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Author Topic: Pitfalls of Bitcoin  (Read 2144 times)
MountainMan
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July 18, 2011, 03:18:22 AM
 #21

^^
I agree. There's still a lot of ground to cover, but I'm hopeful that the project has reached critical mass already.

The best thing about BitCoin so far, for me, is that it's smart people money. There's a noticable lack of morons in this community, and it makes discussing things so much easier.
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Teach
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July 18, 2011, 07:18:53 PM
 #22

As an economic news junkie, this is a really interesting discussion.  Perhaps BC is the birth of a new medium of exchange, albeit a floating measure that mirrors fiat values?
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July 19, 2011, 12:45:32 AM
 #23

uploaded.to just started accepting bitcoins. If more companies like this join will we get our pizza price? I don't know much about economy, but I don't see how can this stop the market speculation...
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July 19, 2011, 02:21:35 AM
 #24

By classical econonic models, bitcoin has lots of weakness and is still very unmature, but if we are planning the future with a worldwide currency, every existing rules could be changed given good implementation

wealth is not labor, it is desire, the more desire, the more wealth

This could be the bubble for the next 10 years, maybe 10 times bigger than housing bubble(measured in USD)!

Not Drinking The Kool-Aid
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July 19, 2011, 01:23:28 PM
 #25

A slightly more serious answer: try traveling in foreign countries for a while. You'll find out pretty quick that you'll tend to choose a reference currency or maybe two _ even in your head _ to see whether something is cheap or expensive.

In practical terms, in the United States that reference point is going to be the dollar in almost every scenario, the exception being that there's a real currency collapse, since the dollar hasn't had any serious competition (no, not even from gold) in any of our lifetimes. And in case of a dollar collapse, it's going to take people some time to figure out new reference points, and a lot of things more serious than the BitCoin experiment are going to be changing in the real world.

The only thing that's close to what you're imagining is that the BitCoin economy would become large enough that its exchange rate to the dollar would stop being so volatile. That's within the realm of the possible (but still unlikely in my view).

Fortunately for BitCoin dreamers, technology is on their side in that they can weather just about any volatility if BitCoin is truly destined for an enduring, if niche, place in the real economy. Computers will continue to do the 'price checking' for them, presumably by having a look at the current exchange rate at MtGox or whatever dominant forum for discovering spot prices emerges.

All of this is a major argument for keeping your real money in dollars as a store of value and changing into BitCoin only when you want to carry out a transaction. Unless of course you want to speculate on the future of BitCoin one way or another.

I'm not in the business of giving financial advice, but my opinion is that those who go "short" will do better than those that are "long" BTC vs USD.

"If you kill me you will not easily find another like me...a sort of gadfly, given to the state by the God."
MountainMan
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July 19, 2011, 11:10:38 PM
 #26

Quote
All of this is a major argument for keeping your real money in dollars as a store of value and changing into BitCoin only when you want to carry out a transaction. Unless of course you want to speculate on the future of BitCoin one way or another.


This. The "store of value" concept is where volatility in BitCoin transfers difficult to grok. Am I losing value if I spend BitCoins and the price goes up the next day/week/month? If so, then am I growing wealth by hoarding? And so on. Definitely takes some thinking about.
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July 20, 2011, 10:49:09 PM
 #27

It shouldn't be that hard to "grok" (the expression is grating on me, but I'll get over it). The short answer is if you hold BTC you will gain if it strengthens against the dollar and lose if it weakens in dollar terms. Spending before a rise in BTC/USD is bad, but spending before a fall is good.

Say you bought 50 BitCoins at 1BTC/$10 on Monday, spent them on oh, say, 10 grams of cocaine @ $50 per, and the following day BitCoin 'strengthened' to 1BTC/$15, you will be sad and very wired.
Because if you had only waited a day, you could have had all that smack for just BTC33.3 (33.3*$15=$499.5) and you would have still had 16.7BTC left (16.7*$15=$250).

And the reverse is true, if you did the same deal and then BTC suddenly weakened to 1BTC/$5 on Tuesday, you would have had quite a bargain on all that charlie _ you now have $500 worth of coke, and the dealer is left holding lousy bitcoins. You could snort half, sell the other half for $250, and use that $250 to buy back your original 50BTC.

Anyhow, it's rational to hoard if you believe BitCoin will go up in dollar terms, and rational to dump if you think it will go down (I'm in the latter camp).

Keep it simple, mentally convert BTC to dollars and do your best to reason out whether you think BTC is going to rise or fall. Consider all you know about the amount of BTC out there and who may be holding it, versus the BitCoin economy and its potential to grow _ in short, whether buyers or sellers will be more eager in the future.

I'll resist more bashing BitCoin and just say the most important thing to decide is how confident you are about your opinion, how much you're willing to 'risk' on it.

PS for fun, run those same numbers and pretend you bought 100BTC on the first day, but managed to only spend your usual 50BTC/$500 worth on blow. The results may surprise you and introduce you to the benefits of 'hedging your bets.'


"If you kill me you will not easily find another like me...a sort of gadfly, given to the state by the God."
MountainMan
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July 21, 2011, 01:00:18 AM
 #28

I didn't write that last post very well. I meant it in terms of using it strictly as a currency, instead of using it as an investment opportunity. I fully understand the mechanics of monetary exchanges. The difficult part doesn't come up when you view it as an investment or an exercise speculation.

The difficult part comes when you see the opportunity to use it as a currency. A majority of real world commerce ignores exchange rates. If the dollar went down against the yen yesterday, you don't see prices change at WalMart today. Long term financial trends impact prices, especially in international commerce, but most people aren't ever aware of it except as soundbites from their favorite finance show.

Hypothetically: I charge 50 BitCoins as a flat rate to develop a forum sig. I'm an awesome artist, and well worth the price (I said hypothetically, ok? Tongue) I get some 400 people buying sigs, and thus the market has determined that Mountain Man sigs are worth 50 BTC.

How do you get to the point where people think of the value as being 50 BTC, natively, instead of... "50 BTC is currently $700, therefore the sig is worth $700!"

From what I've learned over the last few days, the only way that people start using BTC as a reference is if the BTC "native" economy gets big. Use it often enough for enough different things and the perception stabilizes.

The way things are now, people use bitcoin as a proxy for their favorite currency, using the exchange rates to measure value. That will change and people will be able to make (and lose) money when/while that happens.
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