I think most of the people currently using Bitcoins are actually currency speculators, YJ.

@Draugnar "Stability is needed" Yeah, anything that takes time to do (e.g. construction) just gets done in a progressively more shitty way in a hyperinflation environment. Buildings go up fine at first when the money that finances them is actually worth something, but it's a race against time to finish the building before the financing is worthless. When the money runs out the tenants have to bash holes through the walls themselves to put the doors in.

For some reason I don't expect a symmetric "things get done more and more better" on the flip side in a hyper deflation environment. Where does the extra value end up?

That's my point tendmote. Someone gets screwed in a radically fluctuating financial environment.

@Draugnar I suggest asymmetry though. Non-short-term projects suffer in hyperinflation. But they don't *thrive* in hyperdeflation. So it doesn't balance out if it cycles between the two. Is something created or destroyed?

But bitcoins haven't seen hyper deflation and it would be a fool's errand to assume they will.

more media attention = more demand for bitcoins = more inflation => value bubble.

but it's been popped and re-grown a few times already.

Where is it's value per bitcoin relative to the economy and inflation? Has it gone up over it's life more than inflation? OR has it gone down? The idea of the symmetry is that it stays about the same, but there is no symmetry. Bitcoins are asymmetrical. They have inflated way more than they have ever deflated.

Draug I think you have that the wrong way around. Bitcoins have gained value over time (which is deflation not inflation).

One guy says he found Satoshi Nakamoto.

https://likeinamirror.wordpress.com/2013/12/01/satoshi-nakamoto-is-probably-nick-szabo/

spyman has the best reasoned response here. By capping the bitcoin, it will naturally be a deflationary currency, and as such it can never be a mainsteam currency. Until there is a regulatory authority set up to maintain an equilibrium value for bitcoins (in relation to anything, not necessarily fiat currencies) then it wouldn't be able to succeed long term. Until international clearinghouses agree to process them (which requires recognition of national governments....i think?) then it won't be able to succeed long term. All we're seeing today are bubbles

Goldfinger - bitcoins don't need any regulation to survive they just need not to be banned and retain confidence.

If I wanted to make 1000 ham sandwiches (HS) and use those as currency I could. The value of those HS relative to other currencies would fluctuate depending on how confident a person is that they could always exchange a ham sandwich for goods or other currencies.

What you are saying raises an interesting question, Maniac. And we can look at it two ways: what is it about bitcoin that makes people feel confident, and what would it take for people to lose confidence in the bitcoin? In contrast we could also look at the US dollar, what is it about the dollar that makes people feel confident that it has value and what would it take for people to completely lose confidence.

A few things come to mind that could cause people to completely lose confidence in bitcoin.

Worst case scenario is that some could conceivable crack the algorithm (I don't know anything about cryptography, and apparently it is incredibly secure, but as technology changes maybe it might stop being so secure).

A sudden drop in price at some point in the future might cause panic selling. What determines its present price? Its pure speculation. A lot of people have made a LOT of money from bitcoin, what if enough bitcoin investors decide the time has come to cash in their chips. If the value dropped by half, and you owned a lot of bitcoins, would really hold onto them in the hope that they would regain their value, or would save what you could while you could before you lose everything.

Maybe this sort of currency has some merit, but this is an early attempt. Maybe alternative currencies will be developed that are even more secure AND are endorsed by major economies like the USA. Bitcoin could be out-competed by alternatives.

Then again maybe this really is the future. Bitcoin is the one. Generations from now we will look back on these days and wished we had got in early. But seriously what are the odds? Bitcoin's increase in value has been so dramatic that it just looks like a bubble. For those who have actually made a lot of money - they must be feeling pretty nervous (if excited at the same time). It must be very tempting to get out now and realize those profits.

BTW for speculative purposes, investing in BitCoin doesn't make sense right now. Just pick up LiteCoin or any other BitCoin rip-off that started later so you can enjoy bigger upswing. The amount of coverage BitCoin gets is bad for your investment.

If you're going long that is. But going short requires BIG balls and I wouldn't recommend it to anyone - if you know why you short, you dont need advice anyways.

@Spyman, as tech changes the bitcoin algorithm makes it's hashing more secure - the more mining people do (ie processing power put towards encrpyting) the harder it gets to find a new bitcoin. There are custom hashing machines which are super effective at doing the hashing for bitcoins (using only ~15 watts per machine) but as tech advances the algorithm naturally varies the difficulty.

There is a problem with a 51% - is any single group controlled 51% of the processing power they could 'steal' all the bitcoins, or redistribute them as they choose based on them confirming their own transactions and rejecting whatever transactions they didn't want... but that would likely just fork the project, with history before the theft taking their coins elsewhere and starting over.

Still, i think in principle, the system is more secure them more use it gets; and the better technology available, the better secured it becomes - plus there is an incentive on miners to use the best tech, because they are competing with each other to provide the biggest percentage of the processing power.

That, at least partially, futur proofs it against crypto attacks.

"If the value dropped by half, and you owned a lot of bitcoins, would really hold onto them in the hope that they would regain their value" - and that depends on two things, if you mined them, then yes. You'd have invested time not money in them, and valuing them based on market prices rather than time put in is entirely reasonable. (well time/watts contributed... )

And the value is what you can buy with them, not what other currency you can convert them into - the purchasing power. if Maniac is making ham sandwiches and selling them for bitcoins, and then paying his rent/bills with bitcoins it doesn't matter what the exchange rate is.

On the other hand, if you only buy virtual goods with bitcoin, then you can earn an income from selling virtual services - paid for in bitcoin and avoid ever interacting with the irl economy.

But yes, there does seem to be a bubble at present, which means you shouldn't buy bitcoins at the current price.

Orthaic, let's say the value did drop by half: why would it make a difference if you had mined them. Let's say you had $20,000 worth of bitcoins that you had mined (almost for nothing if you got in early enough I supposed), but the price falls and now you have $10,000 worth. How is your position any different from someone else who had originally bought his bitcoins. You still have $10K that you could lose altogether. $10K is $10K regardless of how you acquired it. Isn't it?

"You'd have invested time not money in them"

Time has its monetary value. Time spend on mining Bitcoins has its opportunity cost. There is no difference between spending money outright by buying Bitcoin and foregoing profitable opportunities because of mining it.

@ Orathaic "And the value is what you can buy with them, not what other currency you can convert them into - the purchasing power." Not true. My £1 might buy a cupcake today and an identical cupcake tomorrow but the value of my £1 changes all the time (during trading hours) in relation to all other currencies. When the value of my £1 changes on the currency markets it will eventually affect the price I pay for a cupcake. The price I pay for a cupcake cannot affect the value of the currency on the international markets.

The value of any currency can only be judged relative to other currencies (and possibly gold and major commodities)

"The value of any currency can only be judged relative to other currencies (and possibly gold and major commodities"

Very, very wrong. Currencies are also judged based upon purchasing power parity, which compares the amount of real goods each can buy. This is mostly the exchange rate economists look at. And I believe you have the relationship in reverse; exchange rates come about by differences in inflation rates and expected inflation rates (according to CIRP, which generally holds true for major currencies). This difference in inflation in turn effects the price of the cupcake. So if your exchange rate is going down the shitter, its likely because of higher inflation.

More practically, lets say the cupcake maker buys sugar from Brazil. If the pound appreciates 20% against the real over a year, then that sugar will be 20% more expensive for the baker, who will in turn raise the price of the cupcakes to compensate for this.

The problem is that there are rules for how exchange rates are formed in the real world. There's no rule for how its formed in a virtual world, so simple supply/demand mechanics will have to do. And since supply is fixed, it will be purely demand that determines its value. There is a reason why every major online gaming company has an economist on staff (Valve, whoever makes EVE, etc) and that's because the economies of those games have been absolutely wrecked via virtual hyperinflation, have experienced recessions (due to depreciating currency), etc. You need someone in control to tinker with the tools in those situations, which is why I said Bitcoin needed regulation

"@invictus - making it illegal to convert bit coins to USD would affect the value slightly. But if it were made illegal then people would convert bit coins to euros and then into USDs. Unless the whole world makes it illegal to convert to their currency bit coins will live on. Also in a sense when you convert bit coins to usd all you are doing is selling a bitcoin. How do you make it illegal to buy things?"

Partially this is my fault for not being more precise. I thought people would take it as given that, if Bitcoin started to rival traditional currencies to the extent that the United States went ahead and made it illegal to convert them into dollars, most other countries would follow suit. So no euro, yen, or sterling loopholes, and probably not even rubles, etc.

However, even if there were countries which did holdout countries which allowed such conversions, Bitcoin would still be shutout of much of the global market. While people could turn their Bitcoins into whatever money they use in some tax haven like Seychelles and then turn those into dollars, the transaction costs and risk of prosecution for money laundering (depending on how the laws are written) would keep away many legitimate businesses and investors.

An imperfect analogy would be the sanctions on Iran. It's not as if we've been blockading the country for all this time, but the costs associated with doing business there is just too high for it to be worthwhile for most.


As for "how do you make it illegal to buy things," I suggest you just think about that for a second. Then you'll realize it's not really that hard.

'Orthaic, let's say the value did drop by half: why would it make a difference if you had mined them.'

Because you didn't invest money in them, you invested time. The time stays the same, what you can get out of that invested time doesn't.

The difference is psychological, you can never recover the time you have invested. You can recover the money (or part thereof)

Imagine that you are going to a concert, and you paid €40 for a ticket - on the way you lose your ticket, you're really annoyed because you can't get in now, you've lost €40 worth of value PLUS your time which you can't get back.

Yet on the other hand, on the way to the concert you lose €40, you continue and use your concert ticket to enjoy your evening. Still annoyed that you lost money... You don't lose the time. (most people would not buy a second ticket, perhaps because it feels kinda shitty to pay a second time for something when you've already paid the first time... )

I don't know if i'm explaining the psychology very well, but there is a difference.

'Time has its monetary value. Time spend on mining Bitcoins has its opportunity cost. There is no difference between spending money outright by buying Bitcoin and foregoing profitable opportunities because of mining it.'

There is a huge difference, because how we value our time and how we value our money has a big psychological impact on what we think of as a loss. Today my bitcoins are worth $10,000; so i'm $10,000 better off than when i started investing time in the mining of bitcoins.

If i i started out with $20,000 and bought bitcoins, which are now worth $10,000 then i've lost $10,000.

Very different from a mental point of view.

"Time has its monetary value." - Yes, but you have to do the conversion in your head, a mental operation which is more flexible than $20,000 > $10,000 (no conversion because you are measuring both in the same units.)

There are some very interesting studies on behavioural economics, and cognitive science (how we think about things) and cognitive illusions - which illustrate the false thoughts we get when equating complex things, and the decisions we make which are not strictly rational (as an economist would like to assume)

@Maniac: I think you've hit the nail on the head there:
"The value of any currency can only be judged relative to other currencies (and possibly gold and major commodities)"

The value of a currency relative to currency markets, and the purchasing power are two DIFFERENT values. The number of cupcakes and the number of dollars i can buy with my Euro (or Bitcoin) may vary separately. (oh, goldfinger already said this, sorry)

"You need someone in control to tinker with the tools in those situations, which is why I said Bitcoin needed regulation" - and that may be true, but bitcoin has an algorithm, which offers stability, and thus confidence. Regulation and tinkering with the supply (which is what eve economists may do when there is a PLEX price bubble) are two separate ideas. Regulation is about the law, bulk transfers, taxation, capital flight. And bitcoin has virtually none (probably something governments do). Controlling supply/inflation is something Central banks do. (and Bitcoin has a algorithm)

"There are some very interesting studies on behavioural economics, and cognitive science (how we think about things) and cognitive illusions - which illustrate the false thoughts we get when equating complex things, and the decisions we make which are not strictly rational (as an economist would like to assume)"

Are you seriously basing your argument about time investment =/= money investment on the fact that most people are unable to comprehend the equality? That people make this mistake doesn't make it right, it just makes it exploitable.

You are the one who is making the equality.

How much is your time worth? Really, also we're not talking about exploitation of people, we're talking about how people will react to a huge drop in the value of bitcoins.

If the exchange rate drops by 50% tomorrow, that doesn't A) change the time invested and B) the purchasing power.

There is a psychological difference between buying $20,000 worth of bitcoins yesterday and investing 6 months of time mining bitcoins.

You may see the monetary value as equal, but they're not equal psychological investments.

And you are denying the equality - hence =/=.

If the exchange rate drops by 50% tomorrow, that doesn't change the time invested NOR the money invested. Both are sunk costs. There is no way you can recover this investment, all you have are equal amounts of bitcoins (assuming equal investment in money and time).

The psychological difference exists because of irrational behaviour of consumers. If you understand that investing time and investing money are just different forms of the same thing, you shouldn't be falling for the common delusion. You don't know that something's wrong and still believe it anyways.

Once you understand the principle, you will be able to increase your net worth better. True, your overall utility might decrease because of psychological perception in spite of being richer, but that's beyond economical reasoning. That's the age-long philosophical question whether it's better to be dumb and happy because you are too dumb to understand your position or to be smart and unhappy because you're smart enough to under your position.

"There is a psychological difference between buying $20,000 worth of bitcoins yesterday and investing 6 months of time mining bitcoins."

Rationally there is zero difference. But you are correct that there is a psychological difference. This is a gamblers fallacy known as the house money effect (where we sense that we're not really playing with our own money, it’s money that we won from the house). Still while the effect exists, people aren't completely stupid. $20K is $20K.

Bitcoin has gone up and down a few times now, so my theory that a sudden drop could cause the whole system to collapse doesn't seem that valid based on past events. BUT if the value gets much higher the more nervous people will become and the less stable it will be perceived. This lack of stability could be the death of bitcoin.

Otherwise what is bitcoin for? Is it a currency - is too unstable to be decent currency and there are too few things you can actually buy with it. Is is a store of wealth - but aren't there better stores of wealth. Wouldn't you be better off with Gold, bonds or real estate, art etc? Is it an investment? But speculation aside, it is not productive. People by share is companies that actually create value. What does bitcoin create?

Looking at bitcoin side by side with other currencies, there seems to be too many cons and too few pros (aside from the fact that they increased in value exponentially - as much as I doubt bitcoin, I wish I had bought some a year or two ago).

'Rationally there is zero difference.' = humans do not behave rationally.

Humans have a different perception, and thus likely emotional attachment - thus the resulting behaviour: IE whether they will dump the coins to minimize their loss VS keeping them as a gain from their hard work, will depend on their perception of the value.

And all value depends on perceived utility. Just as the value of bitcoins today depend on whether you think they will deflate and be usable in the future... Just like the value of money in your bank account depends on whether you think you'll be able to use it to pay your rent/mortgage as needed.

'Once you understand the principle, you will be able to increase your net worth better.'

Understanding you do not. Humans are not rational actors, even if you tell them that they'd be better off if they acted rationally, they're still prone to cognitive illusions, they'll still make poor decisions for emotional reasons, they will still buy lottery tickets because while completely irrational the excitement over their chance to win will be worth the monetary value they sink into the pot.

And yes 'Still while the effect exists, people aren't completely stupid. $20K is $20K.' - there is a difference between $20K which you have seen and time which you have spent (and the emotional attachement you've made to that time spending... if you give up after 6 months then you're suggesting that all your time was wasted, it's much harder to do)

'What does bitcoin create? ' - a medium of exchange, which increases the velocity of currency, which allows more economic activity, and thus is a vechile for growth - though with the stipulations that you mentioned: ie 'too unstable to be decent currency and there are too few things you can actually buy with it.'

"they will still buy lottery tickets"

People buy lottery tickets because the act of gambling gives them utility, which is not actually an irrational behaviour especially once addicted. But you are attributing consumer fallacies to investors. Professional investors are not consumers, they don't buy stocks of GM because it's American or Apple because they want to support company that makes their favourite iPad (both reasons can be rational depending on personal prefferences).

Yes, there is a difference. i wonder how many investors spend money on bitcoins speculating, and how many techie geeks invest processing time and enjoy their virtual rewards...

Oh wait, what i started out saying:
"If the value dropped by half, and you owned a lot of
bitcoins, would really hold onto them in the hope
that they would regain their value" - and that
depends on two things, if you mined them, then yes.
You'd have invested time not money in them, and
valuing them based on market prices rather than time put in is entirely reasonable. (well time/watts
contributed... )

Orathaic - I think what a lot of people are trying to get at is that 1) It's not good enough to be just a medium exchange to be a successful currency. It has to be a store of value as well, and Bitcoins movements do not reflect a store of value. It's acting more like an asset than a currency. Also, 2) It won't be a successful currency until the majority of people using it are investors and corporations rather than "techie geeks". And right now rational actors in the market have no confidence in the currency. Speculators are taking advantage of the fact that said techies won't dump their Bitcoins and are making a killing off of it.