to market today, would it happen?  You're damn right it would.

The network effect is in play here.
Can I go and make a website identical to Facebook? Sure! (Please don't bring any intellectual property argument - there is more than one country in the world, many in which it is perfectly legal to do so.)
But if I make such a site, who will come? All your friends are already on Facebook...
The same thing is true with Bitcoin. The websites are being developed for BTC, the exchanges in place are for BTC, the name Bitcoin is known! (Brand power)

The other argument in favor of BTC in this case is the blockchain. The longer it is, the harder it is to counterfeit. In addition, the current hashing power in the network is huge, making it more secure than any other wannabe Bitcoin clone.

I have other concerns, the bad press, the security issues, lack of merchants, etc. but really those are my two big ones and they sort've tie in together.  Again, I'm coming at this from an investment standpoint.  I see Bitcoin's value as rampant speculation.  I don't want to use the "B" word, but the price appreciation is unsustainable (LONG-TERM) in my view.

There is no such thing as bad press for Bitcoin in the current stage of its development. All you can do is attract new users. Current users know when articles are BS.
The lack of merchant is temporary. If you have looked at the wiki merchant's list a month ago and compare it to what it is now... wow, simply wow!

If it isn't already done, you might want to look at this article: http://falkvinge.net/2011/05/29/why-im-putting-all-my-savings-into-bitcoin/

1PNxesEoWQViHZ8BSjpodqmBB9RpbWFVhT

[ElectricMonk]

The first question is just a complete misunderstanding of market cap. The second is a legitimate concern but IMO unlikely due to first-to-market advantage.

Where does this money come from?

You don't need this influx of money. The current market cap of Bitcoin is 106,482,730 USD. If the price of Bitcoin doubled in the next couple of days, it would not require 106,482,730 USD of investment. It's quite possible for money to flow out of Bitcoin and for the market cap to increase. Make sense?

Bitcoin in unpatented intellectual property.

Firstly, Bitcoin has a first to market advantage. Any competitor would have to have a huge technical advantage or perhaps a marketing advantage e.g. Google to release a decentralised crypto currency. That advantage would have to overcome the hurdle of a 100 Mil market that already exists. You would also be requiring a large company to take a risk on a technology that would potentially become illegal.

Secondly, Bitcoin is the technology and not the business. Think of HTTP and HTML and how it's used by two competitors such as MySpace/Facebook. HTTP/HTML was the technology behind both. It originated in CERN and once it was created and people started using it, it would be very hard for someone to come along and change the base technology once it's been adopted by a large group. THey may change how they use it, they may build different businesses upon it but once it becomes accepted by a group then that technology becomes the obvious foundation to build upon. In fact, it amazes me just how much the web has changed over the years and yet the driving force behind much of that change is innovatiion rather than adaptions to the technology itself.

Hope that helps.

You can put your 1 BTC here ... 1MCoDAms5xMNs3WHm1jaXfUMVGRrHwTSsi

[TheBitMan]

look at the chart...

http://www.google.com/imgres?imgurl=http://cs702.files.wordpress.com/2011/05/bitcoin-price-chart.png&imgrefurl=http://cs702.wordpress.com/2011/05/29/on-the-potential-adoption-and-price-appreciation-of-bitcoin-in-the-long-run/&usg=__Tqo6ClGga-ZBY_sJp1wIlRI1iDI=&h=348&w=659&sz=6&hl=en&start=0&zoom=1&tbnid=AUnZ8xiuPef88M:&tbnh=93&tbnw=176&ei=xmoGTpzVCsro0QHcmqjZCw&prev=/search%3Fq%3Dbitcoin%2Bchart%26um%3D1%26hl%3Den%26sa%3DN%26biw%3D1573%26bih%3D703%26tbm%3Disch&um=1&itbs=1&iact=hc&vpx=350&vpy=326&dur=384&hovh=93&hovw=176&tx=164&ty=71&page=1&ndsp=33&ved=1t:429,r:14,s:0

1 BTC please..numbers don't lie 

[HappyFunnyFoo]

I was going to go big into bitcoin until I realized that bitcoin's encryption algorithm and the entire blockchain will be rebuildable in a single afternoon by the average kid's computer in 5-6 years....

[wareen]

I was going to go big into bitcoin until I realized that bitcoin's encryption algorithm and the entire blockchain will be rebuildable in a single afternoon by the average kid's computer in 5-6 years....

This thread was actually quite interesting and troll-free up until now

[Bastet]

Remember the Million Dollar Home Page, http://www.milliondollarhomepage.com/...

There can be only one.  Lots of copycats but none ever succeeded.  Not to mention, bitcoin already has a two year head start.  Personally, I don't think there will be a fork unless a really good feature comes along and WE want to change.  But when we do, I'm sure we'll be able to "exchange" existing bitcoins for the new bitcoins.

Failure is a possibility in anything.  The upside of bitcoin is so great, that a risk is worth taking.  But just so you can sleep at night, only invest as much as your can afford to lose.  I'm in it for a few bitcoins and happy to just be part of it.  Sure it's just 0.00000001% of all bitcoins, but 0.00000001% of the world economy when this hits will be worth something, don'tcha think?

This bitcoin may no longer exist in the future, but the idea of bitcoin will live on forever (decentralize and p2p.)

[Oldminer]

Because soon BTC will be worth > $100 each

The Bitcoin boats 'docked' at the moment. Its up to you whether you get onboard.

[mpfrank]

I was going to go big into bitcoin until I realized that bitcoin's encryption algorithm and the entire blockchain will be rebuildable in a single afternoon by the average kid's computer in 5-6 years....

This thread was actually quite interesting and troll-free up until now

Yes.  He's significantly exaggerating the steepness of the Moore's Law trend.  Also, not many people realize it yet, but the power-performance of digital computers is only about 10-20 years away from reaching certain fundamental thermodynamic limits, which no amount of engineering cleverness will be able to circumvent.  (Well, except for some real long-shots like reversible computing.)  So, mining power per watt will level off long before things improve that much.

[mpfrank]

Remember the Million Dollar Home Page, http://www.milliondollarhomepage.com/...

There can be only one.  Lots of copycats but none ever succeeded.  Not to mention, bitcoin already has a two year head start.  Personally, I don't think there will be a fork unless a really good feature comes along and WE want to change.  But when we do, I'm sure we'll be able to "exchange" existing bitcoins for the new bitcoins.

Failure is a possibility in anything.  The upside of bitcoin is so great, that a risk is worth taking.  But just so you can sleep at night, only invest as much as your can afford to lose.  I'm in it for a few bitcoins and happy to just be part of it.  Sure it's just 0.00000001% of all bitcoins, but 0.00000001% of the world economy when this hits will be worth something, don'tcha think?

This bitcoin may no longer exist in the future, but the idea of bitcoin will live on forever (decentralize and p2p.)

+1000.

Here's the way I see it:  The total size of the world money supply of all sovereign currencies is on the order of $100T today, expressed in USD units.  Suppose that there is a potential for Bitcoins to eventually take over just 10% ($10T) of that market, and allow that their supply may get inflated 100x by fractional-reserve banking with only a 1% reserve requirement.  That still means that, even when the 21M BTC limit is approached, EACH BITCOIN will be worth almost $5,000.  Even if you think there's only a 10% chance that this scenario (or a more favorable one) may play out, that still means that you should assess that your expected long-term value for 1 bitcoin is AT LEAST $500.

[CurbsideProphet]

I personally don't think this is an issue, because the success of the existing Bitcoin network creates a very strong barrier-to-entry for competitors.  Who is going to participate or invest in a competing cryptocurrency when Bitcoin already has such a long head start?  Why would anyone switch over when Bitcoin is already so well established?  It would take significant, compelling new features in any competing cryptocurrency to convince people to switch over to it.  Maybe it will happen someday, but I personally don't think it will be soon...

I'm just going to use your quote because it's hard to address everyone individually (although thank you everyone for your input).  I have to disagree with your assertion and it's what concerns me the most.  There are very low barriers to entry.  Bitcoin is open source, it's out there for everyone to see and replicate.  There are many barriers to entry but the primary ones are cost of capital, geography, and regulation.  I'm sure there are more but I'm just going off the top of my head.  Bitcoin has none of those barriers.  

My example of Pfizer would be a better example of a high-barrier-to-entry.  They are protected by patents, have to spend millions on R&D and have to deal with the FDA scrutiny/approval process.  THOSE are high barriers to entry.  Bitcoin can be recreated relatively easily by a saavy computer developer(s).

I'm also a bit surprised about the first to market and Facebook examples.  Facebook was most definitely NOT first to market.  Asian Avenue, MySpace, there were tons of predecessor social networking sites.  Facebook just improved on those concepts.  If anything, Facebook strengthens my point.  It's the latest and most successful incarnation of social networking.  But first?  Not even close.

Speaking of market cap (whether you feel it relevant or not) you simply cannot have an unprotected multi-million dollar concept, or whatever you want to call it, and not expect to see immense competition.  If a guy was selling hotdogs for $50 each, that costs him $2 to make, AND posts his recipe for everyone to see, wouldn't you or someone else come in and start selling hotdogs too?  Of course!  Because there's profit to be made.  That's why I say it's simple economics, to think BTC can go to $100 or whatever arbitrary number you want to use without factoring in competition is coming to a conclusion missing a very important variable.

I just want to finish by saying I'm not trying to sway people one way or the other.  I think it's been a great discussion.  But for me, this is the way I do my investing/speculating.  I play devil's advocate and see what type of responses I get.  

[Bastet]

Get in on bitcoin and get in on the competition...win/win...again, with only with as much as you can afford to lose. win/win/win

[Frozenlock]

I'm also a bit surprised about the first to market and Facebook examples.  Facebook was most definitely NOT first to market.  Asian Avenue, MySpace, there were tons of predecessor social networking sites.  Facebook just improved on those concepts.  If anything, Facebook strengthens my point.  It's the latest and most successful incarnation of social networking.  But first?  Not even close.

Neither is Bitcoin. There was many, many, MANY attempt at virtual currency. Bitcoin is simply the most successful incarnation 

You give as an example for high-barrier-to-entry business Pfizer. However, this barrier is artificial and created by a web of regulations. I would not invest my money in such politic-dependent enterprise, but rather in those which create real value.