The rise and fall of Bitcoin

[bobalot]

If you haven't heard, Bitcoin is an Internet currency that's popular with Libertarians who think it's the Internet equivalent of the Gold Standard.

The short story:

• It's a decentralised P2P network that "that tracks and verifies transactions".
• Users broadcast digitally signed transactions, which sign over some amount of the currency to another user, to other participants on the network. Bitcoin uses a proof-of-work system to assure against double-spending and as an initial currency distribution mechanism. (From Wikipedia, it is actually a fairly succinct explanation).
• There can only be a maximum of 21 million Bitcoins (which makes Libertarians wet themselves because the evil government can no longer create money via fiat).
• Bitcoins are generated through 'mining'. A application sits on your computer are creates Bitcoins (fairly slowly). Bitcoins get progressively harder to produce as the total number of Bitcoins reaches 21 million. There are even specialised Bitcoin 'mining rigs'.

After a meteoric rise that benefited early adopters and made Libertarians crow about how eventually all modern fiat currencies would fall by the wayside, Bitcoin has crashed and continues to decline. Some people who got caught up in this bullshit literally lost thousands of dollars.

Closing price over the last year.

Source

The Something Awful forums appear to be currently at war with Bitcoin and supposedly managed to cause a crash in the price. I have my doubts, a crash seemed inevitable.

[Starglider]

While the basic technical design is reasonable (although of unproven scalability), as a currency there is no obvious reason this would work any better than Flooz (if anyone remembers flooz.com; a dot-bomb company that tried to make 'a currency for the web'). New currencies that lack guaranteed convertibility (and hence can't be considered a way of investing in the underlying) need a compelling reason for uptake, which normally means major institutional support.

[Chirios]

I thought the problem with bitcoin was that it was pegged to the dollar, essentially creating an internet gold standard with all the inherent problems.

[DPDarkPrimus]

I thought the problem with bitcoin was that it was pegged to the dollar, essentially creating an internet gold standard with all the inherent problems.

There's a lot more than one problem with bitcoin.

[Skgoa]

any bubble will burst at some point. the huge spike in bitcoin price happened due to massive media attention. people simply tried to get in on it. and mining bitcoins was looking like a very profitable thing for a while. I thought about getting into it, myself, but decided against it exactly because this downturn was absolutely inevitable. buying the nesseccary equipment would have been a massive (for a single person not normaly running server farms) investment that would have resulted in a practically unrecoverable loss once the market crashes. with no way to know when that was going to happen, I opted to not take the risk. I remember discussing this with another CS student in late June or early July. even as early as that we both agreed that there is no long term business case in bitcoin mining. by now even running mining software on your PC is not that cost effective vs. electricity cost.

e/ Bitcoin is not pegged to USD. its just that most people used MountGox's (the biggest money exchange in Bitcoin land) "official" exchange rate.

[UnderAGreySky]

Paul Krugman on Bitcoin

My first reaction to Bitcoin was to say, what’s new? We have lots of ways of making payments electronically; in fact, a lot of the conventional monetary system is already virtual, relying on digital accounting rather than green pieces of paper. But it turns out that there is a difference: Bitcoin, rather than fixing the value of the virtual currency in terms of those green pieces of paper, fixes the total quantity of cybercurrency instead, and lets its dollar value float. In effect, Bitcoin has created its own private gold standard world, in which the money supply is fixed rather than subject to increase via the printing press.

So how’s it going? The dollar value of that cybercurrency has fluctuated sharply, but overall it has soared. So buying into Bitcoin has, at least so far, been a good investment.

But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin.

(as a side note: bobalot, could you resize the chart perchance? It is hard to figure out when it doesn't fit the screen plus it distorts your post too)

[Lord Zentei]

I've never heard of this before.

How can software-based goods possibly replace physical goods as a base for commodity money? It's not as if some data lying around on your hard drive has value in its own right in the same sense as a piece of gold does, if it was designed for the sole purpose of being a virtual coin. It doesn't make any sense.

[UnderAGreySky]

I've never heard of this before.

How can software-based goods possibly replace physical goods as a base for commodity money? It's not as if some data lying around on your hard drive has value in its own right in the same sense as a piece of gold does, if it was designed for the sole purpose of being a virtual coin. It doesn't make any sense.

Money has value, in spite of being designed for the sole purpose of.... having value.

Documents on your computer have value too, depending on what's in them - ask the folks at wikileaks.

Unless you were being sarcastic, then I totally missed your point.

[Lord Zentei]

Money has value, in spite of being designed for the sole purpose of.... having value.

Documents on your computer have value too, depending on what's in them - ask the folks at wikileaks.

Unless you were being sarcastic, then I totally missed your point.

You certainly did. You also missed the phrase "in its own right".

Modern money does not have any value to speak of other than what is assigned to it. It's just pieces of ugly paper.

Moreover, it's asinine to compare bitcoins with wikileaks documents for obvious reasons.

[Skgoa]

his point is true, though. there is no intrinsic value in bitcoins, just the value placed in them by someone who wants to have some. and so, they do actually have value. just like secret documents or little pieces of paper.

[Rogue 9]

Money is just a medium of exchange; theoretically nothing stops a group of people from just making up a medium of exchange and agreeing to honor it except for laws against such things. Bitcoins don't have any value to speak of other than what is assigned to them either; the parallel is obvious.

That said, they set up their currency and then set it up for wild speculation, which is going to make for a grossly unstable currency. It wasn't a good idea to begin with.

[Lord Zentei]

his point is true, though. there is no intrinsic value in bitcoins, just the value placed in them by someone who wants to have some. and so, they do actually have value. just like secret documents or little pieces of paper.

No, his point is false. The whole argument I was presenting was that bitcoins themselves have no value outside of being a medium of exchange, so to consider them a type of commodity money is silly.

Unless the documents would have value even if they were not used as a currency.

[Number Theoretic]

They are valueable, because they are scarce. And the scarcity comes from the (algorithmically secured) hard limit of 21 million Bitcoins that can exist at all.
The problem with that is: why would you ever want to spend a Bitcoin?

[Lord Zentei]

They are valueable, because they are scarce. And the scarcity comes from the (algorithmically secured) hard limit of 21 million Bitcoins that can exist at all.
The problem with that is: why would you ever want to spend a Bitcoin?

The value of a commodity requires demand, not just scarcity.

What can you use a bitcoin for other than as money? Does each of them contain a porno image or something?

[Number Theoretic]

You can wait, and speculate, that the exchange rate for Bitcoins goes up in the future. Because it becomes harder to mine them. Then; ??? Then: Profit!

[Lord Zentei]

Right. So, not based on the value of an actual commodity out of which the currency is made.

[Beowulf]

Right. So, not based on the value of an actual commodity out of which the currency is made.

Why does that matter?

[Lord Zentei]

Didn't you read the thread? My contention was that it's silly to claim that bitcoin is a software version of the gold standard.

[Starglider]

Didn't you read the thread? My contention was that it's silly to claim that bitcoin is a software version of the gold standard.

The industrial and jewelry value of gold has historically been a relatively minor part of the support for gold as an international currency. If we cared primarily about the backing of currency units with items of practical value, we'd use silver, oil or a basket of commodities (possibly commodities futures to prevent currency hoarding causing supply issues). The support for gold as a currency comes from it meeting all the necessary characteristics of currency (portability, durability, scarcity etc) and having massive institutional, historical and cultural support. Bitcoins do lack non-monetary applications, but the real problem is lack of insitutional and cultural support and no compelling reason to gain such support; being backed by something tangible might help with that, but then it would cost a lot more to make the currency and prevent people getting interested just to make money out of their spare compute cycles. Fiat currencies of course inevitably fail on the 'scarcity' characteristic, governments and banks just can't resist creating the stuff much faster than their economy is growing. They compensate for this by having the ultimate in institutional support; by forcing their citizens to pay taxes in that currency on pain of imprisonment and confiscation.

[Lord Zentei]

The reason why bitcoins lack such support is because of the lack of the possibility of utility even in principle, which gold certainly has (even disregarding it's use in jewelry). Gold is a commodity in a way that bitcoins are not. These two failings of bitcoins are interconnected.

[Starglider]

The reason why bitcoins lack such support is because of the lack of the possibility of utility even in principle, which gold certainly has (even disregarding it's use in jewelry).

As other people have pointed out, government fiat currencies have no intrinsic utility yet are the main medium of exchange; yes, you are forced to pay taxes in your domestic currency, but that does not account for the massive overseas use of the dollar (and FX reserves in general). The commodity value of gold reassures people that it isn't going to go to zero, but it was approx 15% of the current price in 2000; if the only source of demand was industrial it would probably be under $200/ounce.

Gold is a commodity in a way that bitcoins are not. These two failings of bitcoins are interconnected.

There is no need for a currency to be formed of or linked to a commodity. It may help with price stability but it is clearly not essential to success.

[Lord Zentei]

As other people have pointed out, government fiat currencies have no intrinsic utility yet are the main medium of exchange; yes, you are forced to pay taxes in your domestic currency, but that does not account for the massive overseas use of the dollar (and FX reserves in general). The commodity value of gold reassures people that it isn't going to go to zero, but it was approx 15% of the current price in 2000; if the only source of demand was industrial it would probably be under $200/ounce.

Are you fucking stupid? I am one of those who pointed out that government fiat currencies have no intrinsic utility.

There is no need for a currency to be formed of or linked to a commodity. It may help with price stability but it is clearly not essential to success.

I know that, moron. What gave you the idea that I'm advocating a commodity currency? All I'm saying that bitcoin is a poor example of such.

[Starglider]

I know that, moron. What gave you the idea that I'm advocating a commodity currency? All I'm saying that bitcoin is a poor example of such.

No one has claimed that it is one other than you. People have claimed that it is comparable to a gold standard, but gold does not in practice act like a commodity either. As I pointed out, actual commodity currencies exist in the form of silver and platinum coins and bullion. You are apparently unable to appreciate these distinctions.

[Lord Zentei]

I know that, moron. What gave you the idea that I'm advocating a commodity currency? All I'm saying that bitcoin is a poor example of such.

No one has claimed that it is one other than you.

Starglider: when you say that I have claimed that bitcoin is a commodity currency, then I say that you lie. I trust that you will now retract that lie.

People have claimed that it is comparable to a gold standard, but gold does not in practice act like a commodity either. As I pointed out, actual commodity currencies exist in the form of silver and platinum coins and bullion. You are apparently unable to appreciate these distinctions.

Nonetheless, gold based currency is held to be a commodity currency. If you want to whine about further distinctions, I must say that I'm rather less than interested or impressed.

[Simon_Jester]

Excuse me. Why is it significant if a currency is "commodity-based?"

I would think, naively, that this matters because commodity currency has guaranteed value, and the value can't go insane one way or the other- it can't inflate to zero because of the 'intrinsic' commercial value of the commodity, and it can't deflate towards infinity because commercial uses demand that the commodity be used, not hoarded indefinitely.

But we've seen so many commodities subject to drastic price spikes and drops, gold most of all perhaps, that even if gold is "commodity-based," I'm not sure that means we should care.

As to bitcoin... well, all I know is that if bitcoin is commodity-based, it's a commodity of zero 'intrinsic' value since the only thing you can do with those strings of digits is make bitcoins out of them. So, again, even if it's "commodity-based," I'm not sure we should care. Most of the arguments for commodity-based currency don't apply to a currency of zero 'intrinsic' value.