Will bitcoin be the next Tulip Mania?

[bitanarchy]

Here is an interesting article about the Tulip Mania of 1637.
http://mises.org/daily/2564

The explanation essentially comes down to the idea that in 17th century Netherlands there was a relative free market in money, which causes lots of money to flow into the Netherlands, causing a mania. Assuming the Austrian school explanation of the Tulip Mania is the correct one, are there any parallels with the Bitcoin Mania of 2011?

[FreeMoney]

Here is an interesting article about the Tulip Mania of 1637.
http://mises.org/daily/2564

The explanation essentially comes down to the idea that in 17th century Netherlands there was a relative free market in money, which causes lots of money to flow into the Netherlands, causing a mania. Assuming the Austrian school explanation of the Tulip Mania is the correct one, are there any parallels with the Bitcoin Mania of 2011?

tulip
tulip tulip
tulip tulip tulip tulip
tulip tulip tulip tulip tulip tulip tulip tulip
tulip tulip tulip tulip tulip tulip tulip tulip tulip tulip tulip tulip tulip tulip tulip tulip

Bitcoin is a little different.

[barbarousrelic]

I don't think the amount of useful things you can currently buy with Bitcoin can support its high valuation for very long. I think a crash is coming.

[ribuck]

I don't think the amount of useful things you can currently buy with Bitcoin can support its high valuation

How much do you think a Bitcoin is "really" worth, and why?

[kiba]

Everybody keep saying these things but the only way you can find out is by waiting.

You could also help pitch in by offering services and goods instead of worrying about a bubble.

[chris200x9]

see here's the thing, bitcoins are digital currency...tulips are flowers...

[caveden]

There's more to the explanation of the tulip mania.
People used gold and silver at the time as money. There was a huge inflation of these metals in Europe after Spanish invasion of South America. Basically they've stolen a lot and all ended up on the dutch banks. The reasons why it ended up there to be used as credit are explained in the article, I think.

In the end, it is yet another application of the austrian theory of business cycles. It's just a peculiar one because inflation came out of massive theft of precious metals instead of money printing.

[barbarousrelic]

I don't think the amount of useful things you can currently buy with Bitcoin can support its high valuation

How much do you think a Bitcoin is "really" worth, and why?

Less than it is now. Gut feeling based on the number of things I see for sale with Bitcoins.

[mimarob]

The Tulip crash.

It is the oldest known example of a financial meltdown.

People did use gold and silver as money, but there was also a lot of trading of "tulip-papers", tulip-bonds, tulip-options etc. you name it.

At the end just before the crash, people would set their house as security to buy a tulip option for one single tulip that wasn't even an onion yet.

So they built up a lot of artificial money, just waiting for the bubble to burst.

The tulip mania has a lot of parallels with the dotcom crash, krueger crash and quite a few other well-known crashes.

Not impossible that the bitcoin will create a similar hysteria, but that will take place if you trade in derivate papers of bitcoins yet to be made at a speculated future price.

As long as you have the coins themselves I think it's safe value, just as gold and silver was during the tulip mania.

[mimarob]

haha, I missed that bit about the gold robbing in history class apparently.

The analogous scenario here would be a fork into several bitcoin systems, making more and more useless cash :-)

[ShadowOfHarbringer]

Here is an interesting article about the Tulip Mania of 1637.
http://mises.org/daily/2564

The explanation essentially comes down to the idea that in 17th century Netherlands there was a relative free market in money, which causes lots of money to flow into the Netherlands, causing a mania. Assuming the Austrian school explanation of the Tulip Mania is the correct one, are there any parallels with the Bitcoin Mania of 2011?

I think that smaller or bigger versions of "tulip manias" are happening a lot on Bitcoin market - it's simple matter of overspeculation.
But complete destruction of currency is not likely to happen as with the tulips.

I mean even if Bitcoin's value drops 10 - fold due to enormously massive overspeculation, it will still be a usable currency. It will still have all the means to be a currency and drop in value is not going to change that.

[ribuck]

How much do you think a Bitcoin is "really" worth, and why?

Less than it is now. Gut feeling based on the number of things I see for sale with Bitcoins.

OK ...

It's a fact that the number of things for sale with Bitcoins is increasing, and has increased every month for the past year. So would you agree that, even if Bitcoin is valued too high right now, its "true" value is trending upwards?

[barbarousrelic]

How much do you think a Bitcoin is "really" worth, and why?

Less than it is now. Gut feeling based on the number of things I see for sale with Bitcoins.

OK ...

It's a fact that the number of things for sale with Bitcoins is increasing, and has increased every month for the past year. So would you agree that, even if Bitcoin is valued too high right now, its "true" value is trending upwards?

I would agree its "true" value is increasing. I just don't think going from $.05/BTC at the beginning of September to $1.00 right now - almost a 500% annualized rate of increase - is at all realistic. The goods-for-BTC market is not increasing at that rate.

[caveden]

The number of people aware of bitcoins and interesting in buying them has not such a strong link with the amount of goods and services offered on BTC.

[casascius]

Here is the thing that I find shocking... the Bitcoin economy is $5 million or something, right? (per bitcoinwatch.com, I'm using an assumption of parity for simplicity)

If you look at the volume of trades that have been swinging the market 10 cents at a time, they are nowhere close to any meaningful fraction $5 million.  At best, they are $10k-$15k USD.  Each 10 cent change in the price supposedly changes the value of the whole Bitcoin economy by over $500k USD...

which leads me to believe that something's just not right.  There is a huge disparity here.  Someone should not be able to create or destroy $500k worth of "wealth" by moving only $15k.  That is as unrealistic as throwing $15 worth of coins in a mall fountain surrounded by a hall of mirrors, and then believing the illusion that suddenly there is now $500 under the water.  The money is just not there.  Can anyone even buy 1 million BTC on MtGox right now?  How about even 100kBTC?  As soon as you take the $15 out of the mirrored fountain, the entire illusion disappears.

Is the BTC economy really worth $5 million?  How did it get that way?  Seems to me, three or four big buy transactions around $15k each, and the rest is pure hot air.

What seems to me to be happening, is that at best, only a couple percent of the whole volume of coins is actually even participating in the market.  There is a very artificial scarcity right now, probably while everyone who got BTC for pennies is waiting for them to become $100 bills... artificial scarcity which creates high prices, but not any real value.

The risk that goes along with that, is that even if BTC became worth $50 each, if that value is established by a small chunk of change with only 1 or 2% of the coins, the value is largely hollow.  Only 1-2% of the holders of BTC would be able to cash it out and get anything.  The remaining 98-99% would not get even a fighting chance at a piece of the pie, except perhaps unless they were the first to cash out.  For the value to be real, the Bitcoin economy will need a huge influx of goods, services, or at least capitalization that actually represents most of the BTC out there.

[ribuck]

... the Bitcoin economy is $5 million or something, right?

$5 million is just the nominal value of the issued bitcoins. The figure is as hypothetical as when someone quotes the total market capitalization of the NYSE. But you understand that already, as the rest of your post showed.

The risk ... is that even if BTC became worth $50 each ...  only 1-2% of the holders of BTC would be able to cash it out and get anything.

What you say is correct, but it misses the point. The value of Bitcoin is not to enable 100% of investors to profit from a rise in the exchange rate.

But you need that rise in the exchange rate to enable the other uses of Bitcoin. If the average person has 100 bitcoins, and a pizza costs 100 bitcoins, then the Bitcoin market is fairly useless as each person can only afford one pizza, and people won't buy pizzas.

Now "fast forward" to the point where the average person has 100 bitcoins, but a pizza costs 0.1 bitcoins. Now people will start to buy their pizza with bitcoins instead of fiat, and the Bitcoin economy will become truly vibrant.

[casascius]

The risk ... is that even if BTC became worth $50 each ...  only 1-2% of the holders of BTC would be able to cash it out and get anything.

What you say is correct, but it misses the point. The value of Bitcoin is not to enable 100% of investors to profit from a rise in the exchange rate.

But you need that rise in the exchange rate to enable the other uses of Bitcoin. If the average person has 100 bitcoins, and a pizza costs 100 bitcoins, then the Bitcoin market is fairly useless as each person can only afford one pizza, and people won't buy pizzas.

The exchange rate needs backing value to be real.

What happens if I order a pizza, and on the way to go pay and pick it up, POOF, the cost of my pizza just rose 1000 times and the value of my entire last 2 weeks paycheck just fell by 99.9% because 1% of the market decided to "cash in".

That would be the cost of volatility, and is antithetical to the interests of BTC being adopted.  I would not be surprised if one or two people own 50% of all the BTC out there.  It would be a far different scenario if everybody out there delivered $1 in goods or services in exchange for the BTC they have, versus people holding onto them purely for the sake of getting something for nothing.

[ribuck]

volatility ... is antithetical to the interests of BTC

Volatility will naturally decrease as more people use Bitcoin, and as liquidity at the exchanges improves (when it gets easier to move money in/out of the exchanges).

The exchange rate isn't going to get "backing value" from anywhere else.

[casascius]

Volatility will naturally decrease as more people use Bitcoin, and as liquidity at the exchanges improves (when it gets easier to move money in/out of the exchanges).

The only thing that will decrease volatility is when more of the currency starts moving.  If 98% of the currency is sitting somewhere like a sleeping tiger, the rest of us trading the remaining 2% are at the mercy of those 98%.  That would be true whether Bitcoin had a hundred, or a thousand, or a million participants all trading the 2%.

Given that 2% is only 1/50th of the whole, when the other 98% started moving at some point down the road, the result it would be no different than if the Federal Reserve started printing money and increased the money supply by 50 times.

We all know that 98% isn't going to just wake up all at once...  but when even just 2% of that 98% started moving, that would be like the Fed merely doubling the money supply.

[ribuck]

No point worrying about it, casascius, as neither you nor I can do anything to change it.