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Author Topic: Unification of bubble and monetization  (Read 1335 times)
xxjs
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June 07, 2013, 07:47:23 PM
 #1

What is cheap price? It is that a good or service has a lower price that it was, lower than it is expected to become, or it can replace another good or service, that has a higher price.

In reality, all prices that are based on voluntary exchange are exactly right, at the time and place of exchange. (Or more precisely said: the price is bounded between the seller's and the buyer's valuation).

A asset bubble, for instance in housing, can be regarded as a monetization of the houses. They are priced, not only on the utility for the owner, but for the expected exchange value of the house in the future. The monetizing effect is self-reinforced, as the rising prices attracts investors prospecting an even higher price. The house has partly a utility value, and partly an exchange value. Eventually, the bubble will burst, because a house is not a very good money: It is not fungible, divisible or movable.

Bitcoin is a bubble in the same sense as the house asset, even more, since it started at zero, has only exchange value, and will likely go to zero in the future, if it can be replaced with something better. (Hopefully far beyond my time). The difference is that the exchange value of bitcoins is real, because, it is in fact fungible, divisible and (extremely) mobile. It can stay on the top of the bubble curve for a long time, the exchange value will hold, because of the usefulness of the system in indirect exchange. Or in stead of real, you could say that bitcoins are extremely liquid, while houses: not so much.

In sum, the same thing: a bubble is the monetization of some stuff, if it is not good money, it will burst.

What do you think?


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bitzox
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June 07, 2013, 10:38:39 PM
 #2

So many confusing, contradictory statements in this post.

You can't really equate the housing bubble and a bitcoin bubble except in that they are both bubbles. Houses are not purchased by anyone because they make a good type of money. The idea that something needs to be fungible, divasable, and mobile really only able to mediums of exchange (usually money). No one should buy a house because they think it makes a good medium of exchange. You buy a house for tax purposes, as a place to live, or as an investment.

The housing bubble was much more complicated than you are making it out to be. First off houses were never monetized, it was the mortgage on said house that was monetized. This might seem like a semantic difference but it is important. During the housing bubble investors weren't buying houses as much as they were buying streams of income (ie mortgage payments). No one really cared about the houses actually underlying the CDO's all they cared about was the yield and the rating(ratings which we now know, and honestly should have known then, to be flawed).

Also you cant say that bitcoin is a bubble because it started at 0. Every asset theoretically started at 0 that doesn't make every asset in a bubble at all times. A bubble is more accurately described as a rapid expansion of something (usually credit) which results in risk assets being bid up to levels that are not justified by underlying realities. Take the dot com bubble for example. Interest rates were super low which allowed for the expansion of credit (Thanks Fed!) thus you have investors with tons of capital that needs to be invested, this capital chased what was hot (tech companies, especially those involved in the internet) and ignored the value proposition of those companies. Thus you had companies who were hemorrhaging money and no plan for getting into the black with valuations in the stratosphere. No one cared about the fundamentals, they had cash to spare and just threw it into what was hot (ie what other people were investing in).

I could go into more depth, but I should really get back to work  Wink I think you are either failing to understand or translate what a bubble is. Just because something is worth more than it was yesterday doesn't necessarily make it a bubble. Usually it is a central bank "printing" more money allowing the price of assets to rise higher than they would otherwise. The beauty of bitcoin is that it avoids this problem. It can still experience volatility of price due to fluctuations in supply and demand however.

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June 07, 2013, 10:56:44 PM
 #3

One of the largest contributors to bubbles is credit.  I would argue it was not the CDOs, in and of themselves, but the cheap, easy, and freeflowing credit.  Not much has changed in the current housing market, actually.. there i still cheap and easy credit, and there are still people taking on far too much of it if there is another downturn.

But, I digress, and generally agree with what you wrote above (second post).  There are bubbles being created as we speak by cheap and easy credit, and though it isn't directly tied to bitcoin, it is effecting its price indirectly.

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June 07, 2013, 11:11:16 PM
 #4

One of the largest contributors to bubbles is credit.  I would argue it was not the CDOs, in and of themselves, but the cheap, easy, and freeflowing credit. 

Couldn't agree with you more. Hooray for the Fed and the Bernanke

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xxjs
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June 08, 2013, 04:42:04 AM
 #5

Thanks. I found this well written blog post about the bitcoin bubble:

http://konradsgraf.com/blog1/2013/4/6/hyper-monetization-questioning-the-bitcoin-bubble-bubble.html


I especially liked

"To imagine how different this is from a classic asset bubble, it would be as if not only the price of bubble-era houses were rising, but also that their actual sought-after qualities as houses were improving spontaneously at the same time. Such houses might sprout new rooms with no one building them, with new paint jobs appearing mysteriously overnight without any painters having visited."

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June 08, 2013, 01:08:50 PM
 #6

Thanks. I found this well written blog post about the bitcoin bubble:

http://konradsgraf.com/blog1/2013/4/6/hyper-monetization-questioning-the-bitcoin-bubble-bubble.html


I especially liked

"To imagine how different this is from a classic asset bubble, it would be as if not only the price of bubble-era houses were rising, but also that their actual sought-after qualities as houses were improving spontaneously at the same time. Such houses might sprout new rooms with no one building them, with new paint jobs appearing mysteriously overnight without any painters having visited."



Except any improvements in the bitcoin ecosystem are made by people.  Yes, you can benefit without participating (other than holding btc), but that doesn't make those improvements spontaneously appear.

https://www.bitcoin.org/bitcoin.pdf
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bitzox
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June 08, 2013, 08:46:18 PM
 #7

The article was written earlier this year when the price of BTC was well over $200, I dont think you can make the same arguments now that the price appears to have stabilized in the low 100's.

The article also falls fall short of actually saying that bitcoin is in a bubble. In fact it more accurately argues that the exchange rate between BTC and USD looks similar in patter to the German Mark during its period of hyperinflation. But as I stated this was all before the correction, the article assumes that the exchange rate will keep going up until an eventual crash and while their was a period of stabilization I don't think anyone would argue that it was a crash.

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xxjs
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June 09, 2013, 06:05:54 PM
 #8

The article was written earlier this year when the price of BTC was well over $200, I dont think you can make the same arguments now that the price appears to have stabilized in the low 100's.

The article also falls fall short of actually saying that bitcoin is in a bubble. In fact it more accurately argues that the exchange rate between BTC and USD looks similar in patter to the German Mark during its period of hyperinflation. But as I stated this was all before the correction, the article assumes that the exchange rate will keep going up until an eventual crash and while their was a period of stabilization I don't think anyone would argue that it was a crash.

Well, I humbly tried to add some insight to the article Smiley

I don't deny it is a crash, the problem is in bitcoin there is no baseline for the use-value, it is in fact 0. All you have is, you can say the appreciation was to high in april, and the correction came to quickly.

I housing, you have the baseline of immediate use value. Prices could go lower just after a crash, but will eventually end up at use value (unless a new bubble builds up through monetization).

In short, in bitcoin, it is not possible to adequately define the price movements as bubbles, alternatively, you could say that the whole bitcoin history from the genesis to the end some time in the future is a bubble, equivalent to monetization and demonetization.
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June 09, 2013, 10:33:27 PM
 #9

One of the largest contributors to bubbles is credit.  I would argue it was not the CDOs, in and of themselves, but the cheap, easy, and freeflowing credit. 

Couldn't agree with you more. Hooray for the Fed and the Bernanke

Easy money covers over a lot of problems. 
Junk bonds were only paying 5-6% and were selling well.
Now that money is starting to tighten, the game is going to change.  We are going to start to see those problems poking through the paper.

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June 10, 2013, 05:24:48 PM
 #10

I don't deny it is a crash, the problem is in bitcoin there is no baseline for the use-value, it is in fact 0. All you have is, you can say the appreciation was to high in april, and the correction came to quickly.

Can you give me an example of any currency that has a baseline use-value over 0?

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June 11, 2013, 03:12:14 AM
 #11

I don't deny it is a crash, the problem is in bitcoin there is no baseline for the use-value, it is in fact 0. All you have is, you can say the appreciation was to high in april, and the correction came to quickly.

Can you give me an example of any currency that has a baseline use-value over 0?

I was mulling this over as well.  Does "legal tender law" create a baseline use-value?
(That it must be accepted as payment for a debt or tax.)
Other than fiat, there are value based currencies (gold and silver).
When I finish my current projects and marry bitcoin to gold and silver, it will be as good as gold.

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June 11, 2013, 04:47:51 PM
 #12

I was mulling this over as well.  Does "legal tender law" create a baseline use-value?
(That it must be accepted as payment for a debt or tax.)
Other than fiat, there are value based currencies (gold and silver).
When I finish my current projects and marry bitcoin to gold and silver, it will be as good as gold.

I think that OP's argument would be that no fiat can have a base line use value above 0 because of the potential for inflationary actions by the issuing authority. $10 today doesn't buy near what it did 10, 20, or 30 years ago. Gold and silver both have commodity value but I don't know if they have an intrinsic "baseline" value inherent to them as a money.

I personally think that all currency derives its baseline value from its function as a medium of exchange. It has a value because we assign a value to it. But I guess if you get real philosophical the same could be said of any asset. If we define asset values in terms of some currency and that currency doesn't have any inherent value are we essentially saying that the asset has no inherent value?

Either way, to me it seems we have three options. A currency that is consistently experiencing inflation (most fiat), consistently experiences deflation (gold, silver, and BTC), or one that changes at the whim of a central issuing authority and can go up or down as it pleases (most fiat in the short term). If you are a net debtor, you inherently prefer inflation, a saver prefers deflation, and the uninformed couldn't care less so they get the variable one (which almost always benefits the class in power).

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June 11, 2013, 05:00:17 PM
 #13

I was mulling this over as well.  Does "legal tender law" create a baseline use-value?
(That it must be accepted as payment for a debt or tax.)
Other than fiat, there are value based currencies (gold and silver).
When I finish my current projects and marry bitcoin to gold and silver, it will be as good as gold.

I think that OP's argument would be that no fiat can have a base line use value above 0 because of the potential for inflationary actions by the issuing authority. $10 today doesn't buy near what it did 10, 20, or 30 years ago. Gold and silver both have commodity value but I don't know if they have an intrinsic "baseline" value inherent to them as a money.

I personally think that all currency derives its baseline value from its function as a medium of exchange. It has a value because we assign a value to it. But I guess if you get real philosophical the same could be said of any asset. If we define asset values in terms of some currency and that currency doesn't have any inherent value are we essentially saying that the asset has no inherent value?

Either way, to me it seems we have three options. A currency that is consistently experiencing inflation (most fiat), consistently experiences deflation (gold, silver, and BTC), or one that changes at the whim of a central issuing authority and can go up or down as it pleases (most fiat in the short term). If you are a net debtor, you inherently prefer inflation, a saver prefers deflation, and the uninformed couldn't care less so they get the variable one (which almost always benefits the class in power).

And of course one could be a debtor and saver.
For example, those that mortgaged their home and bought bitcoin a few years back.

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June 11, 2013, 05:28:33 PM
 #14

And of course one could be a debtor and saver.
For example, those that mortgaged their home and bought bitcoin a few years back.

I meant net debtor or saver, either you have more assets than you owe debt and find it advantageous, usually for tax reasons but also possibly to utilize leverage to further growth, to have some debt. Or you have more debt than assets and do not have the option of paying off the debts.

Your example above is a little more nuanced because of the use of two currencies. If they believe that the combined effect of inflation and the interest on their mortgage will be less than the depreciation of bitcoin (ie the increase in its value) they should continue to hold the bitcoin. If they feel the opposite they should sell their bitcoin to pay off the mortgage.

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June 11, 2013, 06:17:32 PM
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And of course one could be a debtor and saver.
For example, those that mortgaged their home and bought bitcoin a few years back.

I meant net debtor or saver, either you have more assets than you owe debt and find it advantageous, usually for tax reasons but also possibly to utilize leverage to further growth, to have some debt. Or you have more debt than assets and do not have the option of paying off the debts.

Your example above is a little more nuanced because of the use of two currencies. If they believe that the combined effect of inflation and the interest on their mortgage will be less than the depreciation of bitcoin (ie the increase in its value) they should continue to hold the bitcoin. If they feel the opposite they should sell their bitcoin to pay off the mortgage.

Right, and the nuance is important because all currencies are commodities (if they are a good currency) so that you can price them easily against all the other currencies.  Wheat, Oil, Energy, Land, Bitcoin, Euros, Gold, Debt/Bonds.  They are all commodities, and there is never just one currency or it can't be used to trade with anything and find a value in anything except itself.  The COMEX for commodities and the MONEX for Fiat, and the co-mingling of them as comex is always priced in fiat anyhow.
Today the bonds in the US are getting sold heavily because folks are concerned that the Fed is going to back off its buying.  This is reducing the price of those bonds and thereby driving up the interest rate on them.  So there is some exchange rate fluxing every day among all the currencies.  After basic needs and basic asset diversity is accomplished, then comes figuring out what sort of balance makes sense.
With a higher interest rate, some buyers come in which keeps it down.  Folks are willing to buy because the junk rate is not much better than the fed rate and they are guessing that the fed is more reliable than the junk.

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June 16, 2013, 11:06:38 PM
 #16

I was mulling this over as well.  Does "legal tender law" create a baseline use-value?
(That it must be accepted as payment for a debt or tax.)
Other than fiat, there are value based currencies (gold and silver).
When I finish my current projects and marry bitcoin to gold and silver, it will be as good as gold.

I think that OP's argument would be that no fiat can have a base line use value above 0 because of the potential for inflationary actions by the issuing authority. $10 today doesn't buy near what it did 10, 20, or 30 years ago. Gold and silver both have commodity value but I don't know if they have an intrinsic "baseline" value inherent to them as a money.

...

Yes. In a currenxy without intrinsic value, like fiat and bitcoin, there is really no value where you can say that the currency is overvalued. This is opposed to for example housing, which have intrinsic value. The point is if people start buying houses, not only for the use-value, but for saving, maybe buying a bigger house to save more, the houses become a sort of money. They acquire exchange value in addition to the intrinsic (uor use-) value. That was the point.

You can say that housing is in a bubble, if this happens.

With money (bitcoin or fiat), the bubble concept is not very useful.
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