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The Bitcoin Bubble (economist.com)
A reader shares an Economist article: More people will trade in Bitcoin and that means more demand, and thus the price should go up. But what is the appeal of Bitcoin? There are really three strands; the limited nature of supply; fears about the long-term value of fiat currencies in an era of quantitative easing; and the appeal of anonymity. The last factor makes Bitcoin appealing to criminals creating this ingenious valuation method for the currency of around $570. These three factors explain why there is some demand for Bitcoin but not the recent surge. The supply details have if anything deteriorated (rival cryptocurrencies are emerging); the criminal community hasn't suddenly risen in size; and there is no sign of general inflation. A possible explanation is the belief that blockchain, the technology that underlines Bitcoin, will be used across the finance industry. But you can create blockchains without having anything to do with Bitcoin; the success of the two aren't inextricably linked. A much more plausible reason for the demand for Bitcoin is that the price is going up rapidly. People are not buying Bitcoin because they intend to use it in their daily lives (Editor's note: the link could be paywalled; alternative source). People are buying Bitcoin because they expect other people to buy it from them at a higher price; the definition of the greater fool theory.
"7 cents? That's outrageous, the bubble will pop soon!"
"70 cents? Such foolishness, who would ever pay that much for a single bitcoin?!"
"7 dollars? Bitcoin is a scam, who's fool enough to fall for it? Stay away!"
"70 dollars? Look, it's definitely a bubble, it will pop anytime now."
"700 dollars? That's like the tulip mania! Don't ever touch bitcoin unless you want to lose a lot of money"
"7000 dollars? Again, it's a bubble, only a true idiot would buy bitcoins, trust me!"
When a single btc will be worth $70k, those idiots will still spew their usual nonsense.
Yes, I really just link to goo.gl. Why? Because it's an Economist article, which sits behind a paywall. So I instead funnelled the article through Pocket service -- a common way to break paywall -- so that most readers see an unpaywalled version of the story. Now, getpocket [dot] com wouldn't make much sense to others, but goo [dot] gl will make it clear to people that the link has been shortened.
When cryptocurrency ultimately gains traction, it'll be because some major institution or government decides to implement it on scale. The world is never going to trust their money to the good folks who brought us Magic The Gathering The Online Currency Exchange, Dogecoin, and "oh, that's bad--well let's just try to get everyone to agree to fork the entire danged currency." They just won't. There's a fundamental, irreparable lack of gravity, responsibility, and accountability in the cryptocurrency world today.
People on the outside see cryptocurrency as one part hobby, one part religion, one part social experiment, one part speculation, and one part black market. Frankly, they're right--and they're right not to touch it with a ten-foot pole.
Obliteracy: Words with explosions
The appeal of Bitcoin is that it is decentralised global money system that cannot be controlled or shut down by governments. The "three strands" are just a bonus. And no, Bitcoin is not anonymous, please stop repeating false claims.
It will continue to be a speculative investment until governments allow you to pay taxes with Bitcoin. Part of the reason the income tax came about at the same time as the Federal Reserve system in the US is that it forces people to use the new currency. You need dollars because you need to pay your taxes. It's the same reason the US fights so hard to keep oil traded in dollars. It props up and makes essential the currency.
Even now we use dollars to judge the value of Bitcoin. Perhaps some day we will judge the value based on how many you need to buy a car (for example). But for the time being and foreseeable future, Bitcoin is only worth what it can be traded for in dollars or another currency controlled by governments.
"What the American public doesn't know is what makes them the American public." -Ray Zalinsky (Tommy Boy)
The thing I find hillarious is the belief in anonymity which, while effectively true for a short time, is actually counter to the whole concept of what is a blockchain.
If you have a real blockchain, transactions are anti-anonymous.
Well done and well said. You catch a lot of undue flack.
I don't think that the argument you replied to suggests it will go on forever, it is a fair critique of the "soon" crowd.
That crowd always picks some subjective reason why bitcoin will fall apart. Some of them are hilarious....like that it isn't backed by a government. They also never set even a rough date when this falling apart will happen.
Essentially they are making claims that can't be disproved, which alone is enough to ignore them regardless of how many bitcoin one owns.
It is a blog post hosted on economist.com that did not appear particularly coherent to me.
Spotted the Bitcoin speculator!
The Economist nailed it. BTC would be valuable as an anonymous digital currency if the ratio of coins to everything that can be traded for coins remained stable. Traditionally, this is what the central bank of a national currency is supposed to do. BTC has no central bank, and limits its money supply mathematically. The advantage of this is that BTC cannot inflate, but it also means that as the currency trades more widely (is exchanged for for more things), the money supply grows only very slowly through new mining. It is DEFLATING, so people have taken to buying it only because they hope to sell the coins themselves for more later on.
As soon as you avoid buying a beer for BTC because you think you will get more for your coins later, it stops being a currency. It becomes a speculation, and by now it's tulip time.
underlying value,
This is entirely false, bitcoin only has value because people think it does. Copper has an underlying value, even if markets aren't speculating on it there will always be a buyer with a use for it as a conductor willing to pay something for it.
Actually I'm lately hearing this line of argument:
"7 cents? That's outrageous, the bubble will pop soon!"
"70 cents? Such foolishness, who would ever pay that much for a single bitcoin?!"
"7 dollars? Bitcoin is a scam, who's fool enough to fall for it? Stay away!"
"70 dollars? My barber recommends Bitcoin, and so does my dog walker..."
"700 dollars? Okay, now I'm buying in."
"7000 dollars? I'm riding this to the stars. Desert Rat Blog is calling for $100,000 BTC by 2020!"
It is comforting to me that one of the pro-bubble arguments the author makes is:
People aren't buying bitcoin to use in their daily lives
Protip: we don't buy stocks to use in our daily lives either. Or gold, or bonds, foreign currencies, or futures of any sort, or shorts, or MBS, or mutual funds, or.....
The author doesn't seem to have thought his whole argument through very well.
Eh... The usage of BC in areas with hyperinflation is not proof that it's detached from fiat systems because it's not. Areas with hyperinflation traditionally switch to using currencies other than their own one, meaning traditionally the dollar and other major currencies. In this case some have chosen to use BC, but most of the black market trade is still conducted using other major fiat currencies because they're more easily available.
You still need fiat currencies to purchase bitcoins. Without the exchanges (which can be regulated quite easily) bitcoin would be useless as without a convenient way of transferring back and forth between fiat-bitcoin-fiat the utility of BC (and hence, its value) will plummet.
What? Compared to regular debit/credit cards that are pretty much universally accepted and cash BC is terrible in terms of simplicity of use.
There's a problem with this incentive though: the more time passes, the more complicated and difficult the mining becomes which makes it increasingly energy-intensive and hence costly. For the mining to be profitable the price of the coin must keep going up to match the increasing difficulty of calculation, which means should the value of BC drop drastically in the future due to any number of reasons (competitors, increasing regulation etc.) the whole mining infrastructure may suddenly become massively unprofitable and collapse.
"It is the business of the future to be dangerous" -Alfred North Whitehead
As soon as you avoid buying a beer for BTC because you think you will get more for your coins later, it stops being a currency. It becomes a speculation, and by now it's tulip time.
Bitcoin is just a sort of an ersatz "fiat Gold". I'm surprised that we aren't seeing those doom and gloom gold investment infomercials on Television get competition with Bitcoin investment infomercials.
The shepherds did so well protecting the flock that the sheep no longer believed that wolves existed.
The subprime mortgage market bubble was incredibly obvious, just not to those whose entire net worth was leveraged to participate in it (i.e. those buying McMansions with no money down and no way to afford the adjustable rates).
In a few years you'll be telling us that no one say the bubble in higher education either when it has been blindingly obvious for more than a decade.
"The market can stay irrational longer than you can stay solvent."
Just because the price of Bitcoin keeps rising does not mean it's not a bubble. Literally every other bubble has the same evangelists spouting off the various reasons why it's not a bubble and why this time it's different.
The argument that the recent meteoric rise in Bitcoin is due to a herd speculators rather than demand for Bitcoin currency as a currency vehicle is probably the correct one. And if there's one thing that herds do is stampede. Sooner or later, they are going to stampede for the exit and your $7,000 bitcoin is going to plummet back to somewhere near what the true transactional and holding value of BC is.
None of those things you mention claim to be currency (except foreign currency, which literally its only value is that other people use it as a currency and as such is the most risky of all your examples for investments). A currency that you don't use in your daily life is pointless. But bitcoins only value is as a currency. Seriously, what is the point of a currency you don't use? Every one of your examples you don't buy to use as currency. You buy gold as an investment (a poor investment at that, but an investment none the less), and you're counting on its worth because of its value as a malleable, non-corroding metal for its industrial usage and it's rare and "ooooh, shiny" value in the jewelry industry. Bonds, you're literally loaning money to somebody. You buy them, knowing that the seller will pay you back the amount plus interest. Foreign currencies, I personally buy them because I'm going to that country and need them, but on pure speculation...well, at least you can use it as money in those countries, though I think you're a bit of an idiot if you "invest" in foreign currency. Futures, you're hoping a good that people want, will want it more in the future and will pay more for it. I can go on for all of your examples as to the why, but you can at least point to where its intrinsic value is, no matter how silly it is that you believe. The problem with bitcoin is, it's intrinsic value is as currency. But if people don't use it in their daily lives, then it has no value. You might as well be investing in Hyrule rupees at that point. I found a 25K Iraq bill in a parking lot, apparently it was worth $22. But to me, without taking it to the bank to exchange, it was literally worthless. Bitcoin falls into the same category.
"It isn't manipulable -- If someone had 51% of the BTC mining, then one would worry."
Wrong! China holds most of the hashrate and processing power. They can easily hit a 51% attack if they wanted.
"It is secure, and far more useful than most fiat currencies."
It is digital and thus it can be hacked. People have had their bitcoins stolen through electronic means. Security is a fallacy in a chaotic system such as a computer.
"The value isn't going anywhere but up."
And anyone that paid attention to any economic history will quickly say "This is a bubble that's going to leave a lot of 'investors' high and dry."
"When you get paid, you stay paid."
WRONG. To boot, plenty of fraud involving exchanges of goods for bitcoin has already happened, leaving plenty without recourse.
"BTC only will go up in value."
That you use the qualifier 'only' demonstrates you really have no fucking clue about economics.
"BTC is verifiable independent of a bank."
Verifiably stupid with no government insurance if your bank gets robbed, like Mt. Gox.
"If you avoid Mt. Gox like exchanges, your BTC is far safer than a bank."
Given my fuzzing audits on several exchanges - you're better off with a bank. And as stated above, banks come with insurance if you lose your money.
Still waiting on Serviscope_minor to wake up to fucking reality and realize that Jessica Price isn't going to fuck him.