Waiting for bitcoin to get boring

By Felix Salmon
November 30, 2013

Something of a milestone was reached very early in the morning of Friday, November 29, a time when most Americans were either sleeping off their Thanksgiving excesses or out seeking Black Friday bargains. At the end of Wednesday, the price of gold, on Comex, had closed at $1,240 per ounce; that market would not reopen until Friday morning. And then at about 1am Friday, EST, there was a trade on Mt Gox, the largest bitcoin exchange, which valued each coin at $1,242. If only briefly and theoretically, at that point in time a bitcoin was worth more than an ounce of gold.

Bitcoin, by its nature, is a highly volatile asset, which is prone to astonishing run-ups in price. Check out these three one-year charts of the bitcoin price:

chartjun.png

chartapr.png

chartnow.png

The first chart is the year to June 2010; the second is the year to April 2013; and the third is the current chart. Without looking at the y-axis, they’re basically identical.

To put it another way, there is nothing surprising about what bitcoin is doing right now; it has done it many times in the past, and it will probably do it in the future as well. After all, there’s no way to calculate the fundamental value of a bitcoin: indeed, it’s probably easier to justify a price of $1,000 per bitcoin than it was to justify a price of $10. At least now it’s increasingly looking like a Thing, complete with Congressional hearings and front-page-of-the-FT publicity stunts.

The latest bright idea from Alderney — that the tiny island (population: 1,900) should print physical bitcoins backed by electronic bitcoins — is certifiably bonkers. For one thing, the whole point of bitcoin is that it isn’t going to suffer the same fate as all those currencies which the government promised were backed by something else. (The dollar was backed by gold, once; the Argentine peso was backed by the dollar. Neither lasted, and if the burghers of Alderney ever change their mind about the bitcoin backing, or it gets hacked or stolen, the owners of the physical bitcoins are going to have no recourse.)

More weirdly, the Alderney bitcoins are going to have about £500 worth of gold in them, which makes no sense at all. Let’s say that the gold in the coin is worth $800, while the bitcoin backing it is worth $1,000. What, then, would the coin be worth? It can’t be much less than $1,000, at least as long as it can be redeemed for an electronic bitcoin, or a bitcoin’s worth of pounds sterling. But by the same token, it can’t be worth much more than $1,000, because numismatists don’t tend to value gimmicks very highly, so it’s not going to have significant value as a collector’s item. And the most you could sell it for, in terms of its fundamental value, is the value of one bitcoin. Which means that there’s no point whatsoever in pouring £500 worth of gold into it — the gold doesn’t increase the value of the coin at all.

All of which is to say that the FT is splashing all over its front page a crazy bitcoin scheme which is never going to happen. “An independent company will provide the Bitcoins,” explains the newspaper, credulously. “If the price plunged, neither Alderney nor the Royal Mint would lose anything.” But what independent company would ever do such a thing? The company would essentially need to hand over its bitcoins to Alderney, would probably have to help fund the cost of manufacturing the coins out of gold, and would get essentially nothing in return for the huge risk it was taking that all its coins would become worthless.

The news here, then, is not so much that there’s some new cockamamie scheme involving bitcoins — a new such scheme is dreamed up every day. Rather, it’s the way in which the bitcoin bug has infected news editors to the point at which they’ll splash any old vaporware silliness all over their front pages. One of the less reported aspects of the bitcoin story is the way in which editors tend to be much more excited about it than reporters, who are generally more skeptical, and who worry that their own reporting will only serve to inflate the bubble even further.

This is something which should worry the bitcoin faithful, if they really want to see bitcoin become a broadly-used global currency. After all, press coverage of bitocins runs in lockstep with the bitcoin price: it’s times like this, when the price is at its fluffiest, that bitcoin gets written about the most. (If it’s not physical bitcoins, it’s hard drives in landfills.) The largely unspoken assumption behind all such stories: bitcoin is an asset class, and people should get excited about it when (and, implicitly, only when) the price is going up. This is what I think of as the CNBC Premise: when an asset rises in price, that is necessarily a Good Thing, and when it falls in price, that is always a Bad Thing.

The CNBC Premise has never made much sense with respect to currencies, however. And with respect to bitcoin in particular, its most exciting aspect is not its value, but rather its status as an all-but-frictionless international payments mechanism. If you want bitcoin to really take off with respect to payments, you actually don’t want to see crazy price spikes — such things are the best possible way of stopping people from using bitcoins for payments. After all, if your bitcoins are doubling in value every few days, why on earth would you want to spend them?

For me, the most interesting period in the short history of bitcoin was the period from roughly the beginning of May to the end of September, when the volatility in the price of bitcoin was relatively low, even as the price was pretty high* — more than $100 per coin. And more generally, it’s the long flat areas of the three charts above, rather than the attention-grabbing spiky bits, that bitcoin bulls should get excited about. If and when those long flat areas last for years rather than months, bitcoin might start becoming a boring, credible currency. We’ll know that bitcoin has made it to the next level not when editors all want to write about it, but rather when editors don’t want to write about it, because it’s just another way of people paying each other for stuff.

*Update: As Joe Weisenthal points out, stability at a high price is more bullish for the bitcoinverse than stability at a low price, because the higher the market capitalization of bitcoin, the greater the amount of commerce that can be transacted in it.

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
21 comments so far

It all makes sense when you use the log-scale bro:

Price in USD
https://blockchain.info/charts/market-pr ice?timespan=1year&showDataPoints=false& daysAverageString=1&show_header=true&sca le=1&address=

Market Cap
https://blockchain.info/charts/market-ca p?showDataPoints=false&show_header=true& daysAverageString=1&timespan=&scale=1&ad dress=

Number of transactions excluding popular addresses
https://blockchain.info/charts/n-transac tions-excluding-popular?showDataPoints=f alse&show_header=true&daysAverageString= 1&timespan=&scale=1&address=

Posted by DMarshall | Report as abusive

I had heard it was all currency manipulation by automated trading of 1 bitcoin between thousands of accounts all owned by the same speculator, assured of increasing until it runs out of fools.

Posted by MyLord | Report as abusive

Is there any difference between bitcoins and beanie babies? I think not ..

Posted by Woltmann | Report as abusive

So, the best we can ever hope for is that bitcoin will become the monetary equivalent of living directly over the San Andreas Fault.

The only trouble is that the periods of stability are getting shorter, not longer. During the period between the current spike and the previous one, there was much talk that secondary markets would appear and act as a dampener. Still, bitcoin is becoming increasingly unstable. To use another slightly duff analogy: Bitcoin is the monetary equivalent of the Tacoma Narrows Bridge.

I can only assume bitcoin’s designer had hoped that it would go through a rapid deflationary phase and then naturally stabilize when it reached the ‘right’ level. As someone with a background in computer science, I might have been persuaded by that in the past. Today, I know that’s hopelessly naïve.

Posted by AnatomistsHooka | Report as abusive

A bubble awaits every fanboy’s wettest dreams of quick riches.

Posted by GRRR | Report as abusive

You should really cover OpenSourceCoin. Just look at the chart and see for yourself: https://coinex.pw/trade/osc_btc

Posted by andrewjerome | Report as abusive

An excellent article and quite accurate. I’ve purchased both Bitcoin and Litecoin as long term investments awaiting the day when it won’t be necessary to convert back to government issued fiat currency to make everyday purchases. Of course that’s not to say I don’t try to take advantage of the volatility when it occurs but I rarely convert my cryptocurrency back to USD and stick to trading LTC/BTC as the prices fluctuate. My goal is not more USD, it’s more cryptocurrency.

Posted by TBennett1012 | Report as abusive

The physical Bitcoin is not bonkers, as set out in the article, but then more information is needed about the concept. Let me explain…
The amount of bitcoins held as backing by the state that choses to issue commemorative Gold Bitcoins (the ‘Coins’) is always publicly verifiable from the Bitcoin address in the “blockchain” – the global ledger of all Bitcoin transactions and addresses (ie. ‘accounts’). In addition, Bitcoins used to back the Coins will always be held safely offline in so called ‘cold storage,’ thus out of reach of potential hackers and malware. The cold storage would be subject to regular independent audits.
Furthermore, as well as being a collectible item, the Coin provides the opportunity to hold bitcoins, without the attendant risk of holding the virtual Bitcoin in a wallet exposed to hackers etc. Yes there is instead the replacement risk of holding a physical coin of significant value. But at least it can be seen and touched at all times so one knows it is there. As humans, we seem to be more comfortable with that.

Now for the gold content: the gold provides reassurance to the Coin holder that should the price of Bitcoin ever collapse, or become zero, then at least the gold element remains. In a way it is like a collar on the value of the Coin. There is no cap on each Coin’s value; how high do you think Bitcoin will go to? The Coin also provides an opportunity to speculate on Bitcoin whilst having gold value in the Coin as a comfort.

And finally I can explain the role of the independent company that supplies the bitcoins to back the Coins. This company is only taking the Bitcoin price risk during the time window between the marketing of the Coins and receiving payment for the Coins to be minted (or possibly already minted in small numbers on the shelf). A matter of a few days I would say. This would only be done in very small Coin quantities at a time and the price of each batch of Coins would be set according to the prevailing Bitcoin market price.

I hope my explanatory notes help further understanding of the physical Bitcoin concept.

Posted by BitcoinByte | Report as abusive

Bitcoin has a long way to go before it can be a both successful and boring. Before it becomes boring it has to become ubiquitous — widely accepted by both consumers and merchants. With each of these huge run-ups, countless individuals are being exposed to the idea of Bitcoin that otherwise would have no reason to look at it. That early adopters are rewarded for helping to make the currency ubiquitous is a feature, not a bug, of the system.

Posted by broukhim | Report as abusive

Woltmann-

Comparing it to beanie babies shows that you do not understand it. Accordingly, please do not buy any.

P.S. If you want to use money on the internet, none of these sites, accept beanie babies:
http://bitcoin.travel/
http://www.cheapair.com/
http://www.coinmap.org/
http://www.gyft.com/
https://www.egifter.com/default.aspx

Posted by jp2k | Report as abusive

MyLord
The fools are those who do not do their own research. Bitcoin is simply a ledger, where every transaction is public. Every bitcoin or fraction thereof can exist in only one bitcoin account.

Posted by jp2k | Report as abusive

And the bubble is about to burst now.. just look here http://btc-bitcoin.net/btc-charts/ Bitcoin is in a freefall.

Posted by Bittercoin | Report as abusive

Maybe the bubble is burst because Bitcoin is total in freefall just look at the charts here http://btc-bitcoin.net/btc-charts/

Posted by Bittercoin | Report as abusive

bitcoin is evil. it’s a giant Ponsi scheme for the few who own the bulk of it, and there are no more than a dozen or so of them. If the world continues using it, you’re going to create trillioners, mostly from the mob, and give the World to them. No sane gov’t will allow it, so at some point bitcoin will be made illegal for sure.

Posted by JollyJack | Report as abusive

Typo… your first chart up top is June 2011 not June 2010

Posted by 5atoshi | Report as abusive

The physical Bitcoin is not bonkers, as set out in the article, but then more information is needed about the concept. Let me explain…
The amount of bitcoins held as backing by the state that choses to issue commemorative Gold Bitcoins (the ‘Coins’) is always publicly verifiable from the Bitcoin address in the “blockchain” – the global ledger of all Bitcoin transactions and addresses (ie. ‘accounts’). In addition, Bitcoins used to back the Coins will always be held safely offline in so called ‘cold storage,’ thus out of reach of potential hackers and malware. The cold storage would be subject to regular independent audits.
Furthermore, as well as being a collectible item, the Coin provides the opportunity to hold bitcoins, without the attendant risk of holding the virtual Bitcoin in a wallet exposed to hackers etc. Yes there is instead the replacement risk of holding a physical coin of significant value. But at least it can be seen and touched at all times so one knows it is there. As humans, we seem to be more comfortable with that.

Now for the gold content: the gold provides reassurance to the Coin holder that should the price of Bitcoin ever collapse, or become zero, then at least the gold element remains. In a way it is like a collar on the value of the Coin. There is no cap on each Coin’s value; how high do you think Bitcoin will go to? The Coin also provides an opportunity to speculate on Bitcoin whilst having gold value in the Coin as a comfort.

And finally I can explain the role of the independent company that supplies the bitcoins to back the Coins. This company is only taking the Bitcoin price risk during the time window between the marketing of the Coins and receiving payment for the Coins to be minted (or possibly already minted in small numbers on the shelf). A matter of a few days I would say. This would only be done in very small Coin quantities at a time and the price of each batch of Coins would be set according to the prevailing Bitcoin market price.
I hope my explanatory notes help further understanding of the physical Bitcoin concept.

Posted by BitcoinByte | Report as abusive

See comments from the physical gold Bitcoin concept creator @BitcoinByte here:
http://www.reddit.com/r/Bitcoin/comments  /1rvfym/waiting_for_bitcoin_to_get_bori ng_felix_salmon/

Posted by BitcoinByte | Report as abusive

See comments on Reddit Bitcoin

Posted by BitcoinByte | Report as abusive

Bitchcoin now the preferred currency in prison showers and white-slave trade.

Posted by AlkalineState | Report as abusive

This boring enough for you?

“People who thought that bitcoins could serve as either an investment vehicle or an alternative world currency got their heads handed to them on Thursday and Friday. That’s when the price of the attention-grabbing crypto-currency got crushed, falling from a quoted $1,200 per “coin” to less than $600.”

Posted by TFF | Report as abusive

Great article. Bitcoin should be approached prudently with an eye towards risk management. We comment on this and similar issues on our blog.

http://www.bitmorecoin.com – Quick and easy way to buy Bitcoin in the UK.

Posted by Btc_Exchange | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/