I don't know why you're being downvoted. This is a very valid point. We've had speculative bubbles for as long as we've had financial markets - I don't see any reason why this one should be different.
I'll always up-vote these comments, I have invested a small amount in Bitcoin but am fully aware the whole thing could tank and never return, I consider it to be an interesting experiment for myself. People do need to know how risky this is though.
If it ever becomes successful, we will marvel that individuals could ever afford a bitcoin. 21 million is a tiny number for a currency when compared to $40 trillion in global currency ($6000 per person).
~$1.25 billion spend on Cyber Monday
~$8 billion are traded for oil every day
~$150 billion NYSE daily
If bitcoin became the trusted currency for any of these activities what would it be worth?
If bitcoin became the global currency we all get 0.003 each, making the upper limit on a bitcoin around $1->2m depending on inflation.
Of course wars will be fought before bitcoin becomes a global currency. I'm also not sure that people really want an inflation proof currency. But it is fun to speculate.
This is the fundamental characteristic of bitcoin that puzzles me. Most currencies are inflationary, which in low doses is a good thing: it disincentivizes keeping the money under the mattress, maintaining a healthy flow of currency. Bitcoin is by design deflationary: it's value increases over time.
Deflation is destructive to the economy, so if bitcoin is deflationary by design, it can't ever be a primary currency, and thus it's expansion in usage is constrained from the get go.
Now, if you assume the market is smart, then there must be some other motive, other than usage, for appreciation. I suspect an artificial bubble.
"This is the fundamental characteristic of bitcoin that puzzles me. Most currencies are inflationary, which in low doses is a good thing: it disincentivizes keeping the money under the mattress, maintaining a healthy flow of currency. Bitcoin is by design deflationary: it's value increases over time."
Thank you for this. I constantly try to explain this to bitcoin fanatics and they don't get it.
What's less clear is how damaging that actually is. If you are looking for a way to preserve value, then being deflationary might even be beneficial. There are plenty of things that are deflationary (i.e. limited in supply), such as gold, stocks of a growing company, or real estate in Manhatten. Does that make these things worthless?
To the person who just wants to save for retirement and doesn't want to invest in the rollercoaster stock market, the best thing that money could do is to at least retain its current purchasing power.
You can talk about "maintaining a healthy flow of currency", but to some people it's more like "use your dollar coupons before they expire" and they don't like playing that game.
Just keep dividing it, that's one of the key designs. Work in mini bitcoin, or micro bitcoin, or even single satoshi. There's nothing saying that you have to use full units.
That doesn't actually solve the underlying problem, which is, why would I spend my bitcoin today when it will be worth more tomorrow?
Now, if bitcoin merchants agreed on the expectation that bitcoin will continually rise, it would be rational to price things at a discounted rate. But that is a lot of risk to take considering bitcoin's volatility. In the end I think BTC speculation will do the most to harm its actual economic utility.
All else being equal, the more people who use Bitcoin (whether as a store of value or medium of exchange), the greater the demand for it -- and therefore the higher its price, because the supply is fixed asymptotically at 21 million bitcoins.
In the long run, Bitcoin's price will be positively correlated with adoption.[1]
People will want to have it as an asset, not as a usable currency. Appreciating currencies are disastrous for any economy stuck with them, which is why we're no longer on the gold standard.
The gold standard worked in the US for about 170 years, which is part of why the US became the wealthiest nation in history: it had an extraordinarily trusted currency (green back = good as gold). Gold was worth $19 to $35 for 100+ years, and it worked, America had no problem growing dramatically.
The US economy also had no problem growing fast during the 1990s, when the US Dollar was strong and had appreciated extremely strongly against gold over a 20 year period ($600 in 1980, to $270 in 2001).
China also dramatically counters this notion. The Yuan has appreciated significantly (for a currency) over the last decade, while they've simultaneously gotten far wealthier.
The disaster has been what has happened to our money since 1971 (specifically the 1970s and since 2001). The real cost of goods has gone parabolic.
1964, 5 silver quarters (90% silver, 10% copper) for a $1.25 minimum wage, now worth $25.90 ($5.18 each). That's pure destruction via inflation.
And that's not even getting into how the Fed + Congress funds insanity like endless war because there is no gold standard restricting their spending habits.
China also dramatically counters this notion. The Yuan has appreciated significantly (for a currency) over the last decade, while they've simultaneously gotten far wealthier.
Real world calling. China pegs the Yuan at 6.22 Y / $1. It's appreciated by something like 3 cents over the last decade.
How do they do this? They continually buy dollars with Yuan. Increase the supply of Yuan, decrease the supply of dollars. They can't stop, or the Yuan appreciates, devaluing the dollars they already hold and, more importantly, hurting their exports.
This is why you're seeing the federal government borrow money for 0.1% interest, and why there's been almost-zero inflation despite deficts and quantitative easing.
The Yuan is not pegged to the dollar. The dollar peg was lifted in 2005.
What you mean is, it has appreciated by 15% over just the last 5 years. That's a significant value increase.
There has been dramatic inflation. Which is why a normal price for oil, despite plenty of supply, is now $85 to $90. Also why gold is now $1500 as normal. And also why grocery prices are at all time highs. And why housing prices, even in the supposedly destroyed markets, are up 50% to 100% over 15 years - drastic by any historical norm, particularly so in an economy with 14% real unemployment.
The Federal Government is borrowing at near zero because the global reserve currency is temporarily the US Dollar, and the Fed is buying about 85% to 90% of all new US Government debt because nobody else wants to touch it as they know the disaster that is coming. If you think borrowing rates for the US Govt. are going to stay this cheap for the next two decades, I'll take you up on that bet.
The RMB was 'depegged' as a press release but is only allowed to float in a narrow range of 0.3%. (http://en.wikipedia.org/wiki/Renminbi#Managed_float). Most of the increase in value from 2005 was a command decision from the CCP, not a result of market float.
At any rate, 15% over 5 years is less than 3% inflation. That's low inflation.
I don't think borrowing rates will stay this cheap over the next 2 decades because eventually the private sector will catch up to all the public jobs we've been shedding under socialist obama and GDP growth will resume, creating inflationary pressure again. But for now, and while we're either losing or barely holding even on employment over the next year or so, the interest rates will stay low. The second they touch 3% or 5% (normal inflation range), the fed can start jacking up their interest rate to compensate.
In short: It's ok, our currency is not going to collapse.
I agree the USD is not going to collapse. It's going to continue to devalue at an accelerating pace, as it becomes increasingly less of a global reserve standard.
Interest rates on US debt will climb from here forward.
The Fed will increase its rate of debt monetization as the US economy flails, likely from $85 billion per month up above $125 billion per month in the coming year.
The Fed will also never be able to actually unwind its portfolio, as Bernanke has begun admitting.
The dollar will have a severe crisis of confidence over the next decade, but it won't collapse.
Of course interest rates will climb -- what else are they going to do from 0.1%?
People have been making your predictions since January 2009. When's it going to start?
My prediction is specifically that inflation won't start until growth starts, at which point it's really much less dire than the picture you're painting.
It never really worked in the sense that you mean. Economic growth was virtually nil until the industrial revolution. Not coincidentally, it was around the same time that gold-backed currencies came to be seen as a bad idea. If you have the time, 'The Populist Moment' is an excellent read.
The statement was that appreciating currencies are a disaster. The counter point is that the Yuan has been appreciating for the last decade while China has simultaneously gotten much wealthier and maintained a fast growth rate.
We are no longer on the gold standard because the gold was confiscated under threat of 10 years in prison. Please explain how holding a piece of metal under mattress destroys someone else's wealth, so you can come to a person and extract gold by force.
When you have a growing economy but a fixed money supply, money will appreciate. When this happens, people will prefer to keep money rather than spend it, and you get deflation-induced recessions/depressions. See the latter part of the 19th century in the US for repeated examples of this.
It should be noted that other countries at the time had similar currency restrictions yet they didn't have the bank runs and depressions that the US had. Economists like Eugene White believe there were other, possibly even more influential, factors in those panics, like the branching restrictions, which made banks more fragile.
Exactly, and I'd like to point out that you having to explain this goes to show we aren't teaching economics properly (or at all) in school. The school systems focus on make sure our children are well rounded in every way except financially.
In regards to the concept above: even if kids take macro, they'll remember this concept for about 6 months ....and it's gone.
This is like lamenting that kids don't know enough about Chaucer or don't understand that evolution only applies to populations, not to individuals.
These kinds of small details will be forgotten intentionally by most people within months of learning them.
Quite frankly: I don't care if kids come out of high school with a functional knowledge of the effects of an inflating currency: I'd rather they understand personal finance instead of macroeconomics.
Well put, I wholeheartedly agree that personal finance should should come first. I do think the concepts of supply and demand, hording, etc.. can be taught very simply and once they sink in once they can be reapplied to a variety of situations.
What's wrong with that though? So people will end up not spending money unless it's very valuable to their lives. So less money gets spent on Angry Birds, iPad Minis, and games. Makes entrepreneurs have to up their game if they want people to spend money on them.
Literally the entire purpose of currency is to facilitate trade. Having a fixed money supply penalizes and discourages trade, and encourages currency hoarding.
People on the bottom rung end up spending all of their money, and will find it even harder to ever dig their way out. The top 1%, who cannot spend money fast enough to exhaust it, will hold onto their money which will become exponentially more valuable over time.
Capital investment will plummet, because statistically, you're better off simply holding your money. It's like holding an index fund in the stock market (your money increases with value correlated to the market), except there is practically zero risk. Any investment you make by definition will perform on average no better than the economy as a whole; so why bother investing your money with risk, as opposed to holding onto your money with no risk? They both have the same expected value.
We're no longer on the gold standard because it lead to hoarding and economic inflexibility. It doesn't destroy wealth, however when gold is your currency and people hoard gold (for any reason be it economic instability or as an investment in the future price increases) the economy loses that amount of circulating money and moving money is what makes an economy work, not stagnant saved money. So by signing that executive order and replacing hoarded gold with non-appreciating paper money there was less incentive to hoard and more likely to spend, which is what we needed to get out of the Great Depression.
It'd be a little harder for that to happen with Bitcoin since it's not a currency backer but a side currency but the chance it could stagnate into investment only is there. Then it's value is entirely determined by the whim of the market since it's entirely ephemeral. (Yes all monetary value is ephemeral, intangible and based on the belief and good will of the market, but thing like gold have a longer history of having value everywhere.)
Yes all monetary value is ephemeral, intangible and based on the belief and good will of the market
That's an overly simplistic view of the value of money. If the value of money were only based on belief, then one would except sudden collapses of monetary value without any connection to the real economy quite regularly. In a sense, money would be like the cartoon character who defies gravity until he looks down.
In reality, the value of money is based on people's demand for money. This demand is largely circular (the store wants money in exchange for goods because that's what the suppliers demand, and the suppliers demand money because that's what their employees demand, who demand it because that's what the stores want, and so on).
However, there are two decidedly non-circular sources of the demand for money. One of these sources is taxation: If the government decides that you have to pay your taxes in currency X, then there will always be demand for that currency. Even if your employer pays you in Bitcoin, you will still have to pay your income tax in whatever the local fiat currency happens to be.
The other source is debt payment: If you are in debt, you have to make certain payments (under threat of losing your house etc.).
These two belief-free sources of demand for fiat currency are the "base case of induction" for why fiat currency has value. They ensure that the viability of fiat currency does not depend on belief.
A decent point but the government accepting payment in a certain currency requires that they are sure/believe that they will be able to use that currency to pay their debts. Same thing applies to the debt argument both rely on a communal acceptance that a dollar/euro/ruby/piece of eight/bitcoin/kongbuck will be accepted as payment.
I suppose it'd be clearer if I said it's exchange value is ephemeral, ie completely determined by the faith that currency X is worth/will be accepted in exchange for some amount of currency or product Y.
A decent point but the government accepting payment in a certain currency requires that they are sure/believe that they will be able to use that currency to pay their debts.
There are all sorts of ways to answer to this, but all of them amount to pointing out the bleedingly obvious: Most[0] governments issue debt in the same currency that they demand tax payments in, so your condition is not really a condition at all.
If somebody holds a government bond denominated in currency X, then they will be paid in currency X. If they suddenly decide that they would prefer to be paid in currency Y, well, take it to the foreign exchange: said government does not, and does not need to, care.
[0] The governments that don't do that almost invariably end up in trouble at some point because of precisely this. On a related note, almost all stories of hyperinflation are in fact stories about foreign-currency-denominated debt.
Do you say, if some people think you and your friends cannot play with certain non-harmful objects (e.g. gold bricks), it is morally alright to force you to go to prison or kill you if you try to protect yourself?
The bricks themselves are not harmful however stockpiling the primary medium of exchange is very harmful.
A better metaphor is water in a desert, except instead of being consumed it's passed from one person to another without loss and actually increases when it's transferred. The item itself isn't harmful but hoarding it is extremely harmful.
Stockpiling gold is extremely helpful if the standard is gold.
It reduces supply, which boosts the value of every other outstanding dollar. I boost everybody else's current purchasing power by increasing the real value of the dollar bill in their pocket by reducing the availability of gold, since the true measure of a bill is what goods it can purchase.
Not to mention, markets take note of the true availability of gold. Hoarding gold doesn't mean it is destroyed, and the market knows that in general estimation, because the market knows in general estimate how much gold is mined / stored / sold / etc. IE that gold can and will come onto the market, whether today or when I die, and the market prices accordingly.
Any currency backed by a gold standard when I hoard, will benefit over any nations not on a gold standard or specifically with a depreciating currency. I can buy more and more and more of their exports for the same dollar.
I make everybody else that is using the US Dollar standard richer if I hoard gold. It means they can buy more real goods with their dollar. This principle is demonstrated in the 'printing' of dollars, in which increased supply devalues the dollar and makes it possible to purchase less real goods (whether you're talking houses, real estate, gold, silver, platinum, or oil as a baseline).
The same concept is demonstrated in the adoption of bitcoin. Finite supply means anybody holding bitcoins will benefit as demand goes up. Anybody holding a dollar bill would benefit from my gold hoarding.
Ask China how awesome it is to have an appreciating currency while the rest of the world foolishly destroys their currencies: China gets to buy more foreign goods every year with their same yuan notes, while the rest of the world can buy less and less (China can also more easily begin purchasing their own goods, which means less need to export; and they can more easily buy foreign natural resources, as the yuan gains against eg the dollar (since commodities are priced in dollars)).
"I make everybody else that is using the US Dollar standard richer if I hoard gold. It means they can buy more real goods with their dollar."
Conversely it means that everyone exchanging labour or goods for dollars gets less, and the incentive for those of you with dollars is to keep hold of them, thereby increasing your wealth while not actually producing any economic output.
Used iPhones have some liquidity and a market price. Should I be forced to not hold mine for a very long time? At what point the good becomes a "medium of exchange" in your view, so you allow yourself using force to extract it?
LOL. Inflation is force, currency is force, but let me guess - property rights aren't a form of force right?
Sorry, but bringing the use of force into this is the first sign I'm talking to a libertarian, and one that is not open to any form of reason.
Hoarding the primary means of exchange (what BTC advocates would really like BTC to become) is a negative for society. As the hoarding increases so does the value of the item, encouraging more hoarding and less lending and concentrating wealth in the hands of those that already have it. Not really a recipe for a healthy economy.
I was not saying a thing about property rights. The "force" appears when two people disagree and instead of trying to find a better argument, one of them takes out a gun and tells another one to shut up (instead of leaving the conversation).
I'm not advocating what you personally, or society should or should not do. I am simply pointing out that some people have gold and others want to take it away from them. My question is: what moral principle makes it valid for some people ("government") and makes it invalid for others ("thieves")? If the principle is "some voters voted some people via secret voting", then Hitler did nothing bad. Also, if the principle is "decision of majority" is moral, then more questions arise: on which territory do you define this majority? How can morality flip completely when 1 extra person joins another camp or gets to a legal voting age? Etc.
If you want to redistribute gold, it's up to you to show why it is justified to kick someone in a face because of "hoarding". And when you start explaining this, it will be you who comes up with some definition of property rights (maybe by saying "hoarded gold does not belong to you, but to society").
I think you have me confused with someone who gives a crap about gold, sorry. I don't. Gold is not a good currency, nor is anything else with a fixed supply, for a variety of reasons. I'm sorry if (controlled) inflationary, government backed currency makes you feel like someone is stealing your gold, but I can't take you seriously - you're such a delightful caricature!
Also your Godwin (democratic taxation = Hitler) is just hilarious.
> Please explain how holding a piece of metal under mattress destroys someone else's wealth
Inflation creates a strong incentive to allocate capital to productive investments.
Inflation decreases the value of a currency, and therefore people attempt to allocate capital to investments that appreciate above the rate of inflation.
Without inflation there would be less incentive to fund new companies, lend money etc...
Gold under a mattress is not productive capital.
This leads to a virtuous cycle of investment and reinvestment. Deflation is a far bigger threat than moderate, controlled inflation.
Think of the economy as a MMORPG. The game's creators (central banks) need tools to balance gameplay and keep the game (the economy) growing and interesting.
The value of fiat currency is very real. It is backed by the ultimate power on earth, the state's monopoly on violence.
Do you have a single rational standard of what's "productive" and "not productive"? Should you have moral right to enforce this standard upon everyone around you? If millions of tourists make millions of pictures of Eiffel Tower an buy millions of cameras and iPhones for that - is it productive? Should they be prevented from buying cameras and instead "invest" money in something more "productive"?
My answer to everyone who thinks there is an objective distinction between productive and non-productive and advocates use of violence to redistribute resources: you are an egoistical immoral evil person who has no humility or interest in people around you. Instead of figuring out why people do what they do, you suggest pointing guns at them to do what you think is better for mysterious "society".
> Do you have a single rational standard of what's "productive" and "not productive"?
Yes. Trade is productive, it is the highest civic virtue. Hoarding is not productive, it makes us all poorer.
I'm not for banning the ownership of gold. I am just pointing out why the redirection of capital from bond markets, venture funds and lending into ownership of gold leads to reduced money velocity and decreases trade.
The story on why we should own gold is a highly pessimistic one. Goldbugs point to a collapse scenario as a reason to own gold. Mass economic collapse would make everyone poorer, even those with large gold reserves.
Hoarding does not make us all poorer. Your blanket statement is false.
If you're living in a country with a gold standard, and that currency appreciates, it means you can purchase more real goods, not less.
China's economy has seen its currency appreciate for the last decade, while they simultaneously get far richer. The same principle was demonstrated by the last manufacturing powerhouse: the USA.
If I hoard dollars under my mattress, which reduces circulation, then all the other dollars gain purchasing power in direct proportion to my hoarding: ie I make everybody else richer while I hoard. The exact same thing is true about gold: any currency backed by gold gains real purchasing power.
Yes, but the incentive not to purchase more real goods increases as the currency appreciates because every unit of currency not spent now will be able to purchase even more real goods in the future. Hence, people avoiding spending now except for essential goods.
This inevitably results in massive deflation and eventually destroys the economy, rendering the accumulated appreciation worthless.
China's economy has seen its currency appreciate for the last decade, while they simultaneously get far richer. The same principle was demonstrated by the last manufacturing powerhouse: the USA.
Yes, and in both cases this happened after the countries stopped fixing the supply of money. In the US, this was moving off the gold standard, in China, this was moving off of the USD standard.
1) Halving of supply. Block rewards halved end of 2012.
2) SatoshiDice continues to become more popular.
3) Big names supporting it: Reddit, Mega, Namecheap.
4) Along with the above that would bring about a general rise in prices, is the speculators that will try to game it.
I sold at $22 thinking the bubble was going to burst soon. Damnit.
There's an understanding that a few big players have a lot of the total amount of bitcoins in circulation. This price must be extremely tempting for them to sell at. That could cause a crash like last time. I would be careful of buying at the current price.
Me at $24 by accident (stupid misclick on Mt. Gox, and didn't think paying the trade fee again would be worth it). Wanted to wait till $27, then the socks I bought would have been free. Free, as in, I earned them back.
I do wonder from whom I stole though; these socks cost labor but I did pay the laborer. Then the price rose and I got an equal amount of euros back as I put in. Who did I steal from, the Bitcoin community in general?
it's the same with stock price. say there's a giant correction. the value disappears. it wasn't stolen from anyone. the same way the global economy has grown over thousands of years, and people are much wealthier - that isn't because they stole from anyone but the total value of the entire economy grew and "everyone" became wealthier.
Hmm I think I understand. It's hard to wrap my head around though: I gained socks (and didn't loose money), the sock maker gained money but lost time and resources, but nobody's money was stolen.
Early in the blockchain there are thousands of addresses with a single 50BTC block reward in them. Presumably people downloaded the client, mined a block and got bored. At that time you could only mine using Bitcoin-QT, which reuses the same addresses for each block reward. Most, if not all coins mined in this way are lost forever.
I'm trying to get perspective on the size of the bitcoin economy.
As far as I can tell, there are 10.86m Bitcoins in existence at the current market rate $40.05. [1] That means there are almost $430m in "circulation".
According to the federal reserve 1.17trillion USD currency is in circulation. [2]
USD: $1,170,000,000.00
BTC: $0,000,430,000.00
0.0367%
Not a perfect comparison, I realize that. It is more of a rough estimate.
So when can we expect it to be $2 again this time? June? Maybe July? I think the last 90% drop only took about three months[1], so I'm gonna put my money on late June for this one. And by "put my money on" I really just mean "post this comment so I can quote it in June".
In other words: you are not willing to put your money on anything; you just want to post baseless predictions so you can gloat later on the off-chance that you're right.
If you actually believed the Bitcoin market will crash in June, you would be buying futures or put options right now.
I've been following it since it was at $7 saying, this won't go up from $10. Then a bit more...a bit more. Now is in $40 and I'm kicking my head against the wall.
Same here. I've been following it but have always talked myself out of throwing money into it. Guess I'll just make money the old fashion way. Curious what this guy [1] is thinking right now.
In theory it can go 2-4 orders of magnitude higher. The value of all bitcoin now is about the value of a dozen tons of gold, or about 1% of the gold backing SPDR. Bitcoin is still minor-league, but it's knocking on the door of being significant. It will be interesting to see if any major governments freak out about bitcoin, or if any governments embrace it for, say, selling oil.
"There are people on many sides who want Bitcoin to fail, and who will do anything to stop it from growing. The banks hate it, because it will disintermediate and replace their business. The Statists dont like it because it will defund their socialist dreams. The gold bugs loathe it because it is not gold. Keynesian journalists bristle at the fact that the money supply in Bitcoin is limited, and dream of seeing it destroyed."
I think the problem is that there are a lot of people that are expecting a significant correction soon because of the earlier crash. I've been expecting drop since $20 threshold was broken. I'd say that when the correction comes, it will be 10-30%, but nothing like we saw in the past.
I would expect the same, but I'm not in any way an economist so I'll wait and see. I also think that after the correction the price will rise again anyway.
i think you are right, past corrections have been cause dby someone dumping between 100k and 200k btc, i dont think there are many early players left with that amount of BTC that they would dump any time soon.Even if they did this would not move the market as much as it would have in the past, perhaps dropping the price by $10-$15 on a day like today, which would not take long to correct upwards again. It is not likely to start a panic driven sell off instead people will buy in at the lower price cuaing it to gain again.
perhaps but most, if not all, will be selling it almost immediately as they need to re-stock, these people use BTC to facilitate their dealing it is not an investment for them. Plus moving the market takes approx 100,000 BTC, that is about $5m, no vendor is going to be selling drugs if they have that much in BTC.
I've looked it up on Wikipedia, but I'm not sure I understand what you mean. These austerity measures would mean that the US increases taxes when people start using Bitcoin, to counter the laundering or something?
Bitcoin threads are always the most interesting, due to the extremity of the positions conveyed. Why cant people see this as it is? A cryptocurrency that is illiquid due to volume, and subject to the ups and downs of hype.
Finally, we examine a new contender - the mysterious and awesome Bitcoin.
I'll be frank with you, dear reader. When I came up with the MoMT, my first thought was: how can I, Mencius Moldbug, make some damned money from this? As system software is my first love, it was not that hard to think of an answer. In some ways Bitcoin is actually much better designed than my design, which was not distributed. The use of Lamport hash chaining is particularly elegant. I did not wind up building my design, however, because I sensed a problem. Bitcoin has the same problem, but worse.
But the basic economic design is the same: an artificial currency of limited supply. What is the currency backed by? Nothing but speculation and hot air. Note that this (contrary to its exponents' claims) violates Mises' classical "regression theorem." MoMT has no problem with an unbacked monetary candidate, because the required epsilon can be provided simply by the probability that the monetary system is adopted.
If Bitcoin becomes the new global monetary system, one bitcoin purchased today (for 90 cents, last time I checked) will make you a very wealthy individual. You are essentially buying Manhattan for a quarter. There are only 21 million bitcoins (including those not yet minted). (In my design, this was a far more elegant 2^64, with quantities in exponential notation. Just sayin'.) Mapped to $100 trillion of global money, to pull a random number out of the air, you become a millionaire. Wow!
So even if the probability of Bitcoin succeeding is epsilon, a million to one, it's still worthwhile for anyone to buy at least a few bitcoins now. The currency thus derives an initial value from this probability, and boots itself into existence from pure worthlessness - becoming a viable repository of savings. If a very strange, dangerous and unstable one.
I think the probability of Bitcoin succeeding is very low. I would not put it at a million to one, though, so I recommend that you go out and buy a few bitcoins if you have the technical chops. My financial advice is to not buy more than ten, which should be F-U money if Bitcoin wins. Or, of course, you can invest in those alpaca socks.
Here is the problem with Bitcoin: the tank, I think, will pop. This is not due to any technical fault in Bitcoin's algorithms or economics. It is due to a political fault in our society, which is that we're governed by dumb people.
Because we're governed by dumb people, here is what I think will happen with Bitcoin. Stage 1: Bitcoin does not exist. Stage 2: Bitcoin exists, but is worthless. Stage 3: Bitcoin exists, and is used by strange and desperate weirdos and geeks. Stage 4: Bitcoin is used by Slashdot readers, perhaps slightly less desperate. (You are here.) Stage 5: Bitcoin is used by criminals. Stage 6: All Bitcoin exchanges are shut down by USG. Stage 7: Bitcoin exists, but is worthless. Stage 8: Bitcoin does not exist.
At least on the surface, Bitcoin exchanges violate the critical know-your-customer rule which USG enforces on all money-transfer businesses. As a money-transfer business, you are essentially an agent of the government - a spy. To a regulator, Bitcoin seems like a way to transfer arbitrary quantities of money anonymously. This is a nonstarter, and the regulator knows exactly whose necks he has to squeeze - the spies who are not doing their jobs.
He cannot shut down Bitcoin itself. He can trivially shut down Bitcoin-dollar exchanges, or even Bitcoin-gold exchanges. Probably seizing all their dollars, etc. He probably can't seize their bitcoins, but it doesn't really matter.
To save in a currency is to place your trust in that currency. If you put energy into this great collective battery, you have to be able to get it back out. If that trust can be convincingly damaged, the currency has no chance. If people lose money in bitcoins, the currency can never recover. No one will ever again exchange it for dollars, or even alpaca socks. It will be dead. Its chances, now and forever, will be zero - not even epsilon.
If Bitcoin was centralized - sacrificing all real coolness - it could deal with this problem, perhaps, by applying KYC to all dollar transactions. But Bitcoin is not centralized, so there is no way the development team can prevent exchanges from operating. These exchanges are obvious targets for numerous predatory authorities. When they are destroyed, the currency dies.
What is Bitcoin's only chance? Perhaps that Bitcoin is not really anonymous. In fact, it is anything but. All transactions, though pseudonymous (named by a random key), are public and can be tracked by anyone, including said authorities. There is no financial secrecy in Bitcoin - it's a completely transparent system.
Which means that, if money launderers try to launder money through Bitcoin, they are actually doing the authorities a massive favor. It is very easy to track dirty bitcoins. If you know Pablo, a drug dealer, is using Bitcoin address X, you can download the entire graph of parties that X trades with, and roll up Pablo's whole network. Instead of shutting down the real-money exchanges, you can secretly force them to send you their entire customer database. That way, the terrorists, drug dealers, etc, are not hiding their transactions at all - they are sharing their most intimate details with the government. Heck, the DEA probably understands Pablo's finances better than Pablo's own people. That's what he gets for using Bitcoin.
But, as I said, we are governed by dumb people. Or, worse, committees of smart people. Therefore, I reiterate my target price on bitcoins: epsilon. Nonetheless, it probably wouldn't kill you to go buy five or ten - not that this is financial advice.
I thought the point of laundering was that yes, you can see where every individual bitcoin goes, but that when you put it through a "washing" service it then goes to people who are completely unrelated to whatever Pablo was doing. And Pablo gets money that was completely unrelated to what he was doing, probably at another account.
a) Can the washing services "mix up" owners' address well enough that you can plausibly say, "I got money that was in a drug deal? Wow, only six thousand other people did too!" (I think they can.)
b) If a) is true, will it be plausible to ban washing services? They're pretty much the definition of money laundering, so the legal case is a lot more airtight.
Bitcoin does not violate Mises' regression theorem because Mises never assumed objective definition of "utility". It is always subjective. And as such, Bitcoin was useful and fun for very early miners, then people started seeing that you can do much more with it, than just exchange.
"Bitcoin exchanges violate the critical know-your-customer rule"
Not any more. Bitcoin-central.net in France already has all the licenses for exchange and knows its customers. MtGox is moving USD operations to US with Coinlab.
MtGox already knows its customers for deposits and withdrawals. I'm Australian and had to hand over lots of important documentation to allow for a bank transfer.
I'm confused how a bitcoin bug fix or protocol fix would get implemented? Isn't it a distributed system, so everyone mining coins would have to agree at once?
But how will the Federal Reserve be able to allocate new blocks of bit coins to give to one of the 12 federal reserve banks so we can fund more trillion dollar packages of spending borrowed money if all they can do is try to acquire bitcoins from other people who have them?
In theory, would inflation be impossible with bitcoin provided that the number of humans who are willing to exchange labour for coins always increase?
Wikipedia's page on the Federal Reserve, particularly the section on 'Purpose' would seem to disagree with you. But it is only wikipedia and may well be inaccurate.
Which means, if bitcoins were to 100% replace US Dollar today, the US Government would have to immediately default on the treasury.
I get the sinking feeling that when Bitcoin takes off for it to make any kind of fractional dent in society, it's going to be squished like a bug. After having been linked to WMD's and terrorism.
