Why bitcoin’s rise is nothing to celebrate

By Felix Salmon
April 3, 2013

I’ve posted a very long piece on bitcoin over at Medium. Obviously, I’d love for you to go over there and read the whole thing — or at least save it somehow for reading later. But here’s the heart of the article:

Volatility is a serious problem, if you’re trying to put together a currency, rather than a vehicle for financial speculation. If the currency of a country ever fluctuated as much as bitcoins did, it would never be taken seriously as a medium of exchange: how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next? Currencies need a modicum of stability; indeed, one of the main selling points of bitcoin was that it couldn’t be destabilized by government institutions. But that comes as scant comfort to people watching the value of a bitcoin behave like some kind of demented internet stock during the dot-com bubble.

In reality, then, bitcoin doesn’t really behave like a currency at all. In terms of its market value, it looks much more like a highly-volatile commodity. That’s by design: bitcoins were created to be the most fungible commodity the world had ever seen – to the point at which they would effectively erase the distinction between a commodity and a currency.

But is that a good idea?

The answer, of course, is no. It’s a bad idea to turn a currency into a commodity, because if the price of the commodity goes up, then everybody using the currency suffers from enormous deflation. Imagine a sucker who took out a loan in bitcoins a few weeks ago — she’d never be able to pay it back today. That’s a pretty good sign that bitcoins don’t work as a currency.

More profoundly, it’s incredibly corrosive to try to build a currency on mistrust, as bitcoin has attempted.

It’s because we place so much trust in banks, after all, that they are forced to take on a great deal of responsibility. Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions. The population of the entire country, as represented by the government, stands behind bank deposits and promises to honor them even if the bank goes bust. Money, in other words, is a key ingredient in the glue which keeps the social compact together. (What we’re seeing in Cyprus is in large part a demonstration of what happens when that compact starts becoming unglued.)

Bitcoin, in that sense, is anti democratic. It’s based on mistrust rather than trust, it refuses to take any responsibility onto itself – indeed, it doesn’t even have a self to take responsibility onto. It’s nihilistic.

It’s fun to watch the bitcoin bubble, but it’s also important to understand that almost no one actually wants to live in the kind of world that bitcoin enthusiasts are looking forward to. Thankfully, the rising price of bitcoins is not some kind of market signal telling us that we’re closer to that world. But at the same time, it’s certainly not something to celebrate.

Comments
43 comments so far

What deflation? When vendors price out goods in Bitcoin, it is directly tied to the USD. So if you bought a Bitcoin for $5 and wish to purchase a $5 sandwich, the proprietor posts the price as $5 or 1 BTC. If Bitcoin doubles in value. The cost of the sandwich is 0.5 BTC. The customer has more purchasing power.The opposite is true as well. A down slide of .5 BTC would mean it would cost 2 BTC for the sandwich.

There are speculators driving up the price, but there are also those seeking a safe haven from failed monetary policy and government greed. If anything, Bitcoin is a store of value. Even if the price stagnated, it would still be a great place to hedge. The market is inflated, oversold and in a bubble. Big banks are manipulating precious metal prices, and the Fed has eroded every savings account in America.

As long as QE continues and Europe raids private accounts, it will continue to rise. Bitcoin is a reflection of the world economy, plain and simple.

Posted by RichieVengeance | Report as abusive

Your comments are douchey. Have fun getting half of your “savings” taxed in a couple years once wall st robs you blind, as they did in 2008. We are in a hyper-inflationary era where we need to buy things that are finite and scarce that hold ACTUAL value. Bitcoin is the answer to many of our problems and is also a global medium for currency and is safer than any currency I’ve seen in my lifetime. Bitcoin is not going to burst. It is not overhyped by wall street, like every other bubble that has burst. It is completely decentralized from all that and, in fact, is equivalent to an IPO starting from 0. It is correcting to its true value which is MUCH greater than what it currently is at a measly 1.4 billion dollar cap. This is unlike anything of its kind, so yea, have fun watching….your bank acct go to 0.

Posted by alp1234567 | Report as abusive

Well, because its completely rational to think a newly born currency will pop into existence already at a completely stabilized rate of return relative other currencies… I mean no reason to go through all that icky appreciation initially…we will just quantum leap into some stable orbit.

Cripe… can we find the next straw man please? This one is getting pretty old and worn out at this point.

Posted by TampaAnimus | Report as abusive

Everyone ‘suffers’ from deflation, where they are able to buy more goods with their currency than before…

We’re so fixated on this growth economy fueled by consumption, we forget that we exist on a physically finite planet.

I see Bitcoin, and it’s deflationary nature as a good thing, rather than a bad thing. Bitcoin provides a liquid, finite number upon which to judge other currencies. There has not been a medium of exchange that has both facilitated trades and provided a hedge against other currencies with looser supplies. Bitcoin allows anyone to take advantage of the global trust in the Bitcoin network, trust that is based in knowledge that the supply of Bitcoin is finite, the system works(transactions can be sent without worry of their security), and that this combination is useful to (more) people.

Some people may be buying BTC due to lack of trust, but ultimately, it is due to trust that people remain. Its not that bitcoin folks don’t trust other people with the keys to their currency, its that they trust the software more. In that sense, Bitcoin users are very democratic. They have independently yet interdependently chosen to come together, each voting with their other currencies, items or services. It’s just that no one ordained it to be ‘democracy’. Perhaps that’s true democracy.

And why would people ever spend BTC when they know they may be able to get more tomorrow? Cost-benefit analysis. I need this food to survive, I guess I’ll buy it. I want that computer so I can have access to its resources, I guess I’ll buy it.

What does this mean for the economy? Scale down, from bloated and manipulated, to lean and conservation-minded. Seems only fitting for a planet with finite resources.

If your only choice your whole life has been to use USD or other local currency, you could easily develop a place for it in your heart. But given the choice between growing value and shrinking, manipulated value, I think the long term choice is obvious. Soon enough, people will free themselves.

And even beyond the choice that we so fortunately have, there’s another side to this story. Think about the bottom 90% of the world’s population in terms of wealth. Many of those people have never had any secure way to store wealth. They are denied bank accounts or any safe storage of value, left to either barter or use oft-hyperinflated local currencies. For those people, for those many, Bitcoin is a complete gamechanger. They had nothing. Now they are part of the global economy, on their own terms. This perspective is hard to see from our pedestal in the West, but it most certainly exists for those less fortunate who have heard of Bitcoin and are now empowered.

Perhaps this is why folks talk about Bitcoin having good ‘fundamentals’…

Posted by GuyWhoStuff | Report as abusive

I can’t tell whether you’re being sarcastic or not.

Basically, your argument boils down to: people love and trust the federal government and the big banks, so they will never switch to a currency that is easier, faster, cheaper, and more reliable than government money?

They like the fact that governments constantly steal their savings by out-of-control printing to cover up their out-of-control spending, which leads to prices rising faster than salaries?

The Fed was supposedly created to smooth out the minor peaks and bubbles that come with a free market, and other than 1 Great Depression, 17 recessions, 1 period of stagflation, countless bubbles, and whatever you call the mess we’re in now, they’ve done an excellent job. Their secret mission was to make a few banksters even richer, and they’ve truly done well at that.

I think we are a nation divided. The wealthy elite who profit from the current abomination of a monetary system are going to fight tooth and nail against the common man who wants something more fair.

A revolution in money is coming. Which side are you going to be on?

Posted by jzcjca00 | Report as abusive

Can you pay the government your tax bill in bitcoins? Can you repay your bank loan in bitcoins? Can you buy merchandise on Amazon or eBay, let alone a brick and mortar retailer, and pay in bitcoins? Can you actually do ANYTHING with them apart from speculate or buy contraband on Tor with them?

Posted by RueTheDay | Report as abusive

I think you are complete idiot who doesn’t know how bitcoins work. Even if you read the first few pages of the bitcoin wikipedia you’ll gain a rudimentary understanding on the elegance of how bitcoins are created and managed. Right now, our money is trusted with the government, the banks, and the corrupt institutions. Bitcoins brings control of moneyback the hands of the people. This is why as long as there is interest in bitcoins, the bubble will not burst.

Posted by rabbitonastick | Report as abusive

Absolutely right on most points, but Bitcoins are also an emergent currency. It’s never been done this way before, so it has traits that make it quite unsuitable to be used in the ways you’ve already listed. But those same traits are there because of its youth. It will likely stabilise.

It’s probably not going to plateau at current value, or wherever it finally peaks though. It’s a Bubble and until we hit the ceiling of feasibly economic mining we won’t see it burst. When it does burst it will then stabilise, and at that point it will become a mature platform for a currency. Of course the bursting bubble will cause a lot of fallout though.

It will resemble the Dot Com bust very closely I’d imagine. An awful lot of instability a brief period of absolute chaos as it crashes and then maturity and acceptance in the mainstream.

Celebrating at any stage of this evolution depends on who you are. Miners should be celebrating and bowing out now. Traders are having good times and could continue to do so during the bust, if they are lucky. And then I think it’ll be the traditional businessman, the adopter of bitcoins as payment methods, the people who bring the currency to mainstream services through integrations and novel applications who will profit after the bust.

Posted by Pseudotim | Report as abusive

The currency’s stability will come about when there are more participants, it’s a briliant concept and I’m convinced that someone will make a billion or two with it.

Posted by davlev | Report as abusive

Can you pay tax bills? Not yet, the Govt accepts their own fiat currency. Can you pay your tax bills in gold? No. Has gold, being a scarce commodity gone up tremendously in eras of hyperinflation of fiat currency over time, yes.

Can you buy merchandise on Amazon? Yes. Bitspend.net. Until retailers all jump on board once they realize their savings potential due to eliminating a fraud department and giving credit card companies a hefty fee, Bitspend will take care of your internet orders.

Can you actually do anything with them apart from speculate or buy contraband on Tor? Yes. There are many merchants, including coffee makers, wineries, bitcoinstore, coinabul, okcupid, wordpress and hundreds of other merchants that accept bitcoin. I don’t know, what do you do with gold? Wear it or keep it in a safe? That sounds boring.

Posted by alp1234567 | Report as abusive

@ruetheday You can soon pay some government bills: http://www2.egovlink.com/press-release-b itcoin.cfm

Posted by jazzyjaffa | Report as abusive

Can you pay the government your tax bill in TBills? Can you repay your bank loan in TBills? Can you buy merchandise on Amazon or eBay, let alone a brick and mortar retailer, and pay in TBills?

No. People buy them anyway.

Posted by Bob987 | Report as abusive

Actually, my friend just bought a tv and I just bought gold, and socks, and jewelry,… you can buy almost anything with bitcoin, and its popularity is growing everyday.

I trade almost exclusively in bitcoin so that I am not funding political slavery/governments. No innocent kids bombed with my money! No victimless crimes with my money! I am happy to know that digital currencies are the inevitable future, and that I rarely have to support political slavery ever again! I love buying almost all my stuff in bitcoin.

P.S. If you buy online with bitcoin, buy in bulk so you can get discounts on shipping!

Posted by mikeshanklin | Report as abusive

How stable do you think the USD was 4 years after its creation??? or any new curacy, patients are key, try them sometime.

Posted by KMSAlex | Report as abusive

Can you do any of that with TBills or Microsoft Stock? Of course not, but people buy them anyway. When the Dow rises it’s not called deflation. I’m not sure whether BitCoins qualifies as a real currency but it has been a great investment to date. And I ain’t selling yet.

Posted by Bob987 | Report as abusive

RueTheDay,

Here is a list of a few..
https://www.spendbitcoins.com/places/

Posted by ChrisJS | Report as abusive

Everyone ‘suffers’ from deflation, where they are able to buy more goods with their currency than before…

We’re so fixated on this growth economy fueled by consumption, we forget that we exist on a physically finite planet.

I see Bitcoin, and it’s deflationary nature as a good thing, rather than a bad thing. Bitcoin provides a liquid, finite number upon which to judge other currencies. There has not been a medium of exchange that has both facilitated trades and provided a hedge against other currencies with looser supplies. Bitcoin allows anyone to take advantage of the global trust in the Bitcoin network, trust that is based in knowledge that the supply of Bitcoin is finite, the system works(transactions can be sent without worry of their security), and that this combination is useful to (more) people.

Some people may be buying BTC due to lack of trust, but ultimately, it is due to trust that people remain. Its not that bitcoin folks don’t trust other people with the keys to their currency, its that they trust the software more. In that sense, Bitcoin users are very democratic. They have independently yet interdependently chosen to come together, each voting with their other currencies, items or services. It’s just that no one ordained it to be ‘democracy’. Perhaps that’s true democracy.

And why would people ever spend BTC when they know they may be able to get more tomorrow? Cost-benefit analysis. I need this food to survive, I guess I’ll buy it. I want that computer so I can have access to its resources, I guess I’ll buy it.

What does this mean for the economy? Scale down, from bloated and manipulated, to lean and conservation-minded. Seems only fitting for a planet with finite resources.

If your only choice your whole life has been to use USD or other local currency, you could easily develop a place for it in your heart. But given the choice between growing value and shrinking, manipulated value, I think the long term choice is obvious. Soon enough, people will free themselves.

And even beyond the choice that we so fortunately have, there’s another side to this story. Think about the bottom 90% of the world’s population in terms of wealth. Many of those people have never had any secure way to store wealth. They are denied bank accounts or any safe storage of value, left to either barter or use oft-hyperinflated local currencies. For those people, for those many, Bitcoin is a complete gamechanger. They had nothing. Now they are part of the global economy, on their own terms. This perspective is hard to see from our pedestal in the West, but it most certainly exists for those less fortunate who have heard of Bitcoin and are now empowered.

Perhaps this is why folks talk about Bitcoin having good ‘fundamentals’…

Posted by GuyWhoStuff | Report as abusive

You’re correct in that this neurotic run up in bitcoin value is upsetting. What goes up eventually comes back down.

But if we’re being honest, the rest of what you said is decidedly inaccurate. If it were accurate, and something that is based on *mistrust* wouldn’t be a viable currency, then gold wouldn’t be a vehicle for safety. You see, your term “mistrust” is a not-so-rough equivalent to what legitimate market partakers call a “safety vehicle”.

Bitcoin is looking at hyper-HYPER deflation. That’s true. But it’s because that is a DIRECT reflection when faith is lost in the traditional currency. And you and I both know that those with the proverbial “printing machines” absolutely can’t stand the idea of a currency others can flock to that is immune to their confiscatory, inflationary/deflationary keyboard-like control of their economies.

You’re whole assertion about how seriously these banks take their responsibility is laughable in the face of the complete and total debacle that is the European Debt Crisis and in the face of Bernanke freely admitting that what we’re doing in the U.S. with fiscal policy is nothing short of theoretical. You’re saying that…THAT…is responsible??? Excuse my while I go change my pants. I just shat myself laughing so hard.

Bottom line is this: You can’t stop crypto currency forever. You can’t monopolize money forever. At some point, after enough screwing around with money supplies and confiscatory actions (a euro in Cyrpus is now worth less than a euro outside of cyprus…go try and lib-dart your way around that one), people will lose faith in a given currency. You can’t stop it. You can’t demand to people “Hey, you WILL have faith in this currency, no matter what we do to it!” And when it happens, they will seek alternatives. The real question about the scary bitcoin boom is….what happens if Slovenia or Italy starting looking at bailouts? The people on those countries, even if it’s only a small percentage, will look to get out of their confiscatible Euros and into the untouchable bitcoin.

Keep printing and bailing out, if you want. It’s working out pretty well so far. LOL.

Posted by ilyushin | Report as abusive

i have to agree with the author. volatility is not a good sign.

read, “the bitcoin skeptic.”

Posted by mcratlaw | Report as abusive

@RueTheDay
Amazon Fulfillment Services can now accept Bitcoin:
Bitcoin.http://seekingalpha.com/article/ 1256441-bitpay-integrates-bitcoin-paymen t-with-amazon-com

There are numerous exchanges that can convert Bitcoins into other currencies, thus enabling currency arbitrage without needing a large bank to charge fees.
http://bitcoincharts.com/markets/

Posted by k9quaint | Report as abusive

Bitcoins are still new and the technology for utilizing them is rapidly evolving. One factor contributing to their rise in value is the guaranteed scarecity. The algorithym limits the number of bitcoins to just under 21 million. However they are divisible to 8 decimal places.

Bitcoins have their appeal and it is growing. The comments above would apply to Gold as much as Bitcoins.

Posted by Ivank2139 | Report as abusive

I was just discussing this with an anarcho-liberterian the other day, pointing out that deflation is pretty clearly a bad thing in this case. His position went from “No, inflation is bad!” (I didn’t say it wasn’t) to “deflation is awesome” to “deflation can’t exist.” Sigh.

Posted by AndrewNYC | Report as abusive

You can buy lots of stuff…For example:
https://www.bitcoinstore.com/

Posted by wksantiago | Report as abusive

Very interesting article. Because of the limited supply, as you note, it can never serve as a successful currency. This is either the fatal flaw of the system or its genius. If the creator truly wanted to create a currency, its supply would grow at the same rate as nominal transactions, keeping its real value constant (something somewhat difficult to do in the real world, but easier, I imagine, in the digital world).

But if the creator is as smart as he seems, then he wasn’t really trying to create a currency at all. Instead, it looks to me like a decentralized Ponzi scheme. Increased demand for bitcoins increases their value (due to limited supply), drawing in more investors and thus increasing their value even more. Eventually the supply of new investors will dry up (there are only so many suckers) and since supply is fixed, the price will eventually fall. Why? Once new investors stop coming into the market the rate of return will fall below less risky investments and money will start to pour out of the system. Once the value starts to fall, everybody heads for the exits and the bubble pops.

We know it’s not a real currency because nobody invests in money. Money is neither a productive asset nor a commodity. We need money as a medium of exchange and a unit of account. If it becomes an investment vehicle (as in deflation, as you note) it can no longer be used for those twin purposes.

So was the purpose of the creator of bitcoin to create a Ponzi scheme? Or did he (or she) simply not understand how currencies function? I don’t know. But it would be interesting to know how many bitcoins he owns, and when he plans on selling them. It would also be interesting to know whether or not he’s broken any laws once the bubble bursts. If he hasn’t, and if he times the top of the market well (assuming he does own a significant number of bitcoins), then he may be one of the more successful thieves in history.

Posted by liamcmalloy | Report as abusive

Thank you for stopping me in my tracks when I got to this part

“Imagine a sucker who took out a loan in bitcoins a few weeks ago — she’d never be able to pay it back today. That’s a pretty good sign that bitcoins don’t work as a currency.”

The value has gone up over 100% in the past few weeks… She would easily be able to pay back the loan by pulling out her original investment and would’ve still had a lot of money in there.

Please understand before you write such an uneducated article.

Posted by Sbouillon | Report as abusive

The currency is nihilistic? It’s not a person, it’s what I buy things with. But if it was a person, it would be Ronald “Trust, But Verify” Reagan.

@RueTheDay, municipalities may now accept bitcoin!
http://www2.egovlink.com/press-release-b itcoin.cfm

Posted by JimBeam | Report as abusive

Everyone ‘suffers’ from deflation, where they are able to buy more goods with their currency than before…

We’re so fixated on this growth economy fueled by consumption, we forget that we exist on a physically finite planet.

I see Bitcoin, and it’s deflationary nature as a good thing, rather than a bad thing. Bitcoin provides a liquid, finite number upon which to judge other currencies. There has not been a medium of exchange that has both facilitated trades and provided a hedge against other currencies with looser supplies. Bitcoin allows anyone to take advantage of the global trust in the Bitcoin network, trust that is based in knowledge that the supply of Bitcoin is finite, the system works(transactions can be sent without worry of their security), and that this combination is useful to (more) people.

Some people may be buying BTC due to lack of trust, but ultimately, it is due to trust that people remain. Its not that bitcoin folks don’t trust other people with the keys to their currency, its that they trust the software more. In that sense, Bitcoin users are very democratic. They have independently yet interdependently chosen to come together, each voting with their other currencies, items or services. It’s just that no one ordained it to be ‘democracy’. Perhaps that’s true democracy.

And why would people ever spend BTC when they know they may be able to get more tomorrow? Cost-benefit analysis. I need this food to survive, I guess I’ll buy it. I want that computer so I can have access to its resources, I guess I’ll buy it.

What does this mean for the economy? Scale down, from bloated and manipulated, to lean and conservation-minded. Seems only fitting for a planet with finite resources.

If your only choice your whole life has been to use USD or other local currency, you could easily develop a place for it in your heart. But given the choice between growing value and shrinking, manipulated value, I think the long term choice is obvious. Soon enough, people will free themselves.

And even beyond the choice that we so fortunately have, there’s another side to this story. Think about the bottom 90% of the world’s population in terms of wealth. Many of those people have never had any secure way to store wealth. They are denied bank accounts or any safe storage of value, left to either barter or use oft-hyperinflated local currencies. For those people, for those many, Bitcoin is a complete gamechanger. They had nothing. Now they are part of the global economy, on their own terms. This perspective is hard to see from our pedestal in the West, but it most certainly exists for those less fortunate who have heard of Bitcoin and are now empowered.

Perhaps this is why folks talk about Bitcoin having good ‘fundamentals’…

Posted by GuyWhoStuff | Report as abusive

So many things wrong with both this article and the linked blog item.

You seem to think when a currency is tied to a commodity this is bad, however when the dollar was backed by a commodity (gold) it was very stable, and once we got off the gold standard the dollar has lost most it’s value.

The assumption, its main purpose is to use for electronic payment, does not seem right. It was mainly created to be a currency outside the manipulation of outside central authorities such as central banks.I would say its a main habit, and not thee main reason.

You also seem to say things are “bad” or “good”, but really those types of events depends on your debt, your debts interest rate, and the rest of your asset allocation, and your central bank (if you have one). For example when I just graduated grad school, I would have loved a hyperinflation event because I had school debt and really I was young and could just move to another country. On the other had if I get paid in bitcoins, I won’t suffer from the hyper deflation. That would be great, because everything would be cheaper for me if most were still using US$.

As far as theft. Russians use loose capital controls via London to withdraw their illegal money from Cypress while causing Cypress Orthodox Church to loose probably nearly all their $100 million. John Corzine can steal billions from farmers and walks free.

I don’t own any bitcoins but I would rather have a currency that was not manipulated via central banks or other means.

Posted by if_by_whiskey | Report as abusive

“I was just discussing this with an anarcho-liberterian the other day…..”

Nice Straw Man Argument!

Posted by Nichols7 | Report as abusive

is that world no one wants to live in one where websites aren’t taken down right left and center on the premise they’re ‘pirating’ things?

Posted by swannah | Report as abusive

This article sucks. The author is 100% off-base and mistaken.

However, the comments are EXCELLENT! Thanks, Guys!

Posted by brucewagner | Report as abusive

“it’s incredibly corrosive to try to build a currency on mistrust, as bitcoin has attempted”.

Huh? It is built on trust – trust in algorithms that can’t be manipulated.

Posted by invention13 | Report as abusive

@Sbouillon

You, quoting Felix “ Imagine a sucker who took out a loan in bitcoins a few weeks ago — she’d never be able to pay it back today. That’s a pretty good sign that bitcoins don’t work as a currency. ”

You, calling out Felix : ” The value has gone up over 100% in the past few weeks… She would easily be able to pay back the loan by pulling out her original investment and would’ve still had a lot of money in there.

Please understand before you write such an uneducated article. ”

I don’t think you understand the problem (or the role of a currency, for that matter).

Step 1 – Sucker borrows 1000 bitcoins
Step 2 – Sucker spends those 1000 bitcoins in an (hopefully productive) investment
Step 3 – Bitcoins double in value.
Step 4 – Sucker must repay 1000 bitcoins but the investment is now worth 500 bitcoins
Step 5 – Sucker remains 500 bitcoins short after liquidating the investment and repaying what he/she could.

Posted by Frwip | Report as abusive

The trolls come out, Felix, to defend their dogma. What did you expect?

Posted by GRRR | Report as abusive

Trolls? No. Worse. True believers.

Posted by Frwip | Report as abusive

You say that bitcoin “…would effectively erase the distinction between a commodity and a currency.”

For many years bankers have been saying that money (or Federal Reserve Notes, if you will), IS a commodity.

Do I agree that this is a bad idea? Yes. But it’s no different, in that respect, than the current monetary system…which was a bad idea too.

Posted by trk | Report as abusive

1) I agree that volatility is a problem. But if it’s really the only problem then this shouldn’t prevent us from looking into other posssible currency solutions like Bitcoin. Just compare it to the time when the first automobiles were built. Complaining about Bitcoint’s current volatility is like saying the first cars ever built were so unreliable that we should have focused on horses and stage coaches instead. If a currency gets used by more and more serious businesses, its volatility will go down as well.

2) How can you trust a bank nowadays, when they are essentially publicly-traded for-profit organizations which are trying to please their shareholders by getting an edge over their competitors – and risk everything while doing so? In this current financial system, no bank is completely “safe”. Either we remove the incentives for banks to go after risky financial investments or we have to live with a financial system of mistrust. Bitcoin is just a technical solution to this systematic problem.

Posted by leo499 | Report as abusive

I think I just saw the Achilles heel happening with Bitcoin. Somebody out there is doing some very very strange Bitcoin transactions. Take a look at 229722 for example at block explorer dot com.  With Bitcoin you can have multiple “accounts” debited and credited in a single transaction. So, if you have 500 debits credited to a single credit, you get a very “big” transaction, datawise. In that block 229722 there is a transaction, total value just 3 BTC, that consumes 97.288 KB of data. There is a flurry of similar transactions happening as we speak. What does this mean? Each block has a “soft limit” of 250K of data, and a hard limit of 1 MB. After that, you have to wait for a new block to get “mined”, roughly once every 10 minutes, before there is a “place” to record your transaction. So, it is pretty easy to stuff a block with low value transactions, in other words, create a serious traffic jam. And, every single transaction has to be propagated to everyone’s block chain copy. I think it is game over for Bitcoin.

Posted by dfarago | Report as abusive

1. Any basic research into the evolution of currencies like the dollar would show volatility was an integral part of the establishment phases.

2. Isn’t most of our economy based upon ‘intangible value’ anyway?

3. Indirectly, isn’t the fundamental value of bitcoin based upon the cost of the computing power to create it?

4. Aren’t some of our most treasured and fundamental assets ‘deflationary’ too? Like land and houses?

Posted by JohnnyBoy42 | Report as abusive

There’s a recent academic article on the cultural aspects of Bitcoin. It’s available on scribd here: http://www.scribd.com/doc/130774747/

Posted by btcamp | Report as abusive

I found the chart correlating Twitter volume to Bitcoin value really insightful.

Along these lines, one of the most amazing charts I’ve seen superimposes the popularity of the Beatles on top of the value of the Dow over the same time period. I found the correlation between those two astonishing as well, which also illustrates the following:

Back during the first Bitcoin bubble, I noticed that Bitcoin values were following Elliot Wave patterns.

For those who don’t know Elliot Wave, it’s a form of technical analysis that observes that public mood tends to advance and decline in a very specific mathematical shape.

Financial instruments that are closely correlated to public mood also track that shape.

Right after Bitcoins reversed in the first Bitcoin bubble, I wrote to my Dad, (we were both thinking of speculating in Bitcoins), “Don’t do it, it’s tracking out Elliot Wave impulse waves in the downward direction” because I suspected that true to Elliot Wave theory, all the media attention had created a public mood bubble and that the mood had just begun to decline.

What all this tells me is that Bitcoin is the ultimate fiat currency, and shows it: it has no intrinsic value, just what it’s trusted with, which ultimately boils down to public mood in relation to it. If fiat currency is a good idea or not is a whole ‘nother question. :-)

Lastly, I totally agree with the points in your article that lack of transparency around who is giving money to whom is a *big* problem with Bitcoins.

Posted by dvorme | Report as abusive

I think you’ve made some mistakes through taking words and phrases and shifting their meanings slightly as you go along. There is a sense in which bitcoins are built on “mistrust”, just as the medical profession is built on illness. And mistrust is indeed corrosive to the functioning of a society or an economy, at least ceteris paribus. It is more generally the case that society and distributed economies are hurt by a gap between the trust required in their design and the actual trust that people have; indeed, a more trustworthy design is likely, over time, to make people more trusting in general. If people lack trust in the mainstream financial system, making it more trustworthy seems like a positive development.

That said, I don’t anticipate ever holding bitcoins.

Posted by dWj | Report as abusive

“Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions.”
Close, the only minor tweaks i would make are that a) they’re not regulated, b) they’re not scrutinized, c) they’re primarily responsible for running our economy into the ground, and d) stealing all of your money. The are not “given a job”, they actually are the driving force behind most policy, which you can hopefully see is quite SHIT nowadays.

Regarding bitcoin being “built on mistrust” you’ve got to be kidding me. You clearly have a lot to learn when it comes to bitcoin. There is a lot of fear in ignorance when it comes to technically challenged individuals. As the revolutionary tidal wave of next generation technology sweeps over the planet many panic and get swept out to sea rather than understand what the situation is and adapt.

Posted by relay23 | Report as abusive
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