I'd love to get an economist studying why the value of bitcoins goes up.
After all, they're infinitely reusable, totally fungible, and incredibly low friction. The only reason for their value to rise (rather than them just being passed around at the same price indefinitely) is if people expect them to rise, or if there's a shortage (forcing people to use fractions of a bitcoin to represent the same number of dollars as a whole one used to).
Is the cause largely the latter, or the former? Has there been a high enough rise in the transaction volume to explain the rise in value? Or is it all down to investors?
I'm pretty sure the exchange price of Bitcoins is driven by the marginal supply and demand. So I think it's got to be what you call "investors" almost entirely (note that not all people buying in have to be speculators: if lots of people suddenly decided they'd rather have some Bitcoins because they want to use them, that would suffice).
So the question is how are the marginal supply and demand determined? The marginal demand is subject to spikes in interest, media coverage, the Cyprus crisis (I really doubt the latter is meaningful but perhaps it makes people everywhere think they want to move out of bank deposits. People certainly attribute things to it). The marginal supply is based on (1) mining, which happens at a fixed rate and (2) people who wish to exit Bitcoin, which is subject to lots of whims.
Lots of evidence shows that most Bitcoins are hoarded, so it's possible that what we see is just a supply crunch - nobody wants to sell their Bitcoins and some people want to buy. I suppose the natural way to answer that is to go look at historical exchange volume across all the exchanges (or, as a first-cut proxy, just Mt. Gox).
Can you please show me the evidence you mention that shows that most Bitcoins are hoarded? I'm genuinely curious -- the main metric I'm aware of is Bitcoin Days Destroyed, and that metric seems to show that hoarding is actually steadily decreasing over time.
>and that metric seems to show that hoarding is actually steadily decreasing over time.
This is the big question, isn't it. It's completely understandable the early adapters are hoarding, expecting a med/long-term payoff on their investment via appreciation. But will that continue indefinitely, or change eventually?
And dumping even a portion of that into the system would have significant price effect, and given how so many people seem to value BTC by its price more than its unique utility, what effect will that have on the economy.
You've answered your own question. It is all of the above.
The price system in any market factors in all of the information and motivations of the participants, and balances them out with a single value : the price.
The killer feature of the freely-trading market is the price. It communicates the state of the market as both an input and an outcome of the actions of the market players.
Remember that for any exchange to occur, two things of unequal value have to be exchanged by two willing participants. But the inequality between the items being exchanged is in the eye of the individual holder. The motivations are rarely the same for each participant, so you can never actually make blanket statements about why a market moves where and when it does - very rarely does a single issue dominate a price, because in those circumstances you have a market that stops exchanging if everyone has the same view.
People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.
From a theoretical perspective, this is been the clearest elucidation to me. The reason the value of bitcoins is going up is because people who buy bitcoins expect that others will pay a higher price for it in the future.
Like I tell people: people who buy and sell bitcoins don't care that you don't want to participate. They just want anyone else who will participate.
"Menger's theory avoids all of these difficulties. According to Menger, money emerged spontaneously through the self-interested actions of individuals. No single person sat back and conceived of a universal medium of exchange, and no government compulsion was necessary to effect the transition from a condition of barter to a money economy."
If Bitcoin is to be a success, it is the polar opposite of the origins of money. Instead of developing naturally as a more efficient means of exchange, it has had to be designed top-down in order to work backwards against all the cruft that fiat currencies have collected - features that would have prevented the original money from ever being widley adopted.
The price of the Mona Lisa won't go down because the art community won't let it. It can do that because there is only 1 Mona Lisa. Such a force doesn't exist with Bitcoins.
I'm familiar with the greater fool theory. But people buy commodities, currencies and financial instruments on this expectation of increased future valuation. There could be a case made that the greater fool theory is in effect for bitcoins, but it can't be said that it is the case simply because people expect higher valuation in the future.
The value of bitcoins goes up because the entire system is a
store of value. When bitcions are bought, people are
transfering "real" value (USD or any other government backed
currency) into the Bitcoin system where the value is being
held. When they sell Bitcoins they are removing value from the
system. Due to supply (limited) and demand (increasing), the
amount real currency needed to purchase a unit of Bitcoin is
going up. This transfer of value can be due to hopes of
appreciation (speculative investment, possibly causing a bubble)
or lack of faith in a base currency (hedging wealth, as is
happening in Europe).
Since our monetary systems are now based on little more than
unbacked faith and look to be failing in various ways, people are
looking to put their wealth into something they feel they can
trust and that might have more of a future than current fiat
systems. Given the decentralized lack of control of Bitcoin and
the rise in the current lack of trust in the offical financial
systems, the rise of Bitcoin makes as much sense as the present
rise in the value of gold, a traditional hedge of value and
original currency backer. Now that people are now used to storing
value in non-backed, faith based monetary systems, Bitcoin is the
first fiat monetary system that has no ruler, and people are
transfering their government backed faith based store of value
into it. It can be thought of a democratic store of value, and as
more people believe in it the more value it will have.
Yes. Bitcoin is the first fiat monetary system that has no ruler. Also, it has repealed the law of parsimony (haven't you heard, on the Internet, there are no laws).
So it's totally not the case that Bitcoin is going up because Bitcoin is going up, and people are bidding up its price on the expectation that the peak is nowhere in sight, and they'll make a tidy profit off later speculators.
Because the Internet has upended all the normal ways of doing things, just like it did for Sealand (remember those message board threads?), it doesn't matter that economists look at the price chart for Bitcoin and say "uh, that is a bubble", and then "also, bubble or not, that is not productive behavior for a currency". Nor does it matter that Bitcoin mostly buys you donations to extremely independent bands, tips for blog tip jars, "Avalanche Spa Powder Not For Human Consumption", and highly marginal web hosting. No, the price makes perfect sense: people can't trust the US dollar, which reliably purchases cars, air travel, thai food, houses, Macbooks, chest freezers, pork chops, chlorinated trisphosphate, tuition at Stanford, roofing shingles, dirt, methamphetamine, hookers, and guns. Not just here, but pretty much everywhere in the world.
It's definitely not because if the current price for Bitcoin makes no sense, it's not going to matter whether your online wallet gets hacked and all the Bitcoin stolen, because you've already lost 80-90% of your investment anyways.
The original bailout plan, announced last Saturday, would
have raised €5.8bn by skimming nearly 7% off all bank
deposits of less than €100,000, and 9.9% of bigger bank
accounts.
storing money in the bank means it's not flowing in the economy
Money in the bank is flowing through the economy, since the bank has lent it out to others.
You can have issues with partial-reserve banking, or not. But keeping a bunch of dollars or Euros in the bank is not hoarding them. They are active in the economy.
When bitcions are bought, people are transfering "real" value (USD or any other government backed currency) into the Bitcoin system where the value is being held. When they sell Bitcoins they are removing value from the system.
These two sentences may be the perfect summary of how misguided the Bitcoin community is.
There is no value transferred into or out of the Bitcoin system when people buy or sell Bitcoins from each other. AAPL doesn't get money when I buy 1 share of AAPL from someone and they don't lose money when I sell 1 share of APPL to somebody. Because every purchase of AAPL is also a sale and every sale is also a purchase.
Try buying something with your APPL stock before converting it back to USD at the current market rate and tell me where your value went, especially when your probably don't even hold the paper the stock was printed on, if it ever was.
Maybe you put your money into a Stock Market system (buying stock), increasing its value, meaning that taking money out (selling your stock) would reduce the overall value of the system.
Try buying something with your APPL stock before converting it back to USD at the current market rate and tell me where your value went
Why would I do such a thing? It sounds like a giant waste of time.
Even if I were to, say, buy a Microsoft Tablet for 1 share of AAPL stock, no wealth has been transferred into or out of Apple Computer. Instead, the vendor now has 1 more share of AAPL and 1 less Surface, and I have 1 more Surface and 1 less share of AAPL.
And you have set the last sale price of APPL at 1 Tablet. If the current price of APPL was higher than the sticker price of a Tablet you have just gotten ripped off and vice versa. Some of the value just evaporated until the next sale, AKA arbitrage.
The point was that you can't do that even if you wanted to as the 'stock' is completely electronic without a way for you to transfer it's value to your seller of Tablets without first converting it to USD. The current system has no convenient general way to transfer their wealth in AAPL stocks from yourself to any person without going through an intermediary, which is the USD and the stock market itself. When you actually held the paper stocks you could give them to someone, now that value is stored in bits in a trading system.
I think your are confating my argument with 'giving' money to Bitcoin, which is a bit odd since nobody controls Bitcoin. Buying Bitcoin mean you are putting faith into the system, much like buying AAPL means you are putting faith into AAPL in hopes that the value of that stock with increase or at least not fall. If a large shareholder lost faith in AAPL and sold all their shares, the flux of money out of the system would devastate the investors, not APPL. Or at least not financially...the lack of faith might be quite devastating for APPL though.
I chose "Surface" as something that was around the price of a share of AAPL stock. I didn't think that would become an issue, but apparently it did. So just do the same thing with gallons of gas measured down to the cc, if you wanted.
PS: There are such things as fractional shares of stock.
The current system has no convenient general way to transfer their wealth in AAPL stocks from yourself to any person without going through an intermediary
Why is this relevant at all? Are you trying to say that Bitcoin is a more convenient form of currency than stock? No kidding.
Buying Bitcoin mean you are putting faith into the system
And other people are selling, which means they are losing faith in the system.
A stock is priced by the market based on the current value of all expected future dividend payments. ("Growth stocks" are just one more abstraction removed but in the end it all comes down to expected future earnings.) One-tenth of a company that will earn $10 a year every year from now to eternity has a value you can work out on paper.
4 dividends over 17 years, starting again about 7 months ago. Sorry for not knowing the latest news as all I've been hearing is that they don't. And what formula will give proper and accurate pricing on that many data points?
Don't answer that, this is getting silly. Have a good day. :)
Bubble or no, from a personal perspective I will not use bitcoin as a currency to exchange goods - things like purchasing items or paying salaries. Bitcoin's value is just too volatile, why would I pay someone a certain amount in bitcoins, when it'll probably rise up to 10 times the current value in a few weeks? But as a medium for investment, like buying stocks, bitcoin does provide a novel and alluring option.
>why would I pay someone a certain amount in bitcoins, when it'll probably rise up to 10 times the current value in a few weeks?
Why would you pay someone a certain amount in USD, when you could buy Bitcoins instead and they would probably rise to 10 times the current value in a few weeks?
I'm no economist, but isn't this blurring the lines between what an asset is and what a currency is? Isn't a currency fundamentally a perfectly liquid asset?
As for previous commenters, the fact that the value of a Bitcoin might be worth ten times more (or less) what it is now in a few weeks has more to do with its volatility than its depreciative nature.
Why would you ever risk money by lending it when you could just "hide it under your mattress" and make money? It's appealing to those who have the option to do that, but I believe it's highly suboptimal from an economics point of view.
The funny thing is that even though it's bad economically, its deflationary nature is good for the uptake of the currency, because, provided more people start using it, those who are already using it become richer (which is why some accuse it of being a pyramid scheme).
On the other hand, its mid-term value depends on why people are buying into it now. At the moment, I see four groups of people: 1) the idealists who believe it's simply a more perfect form of currency that can't be corrupted by governments et al; 2) the technologists who think it's a neat idea; 3) the speculators who think it's going to go up because it's going up; 4) the users who find it more useful than regular currency (like those on Silk Road). I can't help but think that the speculators are the biggest group at the moment. But I might be wrong.
To answer your question, no, a currency is not fundamentally a perfectly liquid asset. "Currency" is a really, really big word, but at its heart, currency is any medium of exchange. There are myriad microcurrencies that are out on the market now, of which Bitcoin is just one.
However, the difference is that Bitcoin has been primarily commoditized. People aren't using Bitcoin as a medium of exchange, by and large. They're trading dollars for Bitcoins in a hope to get more dollars back in the future. That's an investment in an asset, not a currency trade.
Now, to confuse things further, there is a FOREX market which allows you to (if you so chose) speculate on currency. By and large, these currencies fluctuate within the FOREX based on their respective purchasing power at that time (there's a lot that goes into this--I'm simplifying). The thing that makes the FOREX unique is that you can trade any currency with any currency in it. It's not a commodity market, wherein you need to sell your commodity to trade for another one.
Bitcoin wants to be a currency, but is a commodity. Until it becomes a viable (viable in the sense of macro-level use and acceptance) medium of exchange, it will only be a commodity. In one transaction, anything can look like a currency, and anything can look like an asset. But when you throw those words around, realize that at a mirco level, they're nigh meaningless.
> Isn't a currency fundamentally a perfectly liquid asset?
I'd say the defining property of a currency is that it's in wide use as a medium of exchange.
> its deflationary nature is good for the uptake of the currency, because, provided more people start using it
Except that the deflationary nature makes people hoard it, not use it.
For Bitcoin to succeed in the long run, the most important influence has to come from normal businesses accepting it as payment, not from speculators attracted by its skyrocketing market price.
You do not "make" money, when you hide them under a mattress.
Assuming a stable money supply, when all is said and done, you own the same fraction of total purchasing power at the end that period as you had when it started.
You do not get richer, if that's what you mean by making money. You just keep what you had.
But you do make money! When the value of Bitcoin goes up, your wealth increases because the entire Bitcoin economy is worth more, even though your fraction of it remains constant.
Or, to look at it another way, imagine that Bitcoin was the only currency in the world and there were only one million people who each owned 20 Bitcoins (maybe they're communists who have just started using money). Now, give it a few years and the population has doubled so that the average person has 10 Bitcoins. Is the person who still has 20 coins richer than he was at the start? I say yes, because, assuming that people are just as productive, the entire economy has doubled in size in an absolute sense (it can produce twice as much), so those 20 Bitcoins can buy twice as much as when there were only one million people.
(As a less important point, as Bitcoins are irretrievably lost, the fraction of Bitcoins that a person owns of the "real" Bitcoin economy grows larger. And I don't see why this deflationary pressure is different to the deflationary pressure caused by somebody new getting into the Bitcoin economy.)
Say there are 1000 people in the country, and WLOG each of them owns 1/1000th of the wealth.
One of them goes away for 100 years and comes back. The entire country is richer: there are more resources, more people, more goods, more IP, more of everything. And this guy still expects to have claim to 1/1000th of everything in the country.
It's extremely obvious why that first-mover would love that system, and try to convince everyone else to go along with it. It's very dubious what the others would get out of it or why they would ever buy in, besides imagining they could some day be the one who gets to exploit the system at the expense of everyone else.
You're confusing money and wealth. And you saying it yourself, to quote "your wealth increases"
Yes, but this is not the same as making money. You're are not richer in relative terms, than you were. It's only stuff who has get cheaper around.. because people have learned how to produce stuff more efficiently, i.e. cheaper.
And you example with doubling population (in a few years no less) is cheating because.. because you have just added a lot poor people into example.. But, OK. Suppose those of two extra people a person A kids.. But what exactly logic are they not entitled to the whole value of their parent savings?
It is deflationary, of course. What I think the sentence shows is that this is not that huge of a problem. You still will spend your dollars, obviously, even though there is a deflationary currency out there that you COULD make a profit on, because at some point you want or need to spend your dollars. The same logic would apply within the realm of BTC.
There is an easy answer. Because you need it, and you've invested in Bitcoin (to the extent where you can't get what you wanted to buy without selling some bitcoins.)
Otherwise, with the trend as it is, I think you're right! Hoard your bitcoins and don't cash them in until you've spent every US dollar and don't have any more.
How many people have that kind of confidence that the bubble will continue to grow?
Will you bet your mortgage payment on it? I have kept a meager bitcoin savings, but every time I cash out I regret it, and I am getting used to that feeling. And as time goes on, that meager savings begins to look more and more like a full month's expenses in the bank.
Afraid that some day soon I will regret not cashing out when the price of BTC was so high. Oh well, knock on wood that day is not today.
Can be verified at the bottom of the article linked with the following text:
"A version of this article appeared in print on April 8, 2013, on page B3 of the New York edition with the headline: Bubble or No, This Virtual Currency Is a Lot of Coin in Any Realm."
Is there any possibility of another virtual currency - a Bitcoin competitor - being created? Surely this would have a big impact on the value of Bitcoin.
There have been a lot of alternatives[1] spring up, but as far as I can tell, they're all very similar to Bitcoin, so none of them solve big problems that Bitcoin doesn't already (variations include mining being not so biased towards GPUs/ASICs and small changes to the way blocks and coin supply are handled). Fundamentally, they're all variations on the same theme.
If a new currency was developed that solved some of the big problems that Bitcoin has[2], possibly by working in a fundamentally different way, I can see that currency becoming the dominant digital currency.
2. People disagree on this, but I would list things including its deflationary nature and its fragility (human error can cause vast losses in a way that traditional banking prevents). On the other hand, a currency that really was anonymous would serve a purpose too.
As epaga points out, if you lose access to your wallet (forget password, hardware failure without backups, somebody dies without leaving the password to their heirs) there is no way to retrieve that money.
Secondly, if a transaction is made to a valid-according-to-the-protocol address that nobody owns, that money is lost with no possibility of getting it back.
You could argue that these are problems that can be solved with more technology on top of Bitcoin, so you could have Bitcoin banks that:
1) Guarantee that your wallet is stored securely. The idea is that you need to trust that the bank is better at not doing stupid things than you.
2) Control access to it. Like modern banks, you would need to trust these banks, for they would have access to your wallets.
3) Make sure that payments are going to the right place. To make a payment, the bank that controls the wallet that the payment is being made to could be required to notify via another protocol that the address is real and belongs to a certain person/organisation. If this was widely used (so that payments to raw addresses was considered dangerous), it would also prevent a hacker from breaking into, say, EFF's Twitter account and tweeting "we're now accepting donations on this address...".
Re 3: I've been reading about contracts and script in bitcoin. Apparently you can setup transactions such that they automatically roll back to the originator after some time. Might it be feasible to use this to avoid the 'valid address/no wallet' problem? Establish on transactions a period of days/weeks in which the destination has to complete the transaction. I haven't had a chance to wrap my mind around it yet. Need to free up some evenings to spend on it.
If you lose access to your Bitcoin address (e.g. by losing your impossible-to-guess password or deleting your private key), the Bitcoins in that address become completely unreachable. This means you theoretically could wipe out your entire life savings with the click of a button and no one could help you retrieve them.
In (not only) that sense, Bitcoins have more in common with hard dollar bills than with bank funds. If you burn your dollar bills or lose them in some other way, they are gone forever. Similarly, it is not possible to duplicate a dollar bill. In this regard, Bitcoin is even more secure since forgery is not possible either.
Litecoin is currently the leading alternative. It's got a shorter confirmation time, uses scrypt as opposed to sha256, and will in the end have a larger total of coins.
All these make it seem like a better alternative for micro-transactions in the end.
How can larger number of coins be an advantage (or disadvantage for that matter)? As long as the supply is fixed it doesn't matter if the total is just 1 coin or 100 trillion coins.
There's been debates running now in the Bitcoin community what the new 'denomination' should be. So far, it mBTC (millibitcoins) is leading. You can still write it as 0.001 BTC, or 1 mBTC.
I'm just wondering in terms of psychology, what impact it has to write in ever decreasing denominations? Pricing something as 0.000232 BTC is much more difficult to read and understand. So, if there are more coins in circulation, this would hopefully not happen until much later. It will inevitable happen (if it is also a success). But just for adoption and ease of use in the short and medium term it will be easier to read.
Two promising open source cryptocurrencies that are not bitcoin forks are Ripple and Opentransactions. These can also be used on top of Bitcoin, or the others, to provide some functionality (such as decentralized exchanges) that Bitcoin itself has not.
As for a big impact on the value of bitcoin, I don't think so. Bitcoin has the networking effects for now, many people are working on accepting them. It may be that the additional cost of accepting, for example LTC is lower when already accepting BTC, but BTC has a large first mover advantage.
Litecoin is getting a lot of traction. I had made a post about it that rose to the front page until it got mass flagged.
You can check out btc-e.com and see the absolutely massive price spike of litecoin. It went from .80c two weeks ago to trading at $4 consistently over the last week.
However awesome bitcoins are, I wonder how much longer till wallets can be securely stored online, and the technology is simplified to an extent that my barely computer-literate mother can understand bitcoins.
Bitcoin needs more security than credit cards because transactions are irreversible. Say his mother has a significant part of her savings in BTC, and they get stolen. What's she gonna do then?
Cash needs more security than credit cards because transactions are irreversible. Say his mother has a significant part of her savings in cash, and they get stolen. What's she gonna do then?
Answer: let a bank deal with it. Banks can be insured.
For physical cash, banks don't give a hoot, and their insurance doesn't either, because the sums stolen are so small.
Even the dollars a bank has uninvested, they are stored electronically, and it's very easy to undo electronic transactions. Plus, the limiting factor on stealing electronic money from banks is finding a stool pigeon who will do it with cash.[1]
With a system where transactions cannot be undone, you need life-or-death-level security on the entire holdings. No insurance company is going to underwrite a policy of "there is a completely unknown chance of 100% loss."
[1] A PDF of this was on HN recently but apparently I did not bookmark it. Help a brother out?
Correct me if I'm wrong, but BTC banks can be attacked just like normal banks by the very central authorities we are trying to be safe from. Eg: "Oh noes, our economy is doing terrible, so much public debt. Let's just steal from the people.". Sure, they can't use inflation, but that's not the only way.
Credit card transactions only appear to be reversible to the end user. If someone nicks your credit card and buys some gas, it may appear to you that the money just came back but someone in the chain (usually the gas station) is eating that cost.
So the only functional difference between bitcoin and a credit card in this respect is that there's someone big (the bank) sitting in between you and the transaction that has enough clout to force the loss off you and onto someone else. If a bank decided to build a bitcoin payment system, and signed merchants to a contract similar to the one they do on credit cards, there would be no functional difference from the consumer's standpoint.
The money lost to someone buying some gas is minimal.
Transactions are completely reversible until someone involves physical goods, including cash. The system can deal with tiny levels of fraud. With Bitcoin, someone can do a complete transfer of my life savings in an instant, and then what?
If a hacker manages to get into your online bank account and transfer everything out, you're still out of luck unless the bank decides to cover it for you. As far as I know, unless the bank catches it before a transfer is made (which they very well might with fraud detection), they don't necessarily have any means to reverse the transaction after it hits the hackers account. I don't really have any deep experience with that side of banking so feel free to correct me if I'm wrong, but in my limited experience I've seen that once money leaves your account it's only reversible in the sense that the bank may decide to cover the loss for you. There might be some tiny window to reverse things, but I don't think it's a terribly large one.
For personal banking in America, there are almost assuredly laws that say it's the bank's responsibility. (Note that the rules are different for businesses.)
I'm still trying to find the reference I mentioned yesterday, the gist of which was that personal banking theft is limited by the number of cash mules who can be recruited. Krebs[1] has many articles about money mules that I hope will lead me to it.
EDIT I found it! [2] "Federal Reserve Regulation E guarantees that US consumers are made whole when their bank passwords are stolen."
That's a valid point. People are missing the fact that Bitcoin is just the underlaying currency. Exactly like cash. Cash can be stolen if stored in your house. That's why banks exist. In Bitcoin-land banks will not look and behave like banks do in the current world.
It follows an exponential decay curve, so we'll never mine the last bitcoin; rather, each year we mine half the ones that are left. (I'm not sure how the quantization works when we do get to the literal last one, but that's many decades away).
I'm surprised so many people in the tech community have fallen for this Ponzi Scheme.
For example, many heard about "some guy bought a $25 pizza with 10,000 bitcoins", but no one has thought about what this means. It means someone now has that 10,000 "coins" (which is close to 2'000,000).
This also means someone had this amount (and possibly much more).
And, finally, no one questions who posseses the first "coins".
That's why the creator is anonymous.
Just my 2 cents.
After all, they're infinitely reusable, totally fungible, and incredibly low friction. The only reason for their value to rise (rather than them just being passed around at the same price indefinitely) is if people expect them to rise, or if there's a shortage (forcing people to use fractions of a bitcoin to represent the same number of dollars as a whole one used to).
Is the cause largely the latter, or the former? Has there been a high enough rise in the transaction volume to explain the rise in value? Or is it all down to investors?