Hey you, with the bitcoins, mind the bubble.

[LMGTFY]

His analysis is pretty good, although his last point is overly-paranoid and negative: you can steganographically hide data in *anything*. Even your daily newpaper might contain steganographically encrypted state secrets...

Just before D-day, a British crossword compiler was suspected of precisely that! (He managed to convince the authorities that he was innocent).

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[Justsomeforumuser]

Not sure if this is the right thread, but it's fairly close, so I would love to have this discussed by some people with an actual clue about both economics as well as the details of BTC.


I've read some of the both rather nutty as well as sadly common claims about how "fiat currencies" (inherently bad in the Gold-rules-all tinfoil hat community) are all going down the drain anyhow, and how BTC is, like, soooo totally different.

Now, er, here is the kicker: these so called fiat currencies have ACTUAL economies, governments, states and central banks behind them.

BTC, correct me if I am wrong, and I bet you will("But there is difficulty! Limited amounts! Exchanges! Stuff!"), but BTC has quite literally nothing behind it other than the goodwill of the people "believing" in it. It is what I like to call the "Obama currency", i.e. money you need to believe in, because you can quite literally not exchange it for jack(gas station, bakery, supermarket, rent..anything real-wordly survival-related, you name it, it won't take BTC, let alone no "real" bank in the world considering it real) and the market depth is appalling.

So you quite literally are pushing around a virtual currency, without any real means to stem inflation, no interest mechanism, no goods and services tie-back/foundation, no meaningful real world recognition and on top of that, susceptibility to such things as DDOS attacks on the handful of exchanges that do exist, scams left and right("random bitcoin payouts! join now!") and probably a host of other things I don't even yet know about.

Now, don't get me wrong - as long as the wheel spins anyone fast enough can mine and cash out their profit, but I am raising more than an eyebrow when I read about plans for margin trading and actual-actual trading of the currency..heck, a single bored bank player could corner the market with a yawn.
Black Wednesday ( http://en.wikipedia.org/wiki/Black_Wednesday and Silver Thursday ( Silver Thursday ) gone BTC?

Anyway. What I mean to say is that I see a lot of actual fundamental issues with BTC, and while I would be fine exploiting it, it worries me deeply that some people are taking it serious, planning their retirement around it or whatnot.
Does not mean it could not evolve over time, but these are the big question marks right now that make me wonder what the people having a bit too big a dream around it right now are smoking.

Also am very curious about how far the bubble is going to push. Once prices go parabolic and single day price ranges turn huge, it gets wonky(Silver fell 33% once the average daily range went to around 3 times it's normal value and the rise from 20$ onwards was almost a straight line of monthly gains).
But again the question is - what is really going to drive price mechanics here, and how many are going to be willing to go along for how long..


Any thoughts?


TL;DR: BTC seems to be mostly based on faith and good hope, as opposed to the much slandered "fiat" currencies that have whole countries/continents and CBs behind them. Also no market depth&real-worldlyness.

[ribuck]

these so called fiat currencies have ACTUAL economies, governments, states and central banks behind them

Not quite. Fiat currencies do have governments and central banks behind them. Not everyone counts that as a "good" thing, however.

The "actual economy" is economic activity, i.e. people doing useful stuff. Economic activity isn't somehow "behind fiat", just because it makes use of fiat currency for much of its trading. If a better trading currency comes along, the economic activity will switch to the better trading currency without missing a beat.

[wumpus]

Indeed! Open the client, go to "Help -> About".  You'll see the phrase "This is experimental software".

If you compare that to currencies that are 200 year or more old, obviously the older currency will have more support infrastructure and players behind it. If you're expecting that, then bitcoin is not for you.

It is certainly not a rock-solid, proven investment. It's a virtual coin, meant to be used to trade stuff with people over the Internet. Not as an investment.

If you're buying up coins like crazy, you're likely crazy I know one person that got rich by trading in virtual goods (not bitcoin though but ingame stuff), so it can certainly work, but you have to be really know what you're doing.

without any real means to stem inflation, no interest mechanism

Do we need those? Now, that's the experiment.

, no goods and services tie-back/foundation

To be fair, good old physical coins don't have that either.

[goatpig]

There is a good portion of the people in here that think the price of Bitcoin is pure speculation. I'd like to remind these people that the "ideological teenagers" the FatWallet guy is referring to are long term adopters of Bitcoin, and that among the new adopters there are also long term investors. So when the day traders decide the exit the market, these people will be there to buy them out. Will the price go down then? Yes. Will it the announced catastrophe take place? I don't think so. But that's just my opinion.

but BTC has quite literally nothing behind it other than the goodwill of the people "believing" in it.

So you'll take the goodwill of the government over the goodwill of traders and merchants?

[Justsomeforumuser]

So when the day traders decide the exit the market, these people will be there to buy them out. Will the price go down then? Yes. Will it the announced catastrophe take place? I don't think so. But that's just my opinion.

Well the big question mark is what happens at the point where all you have left believing in it are the people that already have all the BTC they can afford or mine and nobody else believes in them anymore/want any.

You're left with a filled cup of toxic assets nobody wants to buy anymore because they don't get anything from or for it. (Mortgage crisis had some house price tags hit $100 - and those were objects in the real world with tangible uses)

Where is price when all you have is holders but no takers?

IMHO "the big tilt"(tipping point) can/could/should/will(take your pick) occur at some point, and then either things need to reset or someone needs to come up with a really brilliant (new?) use (I kinda liked the Email flagging idea mentioned in another thread, not that I'm convinced of it's viability just yet due to the issue of the rest of the world existing when you want to start something like that).

So you'll take the goodwill of the government over the goodwill of traders and merchants?

In turn - of course, because as long as a government and attached society exists, there is a liquidity provider of last resort. A merchant going broke or disappearing is a tad more likely than a country/government, historical defaults aside. At the very least the frequency is lower(failed startups, firms, merchants in number vs failed countries)..

I'm not a big fan of the whole "exploitation/manipulation from above" paradigm.

[Justsomeforumuser]

, no goods and services tie-back/foundation

To be fair, good old physical coins don't have that either.

Not sure what you mean there. The value of money(including the good old phyisical coins) was always tied to what and that you could buy with it.

If everyone/enough people agree that a given item or coin represents a value store and are willing to trade goods for it, you have an economy. Obviously the goods backing vs money amounts representing each other needs to have a semblance of stability, otherwise it keels over.
In turn if that happens and/or if you run out of believers(Weimar, Zimbabwe et al), you are/were left with pretty much pebbles in coin form.

Here it would be numbers on a screen.

[goatpig]

Well the big question mark is what happens at the point where all you have left believing in it are the people that already have all the BTC they can afford or mine and nobody else believes in them anymore/want any.

You're left with a filled cup of toxic assets nobody wants to buy anymore because they don't get anything from or for it.

There are several reason to be involved in the Bitcoin market. One of them is because Bitcoins are a proper store of value. The fact that day traders and speculators exit the market doesn't imply that Bitcoins won't be traded anymore. The example you present is a case of holders not willing to sell while there are no takers. Technically, the absence of both supply and demand, which is to say the complete destruction of the Bitcoin economy. That would be assuming 2 things: That only speculators are actually trading Bitcoins, and that long term "herders" are immune to price signals. I think neither are true. I think everyone has a price, and that there is a big enough portion of the market comprised of people that entered it to hold on the long term that it should prevent massive crashes in price. The real question is what is the ratio of speculators to long term adopters, which would allow to define base price vs inflated price.

Mortgage crisis had some house price tags hit $100 - and those were objects in the real world with tangible uses

If you are referring to the Sub Prime crisis, I'd say there were several significant Fed policies that denatured the market in such a fashion that it can't compare to the Bitcoin market (read deregulated).

and then either things need to reset or someone needs to come up with a really brilliant (new?) use

I think the higher the price, the higher the incentive to come up with new uses. And certainly those novelties will serve to reinforce Bitcoin at its actual price, if it they would be enough on their own to revive Bitcoin from a massive crash.

In turn - of course, because as long as a government and attached society exists, there is a liquidity provider of last resort. A merchant going broke or disappearing is a tad more likely than a country/government, historical defaults aside. At the very least the frequency is lower(failed startups, firms, merchants in number vs failed countries)..

Governments have plenty of failures. They just print some extra money to cover for it. The failure of one merchant isn't the doom of the whole economy. It's just one guy going down. In the grand scheme of things, it's a drop of water in the ocean. Whereas the failure of a government is certainly dramatic, so they patch it through debt and fiat printing. From the stand point of an economy, what do you think is healthier, an all powerful entity that keeps bandaging its failures at the cost of every members' wealth, or a bad business going bankrupt?

[Justsomeforumuser]

There are several reason to be involved in the Bitcoin market. One of them is because Bitcoins are a proper store of value.

What value, how, why?

The example you present is a case of holders not willing to sell while there are no takers.

No I actually tried to say that there could come a situation where the takers disappear - and that then the holders that DO want to sell will have a problem..

Technically, the absence of both supply and demand

Just lack of demand and interchangeability/liquidity is enough for a collapse.

I think [..] that there is a big enough portion of the market comprised of people that entered it to hold on the long term that it should prevent massive crashes in price.

Well I was merely musing how long they can last as buyers against real world funds. Once they are "full", there's a tipping point.

If you are referring to the Sub Prime crisis, I'd say there were several significant Fed policies that denatured the market in such a fashion that it can't compare to the Bitcoin market (read deregulated).

Here begins the irony. Abolishing glass-steagall (http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act) is what got us into that mess, coupled with low interest rates and faulty ratings/swap logic.

But the real irony is that the Fed is constantly accused of printing money. I can currently produce 1 BTC a day for the cost of around .7-1.3 EUR in electricity and sell it for 3-5 times as much.
Where do the extra 2-5 EUR come from? Thin air? What special superduper service did I provide just by hashing and selling them?
That's about as nutty as it can get in terms of cost of production vs value on it..where is the profit margin coming from?
How is this in any way healthy, how is this any different than Fed money printing(until we reach the print limit/BTC ceiling that is, very curious to see what happens then)?

It's literally "invented" value.

Btw, while we're in the vicinity of that subject: I would also like to point out that we don't all live in countries with a rabid printing press, overdone debt, helicopter Bens or bad fiscal policy.
And even there - who is going to ever replace the USD? Nobody. We're all too entangled in it for it to disappear anytime in the next few decades.

Governments have plenty of failures. They just print some extra money to cover for it [..]

Not sure you got the point of counterparty, liquidity and exchangeability for goods and services under one huge regime via gov/state vs random mini-pool of merchants.

The failure of one merchant isn't the doom of the whole economy. It's just one guy going down. In the grand scheme of things, it's a drop of water in the ocean.

Just that the BTC accepting merchants ocean is a cup of water compared to the actual real world ocean sized ocean of USD / EUR acceptance countries/continents/world.

Also see paragraph above.

[FooDSt4mP]

Where do the extra 2-5 EUR come from? Thin air? What special superduper service did I provide just by hashing and selling them?
That's about as nutty as it can get in terms of cost of production vs value on it..where is the profit margin coming from?
How is this in any way healthy, how is this any different than Fed money printing(until we reach the print limit/BTC ceiling that is, very curious to see what happens then)?

It's literally "invented" value.

The profit comes from the demand for bitcoins, and such high profit margins are far from sustainable.  Within a week, difficulty will be increasing by ~40%... meaning 40% less income for the same cost, so less than 60% of your original profits.  But yes, it is not different from the Fed money printing, except for the fact that the inflation rate halves every 4 years until it stops.  Do you have a better way to initially create bitcoins?

[abyssobenthonic]

His analysis is pretty good, although his last point is overly-paranoid and negative: you can steganographically hide data in *anything*. Even your daily newpaper might contain steganographically encrypted state secrets, or your MP3 collection, or your bank statements, and you'd never even notice. That's the purpose of steganography: encoding data so it is hard to find.

Rubicon?

(IMO the best TV show of the past couple of years... pity it was too smart for the masses)

[proudhon]

Where do the extra 2-5 EUR come from? Thin air? What special superduper service did I provide just by hashing and selling them?
That's about as nutty as it can get in terms of cost of production vs value on it..where is the profit margin coming from?
How is this in any way healthy, how is this any different than Fed money printing(until we reach the print limit/BTC ceiling that is, very curious to see what happens then)?

By hashing you're, in part, providing the service of helping to strengthen the security of the bitcoin p2p network and, by extension, the currency.  One would hope that the demand for this type of currency would be the basis of the profit margin, but I suspect the profits of the last several days (weeks?) are less driven by demand and more driven by speculation.

[ribuck]

I can currently produce 1 BTC a day for the cost of around .7-1.3 EUR in electricity and sell it for 3-5 times as much. Where do the extra 2-5 EUR come from? Thin air? What special superduper service did I provide just by hashing and selling them?

The "superduper service" you provide is to generate coins for others. Not everyone wants to purchase, configure and maintain a mining rig, or has the knowledge to do so. The "extra 2-5 EUR" comes from the pockets of those who would rather buy than mine.

They originally gained that 2-5 EUR outside the bitcoin economy, and they pay it to you. Unless you use it to buy bitcoins, you in turn spend that money outside the bitcoin economy. So it flows in then out. Those who bought the coins from you now have coins instead of whatever else they would have bought. You, on the other hand, now have whatever you spent your Euros on, instead of your generated coins.

That all sounds fair and reasonable to me.

[abyssobenthonic]

If you are referring to the Sub Prime crisis, I'd say there were several significant Fed policies that denatured the market in such a fashion that it can't compare to the Bitcoin market (read deregulated).

Here begins the irony. Abolishing glass-steagall (http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act) is what got us into that mess, coupled with low interest rates and faulty ratings/swap logic.

If we accept that Gramm-Leach (the repeal of Glass-Steagall) created the crisis then why didn't Canada go into crisis?  Canada repealed their equivalent of Glass-Steagall decades before the US did.

And even there - who is going to ever replace the USD? Nobody. We're all too entangled in it for it to disappear anytime in the next few decades.

Very true.  The USD is ultimately backed by the USG's ability and propensity to kill people.  I don't see either declining long-term.

[abyssobenthonic]

Bitcoin is a bubble (and has been as long as there's been an exchange rate)
Gold is a bubble (and has been for at least the past couple of centuries)
USD is a bubble (and has been since inception)
EUR is a bubble...
GBP is a bubble...
JPY is a bubble...

Anything that's monetized is a bubble.

[Justsomeforumuser]

They originally gained that 2-5 EUR outside the bitcoin economy, and they pay it to you. Unless you use it to buy bitcoins, you in turn spend that money outside the bitcoin economy. So it flows in then out.

This is the thing though. Someone is essentially paying me(an admittedly floating) amount of EUR to have my idle GPU cycles.
Real world money earned by real world work, just diverted through a double-exchange.
(Which is 100% fine by me, I am LOVING this. It would never happen in any other way.)

But meantime, internally, inside of the BTC economy, there is nothing being created..there is now more money, but I already cashed out the value back into the real EUR world. So I am now out of the equation.

What is left is someone with less EUR in the real world that are now my EUR in the real world, and the number of his BTC on his screen increasing..and tasked with finding someone he can argue to have a reason to give him something tangible for the BTC.

What I mean is:
This is all fun and games while the cashing out still works..but at some point the question of "Why have a BTC" is going to get a lot more realistic. Then it either needs the aforementioned evolution or there will be big, big trouble..

Those who bought the coins from you now have coins instead of whatever else they would have bought. You, on the other hand, now have whatever you spent your Euros on, instead of your generated coins.

Exactly, they now have the trouble of finding a place to "put" that BTC, while I live in a country where I can quite literally give my EURs to anyone.

[goatpig]

What value, how, why?

Bitcoin is a commodity that holds properties making it suitable to store value because:

It is durable
It is divisible
It is easy to identify and takes more resources to counterfeit than it'll grant return
It is easy to send and receive
It is decentralized
It is deflationary

And whatever else I missed. As such, like gold, people will want to store their value in Bitcoins, as opposed to, say, carrots. The government sanctioned currencies are fiat and centralized, as such they contradict 2 of the elements of a proper store of value. It is but natural to expect people to want to store their wealth in gold, silver, or here Bitcoins, instead of keeping it in fiat. The same motivation that drives people to protect their wealth by investing in real estate is at the core of Bitcoin adoption.

My whole argument holds on this point, that there is a more consequent group of adopters that see Bitcoin for what it is and use it as such than day traders. The "takers" are anyone with wealth, and any new wealth produced. If you refute that use, then indeed my argument is moot to you.

No I actually tried to say that there could come a situation where the takers disappear - and that then the holders that DO want to sell will have a problem..

"Takers" are a bit ambiguous. But whether you are speaking of speculators or adopters exiting the market, the impact is, assuming no one is willing to replace them, that the market capitalization of Bitcoin will be reduced by the amount these people were contributing. Will it stop the trading of Bitcoins? No. Consider gold. If tomorrow the day traders just drop it altogether, will its price crash? No. Why? Because it has a function as store of value, this why people seek it and this is what makes most of the gold market to begin with.

Fractional reserve banking teaches us that on average, people use 10% of their wealth on a daily basis. People storing their extra profit while others are taking their value out to cover their costs is what makes the market of Bitcoins, not the speculators. The speculators are just a side effect, and technically isolated from the actual market makers.

But the real irony is that the Fed is constantly accused of printing money. I can currently produce 1 BTC a day for the cost of around .7-1.3 EUR in electricity and sell it for 3-5 times as much.
Where do the extra 2-5 EUR come from? Thin air? What special superduper service did I provide just by hashing and selling them?

Coins mining is no different from inflation. Extra coins aren't producing any wealth, they are taking a little bit of the wealth that all the existing coins were representing. The fact the price is maintained or goes up means that there are more people willing to enter the market than the miners are able to sell daily. The service you provided is akin to gold mining back in the late 1800s. Consider that if tomorrow, mining wasn't rewarding coins anymore, Bitcoins would naturally gain 20-30cents in price every day.

How is this in any way healthy, how is this any different than Fed money printing

Fed printing is erratic, not subject to much logic and the printed money is distributed to people who produce nothing. Bitcoin mining is linear, the inflation rate is known and maintained within bounds by the network, the mined coins are distributed to the people who provide the work securing the network. Also, I don't see how constantly losing valuation is a healthy behavior for a store of value, which is how fiat works.

I would also like to point out that we don't all live in countries with a rabid printing press, overdone debt, helicopter Bens or bad fiscal policy. And even there - who is going to ever replace the USD? Nobody. We're all too entangled in it for it to disappear anytime in the next few decades.

Only a few people here advocate for the total disappearance of fiat currencies. I personally don't think they'll disappear anytime soon. The goal of Bitcoin isn't to replace them, simply to offer a proper store of value. If people then choose Bitcoin as their main currency, then that is for the better, but it isn't necessary. Also I'd like to know which country you live in so I finally have an example of a country without a rabid printing press as its source of currency.

Not sure you got the point of counterparty, liquidity and exchangeability for goods and services under one huge regime via gov/state vs random mini-pool of merchants.

My point was, take the economy of the USA as of today, and replace government controlled and issued currency by a currency that is a only backed by the good will of market actors, like gold. Then compare gov failure in the first situation vs merchant failure in the second one.

Just that the BTC accepting merchants ocean is a cup of water compared to the actual real world ocean sized ocean of USD / EUR acceptance countries/continents/world.

So the only hindrance to a currency that is far superior to government issued fiat in all and every aspects is its rate of adoption? I think you see where this is going.

Here begins the irony. Abolishing glass-steagall (http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act) is what got us into that mess, coupled with low interest rates and faulty ratings/swap logic.

Do you really think that crisis would have occurred if it wasn't for the Fed's Fractional Reserve Banking and its status as a lender of last resort green-lighting the use of sub prime loans?

[grondilu]

Asking stability in a currency that's probably going to dominate the world economy or fall apart in ten years time is nut.

To me, it's rather like wishing for a nice sunny weather every day.  If the market is not stable, be it.   Let the market do its job, whether or not people like the way it does it doesn't matter.

[ribuck]

What is left is someone with less EUR in the real world that are now my EUR in the real world, and the number of his BTC on his screen increasing...

You're over-thinking this. Here's how it is:

1. Someone else wanted your coins more than they wanted their Euros.
2. You wanted someone else's Euros more than you wanted your coins.
3. No-one held a gun to anyone's head.
4. You're both better off, because you traded.

Why sweat the meta stuff?

[amincd]

Here begins the irony. Abolishing glass-steagall (http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act) is what got us into that mess, coupled with low interest rates and faulty ratings/swap logic.

The lack of incentive to effectively manage risk, due to government intervention, is what caused the financial crisis.

This article goes over the causes of the bubble, and explains why systemic problems due to the incentive structure that government intervention created, and not lack of regulations, was the primary cause:

http://www.american.com/archive/2010/december/how-government-failure-caused-the-great-recession

Abolishing glass-steagall had next to nothing to do with it. Canada has never had an equivalent to glass-steagall. Hong Kong and Singapore have a far less regulated financial sector than the US. Neither of these regions had a sub-prime mortgage bubble like the US.

If you want to understand why the US had a bubble in sub-prime mortgages, you have to look to Fannie Mae and Freddie Mac, and the role they play in the mortgage sector. They own/guarantee 50% of the $12 trillion US mortgage market, and they specialize in guaranteeing sub-prime mortgages. In 1999, Fannie Mae, under pressure from the Clinton administration, began a program of massively expanding its lending to low income borrowers:

Fannie Mae Eases Credit To Aid Mortgage Lending

What is left is someone with less EUR in the real world that are now my EUR in the real world, and the number of his BTC on his screen increasing..and tasked with finding someone he can argue to have a reason to give him something tangible for the BTC.

What I mean is:
This is all fun and games while the cashing out still works..but at some point the question of "Why have a BTC" is going to get a lot more realistic. Then it either needs the aforementioned evolution or there will be big, big trouble..

This is very true, but there is a long way to go before the number of people willing to speculate in such a market runs out, and a lot of time for a closed bitcoin economy to emerge.