Value of Bitcoin "Crashes"

souravzzz writes with an update on the state of Bitcoin. Quoting the Ars Technica article: "Bitcoin, the world's first peer-to-peer digital currency, fell below $3 on Monday. That represents a 90 percent fall since the currency hit its peak in early June." That's still three times its value in April 2011.

Comments

Bitcoin

[TechLA]

People keep saying that BitCoin will have it's value as long as people keep using it and that you're not supposed to get rich by mining. But that isn't even the problem. I transferred some cash to BitCoins and back on Friday and it was paid out to me on Sunday. By the time I got the transfer, it had lost almost half of its value. Now imagine if that would constantly happen with your real money. It wasn't much, but I sure as hell aren't going to use it again. This is why PayPal and other ecurrencies are fixed to real world value - they are stable (as far as it can be), and BitCoin can't ever get as stable as real world currencies (yes I know they aren't that stable, but that just means even bigger problems with BitCoin)

Re:Bitcoin

[Smallpond]

You may have lost money on it, but somebody gained. Currency speculation has been around a long time. Most currencies aren't as volatile because there is a government making a monetary policy to control it. Bitcoin is a real opportunity for speculators.

Re:Bitcoin

[Goaway]

Oh, that's nice. I can give my money to speculators! Let me get right on that.

Re:Bitcoin

[MareLooke]

You are most likely already doing that already anyway. What do you think your bank does with your money?

Re:Bitcoin

[TheRaven64]

No, the real problem is that bitcoin is not backed by anything. Old currencies were backed by a precious metal. If you had one Pound Sterling, then the Bank of England would give you one pound of sterling silver. Modern fiat currencies are backed by a promise from the government that they will accept them in payment of taxes. Bitcoin was backed by some pointless computation.

If a bitcoin had been a promise to do some computation work in the future, then it may have had some value, because people need computational work done. For example, something like Amazon's compute cloud could potentially back a currency, because the service of running a VM for some number of CPU seconds is fungible and - importantly - people actually want it. No one wants the work that is done to generate a bitcoin, so the coin itself is worthless. Its value is based entirely on the premise that other people will want it in the future, but that's just a pyramid scheme.

Re:Bitcoin

[fridaynightsmoke]

Oh, that's nice. I can give my money to speculators! Let me get right on that.

Can anyone explain the purpose of "speculators"? When I ask "What do speculators produce?" the answer seems to always be, "Speculators produce liquidity in the market."

That sounds suspiciously like when my mom used to say "Because I said so."

When speculators are right, they even out price fluctuations by buying when they believe a commodity is unreasonably cheap, and selling when it's expensive. The act of buying makes the 'cheap' price more expensive by taking some of the commodity off the market, and conversely selling when expensive makes the commodity cheaper at that time. In non-price terms, speculators soak up surpluses when they exist, and add extra supply in times of shortage.

When speculators are wrong or generally stupid, all hell breaks loose. Careless/stupid speculators buy in a rising market, driving the price up faster, then all sell at the same time when they realise that prices can go down as well as up, causing and then bursting a classic bubble.

Re:Bitcoin

[Bob the Super Hamste]

Rolling around naked in it laughing like maniacs...

And this is why I no longer use cash.

Re:Bitcoin

[DrXym]

So it's directly comparable except in the sense that Bitcoin lost half its value in 2 days versus 10 years in your handpicked scenario.

Re:Bitcoin

[iamthelaw]

Let's be clear here -- no currency is backed by anything, ever. Sure, "old currencies" were backed by a precious metal. What was that backed by? The answer to "why do currencies have value" is that _nobody knows_. The different schools of economics all have different theories, but macroeconomics is not, despite what people say, a science.

The theory backing bitcoins is largely based on the (non-mainstream) ideas of Austrian economics; which claim that currencies have value almost entirely because they are scarce, fungible, and useless. That is, their value as an exchange medium far exceeds their value as physical objects. Incidentally, Austrian economics is pretty much the only school of economics to openly acknowledge that it is not a scientific theory.

Fiat money qualifies easily -- nobody is burning dollars for heat or using them for wallpaper, and the scarcity is guaranteed by the issuing government (although easily abused, and sometimes catastrophically, which is why Austrian's tend not to like fiat currencies).

Gold qualifies with caveats; it's clearly "money", but it suffers from portability and verifiability problems unless it's minted into a form that is hard to reproduce (the old-old-school approach) or vouchers are issued that can be redeemed for stored gold (the newer-old-school approach). The vouchers then become money in their own right, since their scarcity is tied to the scarcity of the underlying metal, and they're just as fungible and useless. But almost universally, governments (and unscrupulous banks, and sometimes even scrupulous banks) abuse the fact that the holder of a voucher can't see the gold to steal the gold; effectively disconnecting the scarcity of the two. Same goes for silver, though less dramatic.

It's surprisingly hard to come up with examples of things that are scarce, fungible, and useless that are have not been used as currencies. Even things that violate one of these things is often used as money in a barter sense or in the short term (i.e. cigarettes in prison, wampum among east-coast Native Americans, Facebook game fun-dollars, baseball cards, or the Iraqi Swiss Dinar).

So this is what Bitcoins are -- they are nothing but pure scarcity, fungibility, and uselessness. The portability is nice, except that transactions are tricky (since there's no real "receipt" mechanism -- verifying that a customer has paid his bill requires funky gymnastics), all use of it is dependent on the accessibility of the internet, and the scarcity is conditional on there being sufficient computing power applied to the problem. But aside from those, it really should work. And the fact that they are worth anything at all (that people are willing to buy them at any non-zero price) is a big deal.

In terms of price stability, this is a complicated phenomenon; Austrian's generally do not consider price increases to be the same as inflation (a purely semantic distinction). What causes price changes are complicated, and can not be reduced to a simple rule, because at any moment, technological progress and other myriad phenomenon are messing with prices that affect, to a small extent, everyone in the supply chain of every business in the world, and that effect get compounded over time. The most visible form of this is the supply chain of money itself, through the mechanisms of banking and credit.

So why is the Bitcoin value so volatile? (Now we're in the realm of pure speculation on my part) Because there's no supply chain to keep prices stable. No supply chain of any sort; a restaurant that accepts bitcoins can not buy silverware, or food, or paper cups, or cash register tape, or POS systems, or pay rent in Bitcoins. There are no mechanisms for loaning bitcoins; in either direction -- there are no banks that will pay you to lend them your bitcoins, and no banks that will assess your trustworthiness and income and lend you the money lent to them. So the price floats, while people try to figure out how to provide baseline services (like web hosting), s

Re:Bitcoin

[networkBoy]

Speculators are a capacitor. Storing charge when the voltage is above the mean level, dumping charge when below.
Market manipulators are an external power supply, forcing the mean level up then down.
If speculators have more resources than the manipulators, the manipulation will fail, otherwise it succeeds.
-nB

Re:Bitcoin

[murdocj]

In other news, there are no "sure things" in this world. If Vladimir Putin goes nuts and unleashes Russia's nukes, clean water and non-radioactive food is going to be a worth a whole lot more than dollars, bitcoins, or gold. In the meantime, comparing Bitcoin losing half it's value in 2 days to the chance that you won't get your federally insured deposit money back is absurd.

Re:Bitcoin

[Chris Burke]

You mean Bitcoin is directly comparable to the currency of an unstable currency like Zimbabwe's that I also would never dream of transferring any of my comparatively rock-stable $US to.

I do believe you are completely correct in that.

Re:Bitcoin

[Yunzil]

Great marketing campaign. "Bitcoins: Hey, it's not as bad as Zimbabwe!"

So to answer your question, yes, it's directly comparable.

No, it isn't.

Winner: ATI

[bengoerz]

And the winner of this whole experiment ends up being ATI, who sold a bunch of GPUs to doe-eyed bitcoin miners.

Re:Winner: ATI

[Hazel Bergeron]

During a gold rush, sell shovels.

Crash? More like correction.

[Cainam]

It seems more like a correction to me. The idea that a BTC was worth $20 or more seemed too good to be true, probably because it was.

I think BitCoin is a great concept, but it needs more of a real economy and less currency speculation. I suspect that will come once the hype dies down. Maybe now that the value has gone down, that'll happen soon.

Re:Crash? More like correction.

[betterunixthanunix]

I think BitCoin is a great concept

Except that decentralized digital cash is inherently flawed, since the tokens will always grow linearly in the number of transactions they are used for. In other digital cash systems, this problem is solved by having an issuing authority (bank, government, etc.) that accepts old tokens and issues fresh tokens. In the case of Bitcoin, no such authority exists, so the tokens are just going to keep getting bigger, and eventually they will be too large to be useful.

Not that the technical problems are going to be what kills Bitcoin. In terms of economics, Bitcoin has a shaky basis to begin with: people only accept Bitcoin because they believe that they can exchange their Bitcoin tokens for some other currency. Eventually people need to make that exchange, in order to pay their taxes, but there is no similar need to obtain Bitcoin tokens. The gap in demand is not really filled by Bitcoin's utility as a digital cash system, which is questionable to begin with because of the technical limitations on Bitcoin.

Even if somehow that did not become a problem, there is the fact that Bitcoin is an inherently deflationary currency. This creates problems with hoarding (which we are already seeing), and makes it harder to repay loans (loans are crucial to a functioning economy, despite what those "occupy" protesters tell you).

In short, the odds are against Bitcoin being successful. Really, more traditional cryptocurrency is needed, where a bank issues tokens but the tokens can still be transferred anonymously. Sadly, Bitcoin's failure will make it even harder to start a digital cash bank, since everyone will associate digital cash with Bitcoin and think that all digital cash systems suffer the same problems.

Time to invest in tulip bulbs...

[Layzej]

I'm moving all of my cash to tulip bulbs. They're due for a comeback ;)

Valuable lesson in currency...

[RyuuzakiTetsuya]

All currencies are fiat. No matter what they're backed by. Currencies have to exist inside of a strong ecosystem that encourages their trading rather than hoarding.

Re:Valuable lesson in currency...

[laron]

Gold was already valuable before it was actually useful. If a large fraction of the value of gold was based on it's technical uses, the gold price should be more stable IMHO. The gold price is more based on a circular logic: It's valuable because everyone thinks so.

...And nothing of value was lost.

[Kaenneth]

Seriously, what did you expect?

A small Bitcoin success

[Teppy]

Our new game, "Dragon's Tale," functions exclusively in Bitcoins. It's a gambling MMORPG based on the same technology as our previous game, "A Tale in the Desert." Choosing Bitcoins means that I never have to worry about PayPal freezing my account, or about $25 chargeback fees, or making Mastercard a 2.5% partner in my business.

When we started Dragon's Tale, Bitcoins were worth 5 cents, and people played for 100's at a time. When Bitcoins were $30, people played for fractions of a coin. Now that Bitcoins are $2.00 or whatever, they may spend a Bitcoin or two on a play session.

The point is that the exchange rate to dollars is irrelevant - players play at the level they're comfortable with, and our revenue (viewed in dollars) has been increasing steadily.

Re:Speculation

[timholman]

The majority of bitcoins is in the hands of a handful who cash in large quantities from time to time thus crashing the market.

Excellent point, and in fact Bitcoin may be one of the cleverest moneymaking scams in recent memory.

No one knows who Satoshi Nakamoto, the purported creator of the Bitcoin protocol, really is. Assuming Bitcoin ever achieved widespread adoption, he and a handful of early adopters would become the richest people on earth by default. When I pointed this out to a Bitcoin "true believer", his response was along the lines of "Well, he's a genius and deserves it." Yes, but if in fact "Mr. Nakamoto" is simply a syndicate of very clever scammers, then we would effectively be turning over a huge portion of the world's wealth to a criminal enterprise. No government is EVER going to allow that to happen.

No cryptographic currency is ever going to gain any traction if it makes early adopters obscenely wealthy just by default. Consequently, the only way anyone will ever make money from Bitcoin is via speculation. The people pushing Bitcoin are appealing to the same mentality (and lack of logic) you see with believers in gold currency. Given the long history of scams involving precious metals, there is clearly no lack of potential victims willing to throw away their money.

I assume the early Bitcoin adopters are cashing in before the entire house of cards collapses. If that was Satoshi Nakamoto's intent from the start, then my hat is off to him for committing what is essentially the perfect crime.