Bitcoin's Big Problem...

[ex-trader]

Two big wrong assumptions by the BTC devotees get thrown up in this and every thread:

1. It is rare/limited so is valuable.

BS - rarity does not always equal value, plenty of rare things are worthless, just search eBay.


2. Fiat currencies depreciate so they are bad to hold.

Yes, but only if you hold them in physical coins/note. If you have them invested then what matters is your investment return relative to their depreciation (inflation) and anyone who cannot out-perform inflation over the medium term is doing pretty poorly. No-one holds any serious amount of currencies in non-interest or non-investment formats.

The original posters points are true, Bitcoin is too-hard and has little compelling reason to be used, which is why real transactions with Bitcoin are very small. That said the point missed is that mobile phone penetration in Africa is huge and thats where it COULD become well-used.

[gambit1]

"Two big wrong assumptions by the BTC devotees get thrown up in this and every thread:

1. It is rare/limited so is valuable.

BS - rarity does not always equal value, plenty of rare things are worthless, just search eBay."

I don't know who you are referring to but it certainly isn't me. I know that scarcity is a property that can make something valuable but only in combination with other factors.

"2. Fiat currencies depreciate so they are bad to hold.

Yes, but only if you hold them in physical coins/note. If you have them invested then what matters is your investment return relative to their depreciation (inflation) and anyone who cannot out-perform inflation over the medium term is doing pretty poorly. No-one holds any serious amount of currencies in non-interest or non-investment formats."

I don't know where you are from but in the UK it has been extremely difficult or even at times actually impossible to match the rate of inflation with bank interest. This is because the Central Bank's interest rate has been held at 0.5% for years and inflation rose to over 4% a while back. Also note that most methods of calculating inflation are selective and controversial. The UK moved from the "RPI" to the "CPI" in order to exclude certain costs and housing costs and house prices are excluded. Therefore, in the UK saving fiat currency in banks is a losing game; you will lose purchasing power. Guaranteed.

In addition you don't only need to worry about inflation but the devaluation of the currency. Pound Sterling lost 25% of its value in 2008. Pound Sterling and the US Dollar lost 90%+ of their value over the course of the 20th century.

This leaves investing, which means assuming risk. This is fine but the equity markets of the US and UK are problematic. The underlying economies are doing very poorly yet those markets are now as high or higher than the crash of 2008. There is a serious question mark over whether the prices of equities should be that high. One of the reasons for the bull stock market is the low interest rates and quantitative easing. It is possible that the whole equities market is overvalued at this point and will suffer a correction.

These concerns and more are some of the reasons why people are unhappy with monetary policies and skeptical about the ability of fiat currencies to store value.

[31337157]

Goodness, it seems like this is a discussion that pops up every week! It's a good sign to gauge growth though. If people are still asking how it all works and what it all means, I guess we still need some sort of "centralized, mainstream" outlet for the general public.

I believe Coinbase is approaching things correctly and bringing an interface that is making it easier for the everyday user to take advantage of. Slowly but surely we will start to see more and more adoption, it's too early to look at the BTC "system" as something 100% ready to go, it's only been around 4 or so years and is in a beta stage still. We can't compare it to the systems being used now which have been developed over many, many years.

[Tolek]

I agree with you, people expect the currency to skyrocket, so they hoard as many BTC as possible and sit on it, lol.

Also, you're right. Most people I know would rather download an app that's quick and simple for BTC rather than get something like Multibit and learn how to use it. When I first started with this a couple days ago I got Multibit, didn't understand something, and then just set up a wallet on blockchain.info instead(and then put that all into inputs.io). No wants to secure their virtual money if it's not easy, because otherwise it may just be a complete waste of time, and many people have jobs or things to do.

[DeathAndTaxes]

Yes paper currency will be around for 20+ years, probably more. However the US government DOES want a decline of the dollar, though not a death. Its enormous debts are denominated in dollars so it is in the interests of the US government to see a decline in the dollar because this means a decline of the real value of its debts. The pound lost 25% of its value in 2008 and this was praised by many in "The City". Paper currencies are in a "race to the bottom".

Ahh this makes sense... I guess the question is what will big Government turn to after they devalue the dollar? How will they collect taxes, and in what form will the average man be paid? I don't like the idea of the government collecting taxes from my bitcoins, but I also recognize the need for a tax paying society in order to function.

Devalued simply means worth less not worthless.   They will pay people and collect taxes just like they do now.  It just might be that minimum wage is $48 an hour a Combo meal at burger king costs $60.00 and a college education (state college 4 years) is $1.2 million.

[ex-trader]

In addition you don't only need to worry about inflation but the devaluation of the currency. Pound Sterling lost 25% of its value in 2008. Pound Sterling and the US Dollar lost 90%+ of their value over the course of the 20th century.

This leaves investing, which means assuming risk. This is fine but the equity markets of the US and UK are problematic.

Firstly your pound depreciation in one year is a very selective statistic. There are other years it gained 25%. In fact 20 years ago in 1993 it was nearly exactly the same USD/GBP rate as today.

Regarding investing, of course it's hard to match inflation with bank deposits alone, but add in bonds/property/equities and it's very easy over the long-term. Yes there's some risk added, but over the longer term the volatility is averaged away. Is Bitcoin riskless?

Quoting that currencies lost 90% over the century is again true but nonsense, no-one would have held their money in a zero-interest deposit account for 100 years. Do the same maths with a mixed invested portfolio and you'll find it out-performs inflation. Barclays produce a study of this over the last 100 years:

http://the3500.wordpress.com/2007/05/19/equity-markets-and-the-upward-drift/

Note that all asset classes outperformed inflation.

Same for the USD:

http://blogs.telegraph.co.uk/finance/jeremywarner/100003705/dump-bonds-and-buy-equities-says-the-historic-data/

[Pinwheel]

if we are looking into adoption of bitcions in the world scale then 10-15 years is very short period of time for the world. Introduction of Euro in Europe took more then 10 years. Maybe for some country it is of any significance but not for the world.

biggest problem with predictions or prognoses is that we have to deal with different processes affecting, influencing each other during some particular place and time.  if we can build a mathematical model describing dynamics of world finances then we can see better where bitcoins fit into it and what processes will influence bitcoins.

I dont think adoption and future of bitcoins have any thing to do with internet penetration or with population. In Pakistan for example, most people are very poor and living on 1 usd per day, but traditional hawala remittance system remitting usd 70 bil per year, as remittance system it is bigger then Pakistani central bank. In india nearly the same. It make no sense at all to expect 80% rural populating in India to begin to use bitcons, but Indian hawala operators already using it.

Besides of speculating we know very little so far, what kind of economical events and in what way affecting bitcoins. Each of us are having different model in his mind and we are discussing outcome of the use of that models , based on use of my mental model I can predict that, and You can predict that, but we never compare models itself.

if we want to understand future of bitcoins we need a mathematical model describing dynamics of world financial markets, then we can use this model and we can see how for example, depreciation of currency in one country or inflation in another country affecting bitcoins and what opportunity its opening.

System Dynamics is a perfect tool for construction of such model.

[Piper67]

Goodness, it seems like this is a discussion that pops up every week! It's a good sign to gauge growth though. If people are still asking how it all works and what it all means, I guess we still need some sort of "centralized, mainstream" outlet for the general public.

I believe Coinbase is approaching things correctly and bringing an interface that is making it easier for the everyday user to take advantage of. Slowly but surely we will start to see more and more adoption, it's too early to look at the BTC "system" as something 100% ready to go, it's only been around 4 or so years and is in a beta stage still. We can't compare it to the systems being used now which have been developed over many, many years.

What we need is a separate forum where all these rehashed, old topics can go to die. We can send the "a deflationary currency is doomed", "we need to do away with the 21 million limit" and "it takes too long to get six confirmations for bitcoin to be useful" threads there.

[gambit1]

"Firstly your pound depreciation in one year is a very selective statistic. There are other years it gained 25%. In fact 20 years ago in 1993 it was nearly exactly the same USD/GBP rate as today."

Recently the trend has been downwards and it is worse if compared with a broader range of currencies, or compared to gold, because of course the US dollar is also weakening. So the pound is weakening against a currency which is itself weakening. My first statistic was selective but my second wasn't.

"Regarding investing, of course it's hard to match inflation with bank deposits alone, but add in bonds/property/equities and it's very easy over the long-term. Yes there's some risk added, but over the longer term the volatility is averaged away. Is Bitcoin riskless?"

By bonds I assume you mean corporate bonds. Government securities are worse than bank interest due to quantitative easier and reckless fiscal policies.

http://www.guardian.co.uk/business/2012/may/14/uk-treasury-bonds-record-low
http://www.bloomberg.com/news/2013-07-22/u-s-two-year-yield-reaches-one-month-low-amid-pimco-policy-bets.html

Corporate bonds are not friendly to retail investors for a variety of reasons. Equities? Property? Maybe and maybe not. All depends on the decisions you make and how things work out.

"Quoting that currencies lost 90% over the century is again true but nonsense, no-one would have held their money in a zero-interest deposit account for 100 years. Do the same maths with a mixed invested portfolio and you'll find it out-performs inflation. Barclays produce a study of this over the last 100 years:"

http://the3500.wordpress.com/2007/05/19/equity-markets-and-the-upward-drift/

Note that all asset classes outperformed inflation.

Same for the USD:

http://blogs.telegraph.co.uk/finance/jeremywarner/100003705/dump-bonds-and-buy-equities-says-the-historic-data/
[/quote]"

If my argument about the decline of the fiat currencies over the 20th centuries is meaningless then so is that. We have entered some very interesting times in the last several decades with the mass printing of money being the new normal and interest rates held at genuinely historic lows for very extended periods of time. That historic data won't do you any good.

Your bullishness for equities is slightly concerning.The equities market is probably overvalued, in my opinion, and it is disconnected from the underlying economic reality. If you want heavy exposure to that market then that's your business.

My point is that holding fiat is less attractive than it has been for a very long time. If you don't believe me, ask the Cypriots, many of whom have lost their deposits, or portions thereof in a new "bail-in" model being piloted in preparation for its roll out across the globe. Many investors are pulling out of the equities market and putting their money in hard assets. These hard assets carry risk like equities but they are seen as a good hedge against inflation, devaluation and the potential for a debt crisis down the road.

[ex-trader]

I'm not bullish on equities actually and hold 0% public equities directly, although some indirectly through hedge funds.

Regarding govt bonds you're correct, they're a bad buy now (I hold none) but a great buy a few years back, especially long-dated or perpetuals.

Quoting GBP vs gold is meaningless as all currencies depreciated vs gold, but that doesn't make gold a good buy or currencies bad.

Choosing to ignore 100 years of historic returns by saying the world has changed is a fools game, the same economic ycles have played out many times through history.

Anyway this was a fun debate, but I think I'll leave it at that.