The Problem with Bitcoin

12/9/13Follow @dnordfors

One purpose of writing this piece is a vague hope of being proven wrong by some economist who knows better than me. That would be nice. Because what I have come to think about Bitcoin is not nice. Before writing this piece, I presented my common-sense critique to Bitcoin proponents, and so far nobody has provided answers. Perhaps I asked the wrong people. So make my day—prove me wrong. Here goes.

Bitcoin is not a currency. It is a virtual commodity. You can place money in a commodity, like gold. But gold isn’t money, and neither is Bitcoin. It is not issued by a government. It is not backed by an economy using it as the standard medium of exchange. It is not governed by a central bank that keeps it from going nuts. And, indeed, Bitcoin has gone nuts. Or, rather, it’s gone tulips. That’s a pun, I’ll come back to that.

People trade in commodities that they don’t use, like gold. So why should you not trade in Bitcoin? After all, we know for sure, based on some solid (we think) cryptology, that the supply of available Bitcoins is predictably exact. With gold, someone can find a new mine, flooding the market and lowering the price. Not with Bitcoin. With gold, you need a third party to carry out a secure transaction. Not with Bitcoin.

So Bitcoin is better, right? Wrong! Bitcoin might be a robust technology. But the Bitcoin market is crazy. Either that, or I am.

You see, gold is like an air raid shelter. If investors lose trust in cash as an investment, they can’t shift to bonds or shares, because they too depend on cash. At that point it’s a good idea to invest in a commodity—something that is less volatile than cash. Like gold. Investing in gold means protecting yourself against a loss of trust in the dollar. So after the financial crash of 2008, the dollar price of gold went up. Now trust in the dollar is coming back. Gold has dropped in price against the dollar by 25 percent since 2012.

But Bitcoin investors seem to be living on a different planet. While gold has gone down since 2012, Bitcoin has soared from $5 to $1,000 (it had dropped back to $879 at the time of publication). If this is about distrusting cash, if Bitcoin-buyers are securing themselves against a currency crash, if $1,000 will have the buying power of less than $5 before long, well, that currency crash will be such a horrible crisis that owning Bitcoins won’t be much help. Better, then, to dig a hole in the ground and fill it with canned beans, warm clothes, and shotguns. Some people do that, too. They might just be the levelheaded ones in this comparison.

Is there anything other than a weakening dollar that can bolster Bitcoin? Well, yes. If there were a strong economy backing up the Bitcoin, exchanging products and services in Bitcoin and outcompeting products and services from other economies, including the US economy, then Bitcoin would do well. If the Bitcoin economy GDP goes up, so will the exchange rate for the Bitcoin. I’ve never heard of any Bitcoin economy like that, but let’s talk about it anyway.

Let’s say a new coffee chain opened in 2012, StarBits. They proudly belong to the economic zone of Bitcoinia, meaning they do all their financials in Bitcoin, write contracts in Bitcoin, pay wages in Bitcoin, sell their products in Bitcoin and so on. Now, they sell totally mind-blowing cafe lattes, and they sell them for only 0.20 Bitcoin each. I went there a year ago and bought a divine latte. It cost me only $1 (I paid seamlessly with my smartphone Bitcoin exchange app.) Well, today, with the appreciation of Bitcoin, that latte will cost me almost $200. Will I buy the world’s best latte for $200 a pop? Do I have a hole in my head? StarBits would have been out of business by now! No customers!

This is one reason to why real currencies, like the dollar, have central banks. The central bank keeps the currency in check so that people can rely on it for doing business, pricing their products, paying … Next Page »

David Nordfors is the president of IIIJ Innovation and Communication. Follow @dnordfors

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  • joe public

    You have it wrong. The latte which cost 0.2 BTC when it was equivalent to $1 would not still cost 0.2BTC when it was worth $200… it would be 0.0001BTC, i.e still $1 You could buy more for your BTC that’s all.

    • Dee

      So then it’s still pegged to the dollar. Or the yuan, or the euro. David is speaking of the end-game, where BTC is has wide global adoption and everything is priced in BTC.

      It’s a bit of a chicken and egg problem, where the only way for the price of BTC to stabilize is that it becomes so widely accepted and NOT pegged and converted to fiat…but that depends on the price to be stabilize enough so that merchants don’t have have to instantly convert to fiat.

      • Tom

        Your first point makes no sense to me. If he is speaking of the point at which it isn’t tied to the dollar then why is the ‘problem’ that (dollar) price has gone up. If we are taking the dollar out of the equation then there is no problem (in his scenario).

        Your second point is a good one, and I think that is possible – it just needs time (for more users, more vendors, people to understand it etc.).

      • dnordfors

        Dee,yes. In short – if a few million people can live by the Bitcoin, then so can I. It doesnt matter if this is a country or a virtual country. But I want to see people getting their income in BTC, to pay their rents and insurances in BTC. How should Bitcoin get there? Yes, this is indeed a chicken-and-egg issues. And stuff like taxes, pension savings etc come into it. And this is why, I believe, economists say that a currency is “A generally accepted form of money which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.” (Investopedia)

    • o

      his point is still valid though. it still fluctuates tremendously. it’s like a company saying we will accept a stock versus cash. are they likely to do that if the stock itself is 100 times more volatile than the currency backing it? probably not – although there is a risk of upside, there’s also a risk of the alternative (loss).

      • Zefrum

        Uh yes, this happens all the time with M & A deals.
        But BTC is only volatile because its the first true international tradable item that happens to be: 1. Not fully ‘mined’ 2. Not fully circulated 3. And facing international regulation 4. A totally new and hard to discuss (understand for some) peer to peer virtual cash.
        5. Everything else being equal, BTC will actually be less volatile then any other tradable thing once a ‘critical mass’ have them and transact with them.

    • dnordfors

      In my example I am demonstrating what would be the case if Starbits lived by the Bitcoin – paid it’s salaries in it, wrote contracts in it, etc. The stuff you do with a currency.

  • albot einseiten

    you say it’s not a currency; govt’s eg swiss gov would disagree, they say it is a currency; so are you saying you know more than these gov’ts? you then build your argument on this false premise that bitcoin is not a currency.

    more correct to say it’s not just a currency, it is that and a whole lot more

    • dnordfors

      You know, I’m not a trained economist – I’m looking forward to being corrected. Here is what I did: I Googled “currency” and compared definitions. Here is one from Investopedia, it is consistent with the others:
      Definition of ‘Currency’

      A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.

      Investopedia explains ‘Currency’

      Generally speaking, each country has its own currency. For example, Switzerland’s official currency is the Swiss franc, and Japan’s official currency is the yen. An exception would be the euro, which is used as the currency for several European countries.

      Investors often trade currency on the foreign exchange market, which is one of the most heavily traded markets in the world

      http://www.investopedia.com/terms/c/currency.asp

      • Zefrum

        Correction- the forex or just FX market is “the” largest market.

    • Zefrum

      BTC is not a currency, it is money.
      Unless you would like to call the world’s citizens collectivly a government, then yes, the citzens of the world who mine BTC are creating Currency.

      But thats a stretch. Money has 5 characheristics, goto wiki fir an enumeration, but fungability is really the main thing that distinguishes money from commodity.

      As a side note: Gold, Silcer, Platinum and Palladium are the only commodities also currency

    • Guest

      You know, I’m not a trained economist – I’m looking forward to being corrected. Here is what I did: I Googled “currency” and compared definitions. Here is one from Investopedia, it is consistent with the others:
      Definition of ‘Currency’

      A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.

      Investopedia explains ‘Currency’

      Generally speaking, each country has its own currency. For example, Switzerland’s official currency is the Swiss franc, and Japan’s official currency is the yen. An exception would be the euro, which is used as the currency for several European countries.

      Investors often trade currency on the foreign exchange market, which is one of the most heavily traded markets in the world

      http://www.investopedia.com/te

    • Zefrum

      BitCoin is money; it is however not a currency or a commodity.
      Because:
      1. it is used as a fungible medium of exchange and passes the other 4 tests that constitute money.
      2. Currencies are issued, and issued by Governments or Central Banks- all curency is money but not all money is currency.
      3. Commodities are economic inputs to creating a finished good. One property of a commodity is that it can be sold at a future time for a current price. This is hard to make similar with BTC’s payment network feature as it doesnt make sense to call Visa’s payment network a commodity, so too it doesnt with BTC’s.

      .:

  • Chris Pacia

    You’re thinking of it exclusively as a commodity. You can’t ignore the payment network. The payment network allows people to instantaneously send value over the internet with no middleman, nearly zero fees, with the click of a mouse. You can’t do that with any other currency.

    Put it this way, a couple weeks ago someone sent $150 million of value over bitcoin. This person paid zero fees (when it otherwise would have cost hundreds of thousands if not millions), the transaction was instantaneous (it would otherwise have taken 4-6 business day), and he didn’t need a third party to move the funds for him.

    You have to be out of your mind if you don’t see value in that. Now if there is only one currency allowed on that network (Bitcoins) clearly those Bitcoins should have value.

    • Dee

      There is incalculable value in electronic transfer of value, but the endpoints are the current weakest point, and will be for some time to come. A large quantity of BTC was sent…sure, it moved from one wallet to another for essentially no fee, but let’s say someone actually tried to do that as attempt to escape capital controls, or for purpose of remittance. How on earth would they actually get $150M in, and $150M out? Until you can complete this process, with no slippage, those are just arbitrary numbers. No exchanges have the liquidity to handle that kind of transaction.

      • Zefrum

        In a bit of time, you and I will both see the solution to this very problem as BTC matures as both a money and as a payment method. That is, we will see contracts and bills (ious) negotiated and denominated in BTC. In other words, as BTC becomes popular, convertibility as a means to economic activity will eventually go away. When USA was still on the gold standard, 99% of people didnt goto the FED window to change their greenbacks to gold eagles. Thus the potential exists to happen with BTC wich is enormously frustrating to Central Banks, particularly the FED and Governments.
        This is the next big thing, and it aint got bulbs.

      • Sugarsail1

        that is actually a benefit for BTC. It encourages people to do transactions for real goods and services exclusively in BTC instead of changing to local currency and it encourages people to not hoard BTC but instead keep spending it.

    • dnordfors

      Chris, I do see that value in that and I point it out very clearly my piece. I can see the point in instantaneous transactions for counteracting fluctuations – thanks for making that point. I don’t see the value in the hyperdeflation of Bitcoin. If anything, it should be close to the average of international currencies, not behaving like an inverted Reichmark.

  • Jimmy Jordan

    Do this. Actually read on Bitcoin then write an article. Bitcoin will not be a “currency” overnight. First we take out Western Union, MoneyGram, etc. Then we work on the 3%-5% credit card companies. Let me ask you. If you have to wire money to someone would you pay Western Union 17% and it takes up to days. Or go to the exact same place offering Western Union, but now they have Bitcoin where you can send the exact same amount for half price. On what planet is cheaper and faster a problem? Do you still use stamps and the post office or have you finally gotten email??

    • Sugarsail1

      what none of these guys get is sea shells are a currency if two people agree to use them as an exchange in lieu of exchanging actual goods and services.

      • dnordfors

        Exactly! Bitcoin is a virtual seashell. It’s quality only partially set by the seashell itself, it depends mostly on the people trading with it and what they do with it.

    • dnordfors

      Yes, exactly. A peer-to-peer payment service is an excellent idea. I write that. Too bad that the intermediary currency – the Bitcoin – is too unstable. I’m looking forward to the next version that removes the risk of speculation ruining the service.

      • Zefrum

        You are then not looking forward. To a peer to peer money, that is.
        Man there are so many free people in this free land tgat are scared of free markets!

        • dnordfors

          If Bitcoin was proprietary it could have been a Ponzi scheme. It isn’t, so it seems more like Tulip mania.

        • dnordfors

          peer-to -peer money needs a protection against Tulip mania. If it’s completely decentralized it needs to be built in to the scheme.Bitcoin does not have it. A currency that increases 20,000% against the dollar in a year is ridiculous. Any central bank director that let anything like that start happening would be fired from the job before the increase reached even a fraction of that.

  • Toipster

    Ahhhhh! All you ignorant journalists are driving me nuts. It’s like you all were sent the same script. Your motto should be: “Must fear what ye does not understand.”

  • Notmy Realname

    There are a few things I think you should keep in mind:

    1. If you’re looking at it as a commodity, bitcoins are scarcer than gold by a LOT. The price gains are not unreasonable when you consider how few bitcoins there actually are in relation to money in the world.

    2. It can absolutely be a hedge against the dollar, and in a situation where 1000$ becomes worth only 5$, bitcoins will be worth many many thousands of dollars.

    3. Considering our current money supply is just numbers, it’s not unreasonable to assume that a partial transition could be made to other numbers. Some may prefer numbers that can’t be printed out of thin air to buy government debt.

    4. If gold is a precious metal, then a bitcoin is a precious number. If you’re a gold bug and you say bitcoins can’t store value because they have no intrinsic worth, good luck squeezing a gold nugget down your ethernet cable.

    • Zefrum

      Intrinsic value; its interstice to discuss and an easy way for some to call a thing a bubble or without worth.
      In evaluating corporations for equities analysis, we often see “intangibles”; and no one really has a problem with this (if the IRS says yea would you say nay (to property that is)? So really BTC is an intangible with tangible value like corporate tangibles have tangible value. And now we have a market for them with a unit of account (taking time for adoption though)
      What exists on the internet is all intangible, but it does exist, it does have value. And in a virtual world, that you participate in by reading my intangible words, virtual things have intrinsic value.

      I hope the author is not offended from all that is written and does as he said he would do; by taking with his computer what all these virtual commenters have hashed out online here for him and writes an article that displays virtual property does exist and thereby does have intrinsic value as our perception of reality with paper dollars has an intrinsic digital analog of binary coins.

      • dnordfors

        Zefrum, I’m not easily offended. I am, however, very offended by that you called me “not and alpha-male” and that you say I am “perfectly fine with [my] 9 to 5 because [I] doesnt have to risk anything except suukin [my] boss’s proverbial kok”. Please, tell me more about my boss, his genitals and your fantasies about what I am doing with them.

        • Zefrum

          Oh, you are the author!

          I was just havinga little fun.
          But seriously, I do hope you take the salient points I’ve written as critique and not offense.

          I came accross your article and virtually ripped it up. I happen tobe very attuned to exonomics and the markets in a proffesional way.
          Grr, the spell check doesnt work either.
          Also, unrelated -the posting is awkward with the iPhone 5; its almost impossible to edit and often after typing a bit, no more can be typed without notice to limit, if there is one.

          • dnordfors

            I’m not a journalist. My Ph.D. is in quantum physics and I work with policy. I have served on World Economic Forum global agenda councils and participate in their strategist meetings, so I meet a good deal of economists.

    • dnordfors

      Scarcity is a required, but not sufficient, criterium.There are lots of scarce commodities around, anybody can construct one. That does not mean it has value.
      The problem with bitcoin, as I point out, is less the technology and more the market. If the gold-market was dominated by lunatics, I’d avoid it. Not because I don’t like gold, but because I am cautious about doing business with lunatics.

  • LookFurther

    BTC makes direct micro payments possible. New online business models will evolve. This will change the internet. Tulip bubble journalists only see the things they want to see, and are blind for all new possibilities.

    • dnordfors

      You know, here is some real value in the BTC idea! I agree that BTC is a prototype of the future of direct payments. But BTC will not be the implementation, probably, because if the extreme fluctuations in the exchange rate. It’s like a peer-to-peer payment system choosing to work with Reichmark, Argentine Pesos or Danish Crowns.

      • LookFurther

        It’s settling, but it needs time. In fact, it’s already becoming less volatile when you compare it to years ago. But you have to look at the logarithmic charts with these kind of things. Last ‘ crash’ was in fact just a small correction. Volumes are getting better, especially on the chinese exchange.
        Overall It’s getting better and better, but it’ s still a long journey.

  • Sum Guy

    Gasoline might be the best analogy to the coffee shop problem. Gas stations are allowed to update their prices once every 24hrs. You will run into real prodlems pricing your goods or services even if you’re updating every hour.

    • Zefrum

      Read the wiki article on Good money and Bad money (a real economics topic); and you’ll see its nothing like gasoline.
      Also, volatility exists with the USD, it fluctuates terribly (against the GBP, EUR, RMB…) but you dont notice because your merchants dont want to loose money giving you a better price because of FX arbitrage.

      • Zefrum

        And though, America’s economy is essentially apart of the world economy, theres a law against allowing Americans to use anything but USD in (direct) transactions.
        And lastly, would you worry if the dollar went from .69 CAD to 1 CAD? Truth is you weren’t even aware of it (Im 99% confident)
        The reason why is because that took about 2 decades of coordinated central bank planning. With BTC, you and I and everyone else coordinate to figure out what this BtC thing not only “IS” but worth.
        Welcome to the first FREE MARKET

      • dnordfors

        Are you suggesting that the Dollar fluctuates anywhere close to 20.000% in a year? Against which currency does it do that (except BTC)? Against which commodities? Oilprices are changing against the USD. But in BTC, oil has depreciated by at least 100 times in a year. That does not reflect the change of value in oil. It reflects the fact that BTC – if to be considered as a currency – is in “free rise” – hyperdeflation!

        • Zefrum

          The dollar is already established, look in your pocket…no the other one.
          See paper bills with numbers.
          I have paper bills too but mostly virtual ones.
          Disregarding this, EVERYONE KNOWS HOW MUCH A BUCK IS WORTH.
          Nobody knows how much a BTC is worth BECAUSE THEY ARE STILL BEING CEATED!
          ….Sorry for YEAlING, I TALK LIKE THIS! ;)

  • Zefrum

    Also. The author clearly hasnt put much thought into the Bitcoin currency and economy debate.
    1. BTCs are infinitely divisable. If a latte costs 10USD or 1BTC, and BTC increases to 20USD per BTC, then the latte, everything else being equal, will cost 10USD or .5BTC. …just like everywhere where merchants constantly update pricing if they accept more than 1 currency.
    2. Money, is what ever you and I say it is; currency is what Governments say it is. So really, we should (fir now) say BTC is money. And as proof the FED and US Treasury wouldnt be talking about a commodity. The FED doesnt even really talk about Gold; but it has the largest amount of it.
    3. Why the author dislikes BTC is an example of a herd/pack mentality; which is that because something is new, it should be viewed as evil or dangerous. This is a discussion in nuero-exonomics, that is the ones who can not take risks or rather way risk&reward either miss the reaping benefits or get harmed as they miscalculated.
    -In other words, the author is not an Alpha male, and hes perfectly fine with his 9 to 5 because he doesnt have to risk anything except suukin his boss’s proverbial kok.

    • Sugarsail1

      actually a good psychoanalysis, and entertainingly crass.

    • dnordfors

      Yes, indeed people reprice their products when they must. We know how that looks like when there is hyperinflation. Prices change every day! This is why I say Bitcoin, as a currency, is experiencing HYPERDEFLATION. This is an urgently serious state for any currency to be in. How do you suggest coming to terms with it? What is your advice to people who have written binding trade contracts in BTC?

      • Zefrum

        BTC can only be deflationary once all BTC have been mind.
        At the moment, BTC is being created; much like back in the 1790s the dollar was being created. But thats really where similarities end.
        The point is, BTC is new and at the same time ‘yet to be released’. Most tradeable things dont experience this type of protracted IPO, as it were, because these other tradable items were discovered in a natural and non-virtual manner.
        So as more and more people hear about it, they want it. As more people use it, more people want to accept it. And because the money supply is increasing, but at a decreasing rate, interesting things happen -its called price discovery in the
        Most free market that can possibly exist.

        • dnordfors

          You are saying that BTC is not deflationary because it isn’t complete as a currency yet. I agree, it is a virtual commodity. Sadly, it looks very much like a tulip at this time and i am concerned about that.

          • Zefrum

            Yes. Its also not inflationary.
            What laymen see is an increase in the number of goods a BtC can buy. Which kinda sorta looks like inflation.
            EXCEPT, hardly anyone uses it and, so the market is figuring out the price of a BTC to a USD each and every moment WHILE more BTCs are created AND more people use them / trade them / secretly think they are an investment -em …The exchanges are where prices are discovered. Sellers give an OFFER price where as Buyers ASK a price. Through the amount of participants and Size of the BTCs being OFFERED and ASKed a spread is formed where by the transaction takes place

          • Zefrum

            More of these happen, and more and more people hear of them, eventually things calm down.
            JUST LIKE WITH IPOs.
            Bitcoin is going theough its Facebook phase, except there are no Investment banks selling to brokers selling to dumb ‘investors’ and HFTs.

          • FreeJack

            It only looks like a tulip because you a) don’t understand why the technology is such a breakthrough and b) you only look at the charts. Tulip bulbs crashed ONCE…and it was over. Bitcoin has dropped precipitously on NUMEROUS occasions over the past several years, only to lurch forward immediately afterward. This price discovery process can be violent because of the relative number of players to the global population, but it will calm down as the currency becomes more widespread. But to compare it to tulip bulbs is to MASSIVELY understate its technical significance and to misunderstand what actually happened with Dutch tulip bulbs, and now there’s really no comparison.

            This is like being able to buy a piece of the world wide web back in the early 90s, basically. It’s not for the feint of heart right now, but it will not always be so.

          • Zefrum

            Its not a virtual or real commodity as BTCs are not inputs to a finished good.
            If it were an input to economic activity or an input then the CFTC and NFA would be holding meaningful discussions, however they are not and its the FED, IRS and FinCen that are with Congress. Those three agencies, police money not commodities.

          • kittycatdestroyer

            Go be concerned. While the people with some brain make money.

        • FreeJack

          The Euro was actually being used about two years prior to its wide adoption. You can liken this period of time, with Bitcoin and Litecoin, as the “early adoption” phase. The market is determining its value and it’s going to take quite a while, because it has to spread virally until it hits a critical mass, where everyone knows about it and most who want it have easy access to it and the ease of use has been improved, the technical aspects have been obscured from John and Jane Q Public. We have a lot of ground to cover between now and then.

      • kittycatdestroyer

        HAHAHAHAHA you have no clue what either of those words mean moron. hyper deflationary means its increasing in value. that’s a great place to be if you own a btc.

        • Zefrum

          That maybe true; but his words dont give you license to spout off ad homonym.

          Dush bag

      • Zefrum

        Deflation is not the value of my dollars going up.
        Deflation is an effect where there is an actual decrease in the supply of aggregate money. The effect of deflation is real purchasing power has gone up, while nominal has stayed the same.

        BTCs are increasing in supply and increasing in real purchasing power. This unique phenomenon is called adoption.

        Thus, as BTCs are mined, the supply of BTCs are created. And thus the effect of mining is inflationary. There are more bitcoins now then a second ago, thus the supply has increased.
        The reason why the value (Man I say this a lot here) of BTC/USD goes up is because of PRIVE DISCOVERY -thats the market volume and bids and asks on an exchange.

  • Sugarsail1

    “Bitcoin is not a currency it is a virtual commodity”. Incorrect sir. You need to recognize the difference between extrinsic and intrinsic value to ascertain the difference, and tangible and intangible assets. A currency’s value is entirely extrinsic and its buying power depends on the size of the economy that accepts it and its supply (quantity theory of money). There IS a Bitcoin economy albeit a small and growing one. I can buy flowers with Bitcoin at my local florist, and someone just bought a Lamborghini with one. It is the fact that the Bitcoin economy is new and growing, that its exchange rate in US$ is “going crazy”, not the lack of a government issuance. A commodity by contrast has entirely intrinsic value (you can utilize it) and unlike Bitcoin is tangible. Like oil, food or water. Gold is unique in that most of its value is extrinsic, like currency, but some is intrinsic, it has historically behaved as both supply limited money and a commodity. The value of all currencies and even commodities have “gone crazy” at times, depending on the financial conditions at the time, this is not a detriment with Bitcoin, merely a sign that there is a large speculative interest in it and that the system is expanding.

    • dnordfors

      thanks for the point about extrinsic and intrinsic value, you might develop that a bit more for laymen like me to get a good grip. You can indeed buy a Lamborghini in Bitcoins.I have two questions for you:
      a) I don’t afford a Lamborghini in cash, so I’ll buy it with installments. I happen to earn my income in Dollars. If I had bought a Lamborghini on installments a year ago for a price of 50.000 bitcoins – then about $250k, not only would I be broke trying to pay the first years installments. I’d also be owing the car dealer in the order of ten million dollars. My question to you: would you dare to write contracts in Bitcoin?
      b) Lets say you hired an engineer a year ago for a salary of 20.000 Bitcoins per year (then about $100k). Today that would correspond to $20million a year. What is your recommendation to employers who might be considering paying their workforce in Bitcoins?

      • Sugarsail1

        Yes, you bring up a very good point about debt and monetary policy. The US$ is deliberately inflationary to aid debtors paying off their loans and encourage them to go into debt in the first place so banks can profit off them. The few people who are savers hate this because it drives the cost of things up artificially (like homes) and devalues their cash savings. I would never go into debt in a currency whose buying power is increasing (like BTC) anymore than I would keep my savings in dollars. As far as paying employees in BTC, many Bitcoin related businesses already do this and they can merely tailor the pay to whatever the current exchange rate is, so that your pay in BTC when converted to local currency comes out the same. As the BTC economy expands the exchange rate should stabilize and a more fixed salary in BTC might be in order. Being digital, all of this is quite easy to do.

      • Sugarsail1

        Intrinsic means you can utilize it like food or oil, the value is in the substance itself. Extrinsic means its value is derived from EXternal social consensus. All currency is extrinsic in value with the exception of the paper it’s printed on which being paper has some intrinsic value) including the dollar. The BTC has no tangible value either, so it has NO intrinsic value, the BTC is 100% extrinsic in value, which is as a currency should be.

        • Zefrum

          Umm, “tangible value” u say?
          Value is by definition, not tangible.

          BTC does indeed have intrinsic value as I can send money to my parents in Europe, with very low fees and pretty much instantaneously.
          BTC’s extrinsic value is its market price.

          .:

        • Hurricane Charlie

          “An intrinsic property is a property of a system or of a material itself or within.” – wikipedia (sorry…)
          Because there are an exact number of unique Bitcoins that can be defined, then I believe that it does have an intrinsic property.
          How society decides to use that property defines its extrinsic value. For instance, if everyone in the world suddenly stopped liking or using gold as a jewellery material, how would that affect its extrinsic value? (Possibly not so much now, because if its use in electronics and other fields, but I hope you get my gist?)

      • kittycatdestroyer

        I’m glad you labeled yourself as a layman. Justifies your inability to grasp basic economic principles. Go have fun with your fiat currency while it’s still worth more than the paper it’s printed on.

      • Hurricane Charlie

        In the 1980s, my brother in law was working as a civil engineer in Bahrain. He was paid in Bahraini Dinar and would send a portion of money home when he felt the economic market was good. One time he sent money home shortly before a fluctuation in the currency rate – he said not waiting for a month ‘cost’ him £1000 GB.
        The point I am trying to make is that if you are paid in one currency, but spend in another, this kind of thing will happen. The fact that Bitcoin rates are fluctuating like crazy at the moment just shows that most people don’t know how to treat it (& that some are getting very rich off it).
        Hope that makes sense – it’s just my thought on the matter.

        • dnordfors

          Charlie, it’s a good example that raises several thoughts. I’m guessing that the Bahraini economy was booming at the time, real value was being created inside the Dinar by pumping oil out of the ground. Your brother was in that system, being paid in Dinars. What value, comparable to pumping oil, is created within Bitcoin? Who is getting their salary in Bitcoin for doing it? I’ve not heard of such a Bitcoin economy yet. If people will write employment contracts, rental contracts etc in Bitcoin, I will consider it a currency. About the ups and downs – we are talking 20.000% in a year! – I don’t think that volatile, high-risk cash is a good thing. Not even risktaking entrepreneurs would like to live with it. Quite the opposite, we need reliable cash in order to take risks. You need to stand with one leg on the ground in order to wave the other one in the air. Options are for risktakters, you bet on the future, you win or lose big! Options require shares. Shares should be a bit less risky – it won’t make sense if the shares are riskier than the options. Sometimes companies need credit. We expect it to be less risky to lend money to an company than to invest money in it. Loans should be less a less risky placement than shares. It should be less risky to lend money to a government than to a company, so bonds should be less risky than loans. It should be less risky not doing things with money than doing things with it (in the short run, that is), so cash should be less risky than bonds, loans, shares and options (in that order). If cash is going haywire, what do you think happens to all the instruments that build on it? – bonds, loans, shares, options. Charlie – ould you dare place your mortgage in Bitcoin? If you lent Bitcoin to someone, how would you guard your interests? The interest rate should cover the risk you are taking. How do you calculate that risk in Bitcoin? How much should the interest rate be on a mortgage in Bitcoin? A currency needs to be stable for people to be able to engage in ventures.

    • Zefrum

      It is actually with intrinsic value as it, unlike any other money/currency, is useful to process payments.
      Whereas an intrinsic property of Gold is the making of Jewlery and ornaments; Bitcoin’s intrinsic, though wholly virtual, value lies in is its payment processong network. Which, as the Fed Chairman himself noted, the ability to transmit money effortlessly and far cheaper then ofher money networks (ACH, SWIFT, Visa, Master Card, PayPal, Money Gram…)

      .:

  • Zefrum

    Did anyone here worry iaa the dollar went from .69 CAD to 1 CAD? Truth is most weren’t even aware of it (Im 99% confident)
    The reason why is because that took about 2 decades of coordinated central bank planning. With BTC, you and I and everyone else coordinate to figure out what this BtC thing not only “IS” but worth.

    Welcome to the first FREE MARKET

  • Tom

    Interesting article (and discussion).

    I agree with your point that it is more akin to a commodity than currency (which are IOU notes for the commodity they are backed by). However, I feel like we are being constrained in thinking in terms of commodity and currency being separate things. That has always been necessary with physical commodities, but not so with Bitcoin.

    Bitcoin is both the commodity (limited resource) AND the currency (what people use for purchase/exchange). This is a new model, and one that is still not well understood by anyone.

    In my mind, for Bitcoin to succeed it needs to pass a point of adoption (from users and vendors) that allows it to stabilise before any dramatic crashes prevent it from reaching that point. If we can get to that point, then I think Bitcoin (and other crypto-currencies, such as Peercoin) will succeed.

    • dnordfors

      Tom, I’ll agree with you that Bitcoin is a currency when
      a) Bitcoin gets a regime – human or otherwise – that protects it against speculation, like any functional Central Bank does with its currency.

      b) It’s backed up by an economy trading in it. If people can live by the Bitcoin, manage both income and expenses, then it works as a currency!

      • Zefrum

        BTC has a ‘regime’ its Peer to Peer; otherwise what you are suggesting is just illogical.
        Speculation is another’s price discovery. Not all BTC have been mind and its known how many and how long it will take.
        The other reason for its explosive growth to USD is BTC is reaching a ‘critical mass’ for not just adoption but as a fungible thing -called money. Thereby those adopting and usinh the currency understand its value and ‘ASK’ more for its fiat convertability.

        • kittycatdestroyer

          None of us want protection from speculation. Central banking as it exists today is corrupt. Banks can only profit on the debt of its users. We don’t someones gun at our heads forcing us to use a currency, it is valued because it is more effective in storage than a fiat currency ever could be due to the inflationary nature of the PRIVATELY OWNED AND CONTROLLED federal reserve. They have the power to print money as they wish effectively stealing the value of the currency we are supposed to be using. and to cover your last point me and many fellow redditors have bought all of our christmas presents with bitcoin thanks to emerging businesses such as GYFT.com.

          to sum up. If i put 100 dollars under my bed and one bitcoin wallet with .1 bitcoin. which would be worth more in 100 years?

  • Zefrum

    Intrinsic value; its interesting thing to discuss and an easy way for some to call a thing a bubble or without worth.
    In evaluating corporations for equities analysis, we often see “intangibles”; and no one really has a problem with this (if the IRS says yea would you say nay (to intellectual property that is)? So really BTC is an intangible with tangible value like corporate intangibles have tangible value. Google.com is very valuable.
    But now we have a market for imtangibles with an intangible unit of account (taking time for adoption though)!

    What exists on the internet is all intangible, but it does exist, and certainly does have value. And in a virtual world, that you participate in, by reading my intangible words, you should see virtual things do indeed have intrinsic value.

    I hope the author is not offended from all that is written and does as he said he would do; by taking with his computer what all these virtual commenters have hashed out online here for him and pens an article that displays virtual property, like these ideas. does exist and thereby does have intrinsic value; just as our perception of reality with paper dollars has an intrinsic digital analog of binary coins.

  • FreeJack

    Here’s the thing. The volatility you see is because a relatively small number of people (compared to the potential user base) are causing the fluctuations. It’s due to day traders, basically. However, as Bitcoin inches closer and closer to mainstream acceptance and wide adoption, those fluctuations will become increasingly smaller – because individuals cannot sway the market as wildly and it will lose its attractiveness to day traders.

    There are tools being developed that allow retailers and vendors to accept payments using Bitcoin while still minimizing their exposure to the volatility, by instantly converting the Bitcoin into their local currency and depositing it into their bank. Unlike Bitcoin, they’ll have to wait 2-3 business days before it makes it there, because the banking system is totally antiquated and not designed for 21st century commerce. But it does reduce their worry about losing value due to a price drop and it allows them to take a frictionless payment with a MINIMAL fee (compared to the ridiculous fees the banks charge for payment processing).

    What you are looking at is the now. You aren’t looking at 10-20 years from now, when this currency (and it IS a currency) is ubiquitous and can even be spent by scanning a QR code at the local 7-11 point of sale system. Imagine taking a trip to Europe and everywhere you go, you can buy things in Bitcoin or Litecoin…and you can see instantly that the price is equivalent to what you can get at home, or not. We live in an era where technology has vastly outpaced the banking system and where people around the globe are increasingly frustrated by their government’s inability to stop devaluing their national currencies. Do we really put so much faith in the Fed and our government (or any other in the world), not to further debase the value of the currency? Because if you look at the purchasing power of the US Dollar today versus 20-50 years ago, I think you’ll find it a pretty sobering experience.

    • dnordfors

      Interesting thought. So IF Bitcoin becomes THE global currency in which EVERYTHING is traded, THEN ALL the money in the world, 5 trillion dollars, will be completely replaced by the 21 million Bitcoins that will come into existance. IF that will happen (I don’t think it will) ONE Bitcoin will be worth $250.000. This will happen next year at the present increase of exchange rate (20000%/yr). Does it seem reasonable that Bitcoin will replace all other currencies in 2014? I don’t think so. At present exchange rate, Now, the roughly ten bilion Bitcoins that exist today should at this moment, at this present exchange rate, have the value of 0.2 percent of all the money in the world money reserve. Money gets its value from trade, so in the case this is the true value of Bitcoin (and I don’t think it is) then 0.2 percent of the Global GDP should be in Bitcoin by now. The global GDP is about $85 trillion in purchasing parity, so the Bitcoin GDP should be roughly 200 billion dollars today. Unfortunately I can’t find the Bitcoin economy GDP listed anywhere, so it’s difficult to say. However, IF Bitcoin has a GDP of 200 billion dollars in purchasing parity, that would make it slightly larger than the economy of Finland today.

      • kittycatdestroyer

        Dude stop spamming, we’ve all read it.

  • Eco Hag

    You seem to be in the wrong business as you plainly have little or no understanding of economics.

    Why do you feel this irrational desire to convert everything back into fiat after every transaction?

    “Do I have a hole in my head?”

    I would check – yes.

  • Eco Hag

    “But Bitcoin investors seem to be living on a different planet. While gold has gone down since 2012, Bitcoin has soared from $5 to $1,000″

    Gosh – you are so close to getting it right there. Everything you need in is that sentence that you, yourself wrote. Come on now – think!

  • Eco Hag

    “Now trust in the dollar is coming back.”

    Now that is just quoted for posterity.

    +1 this if you trust the dollar
    -1 this if you, umm, don’t

  • Joe T

    Most of the articles on bitcoin (like this one) are very negative. A tulip bubble does not exist when (1) most people hate the investment; (2) you don’t know anyone personally who owns bitcoin; and (3) everyone is calling it a bubble. A bubble is when everyone loves the investment; owns as much of it as they can, they borrow money to invest even more, and the average joe is all in.
    This bull run in bitcoin is so incredibly early – you have to have a broad and open mind to understand it and appreciate how it will explode in value over the years. Don’t misinterpret these huge runs bc the market cap needs to (and will) explode. There will be a global currency after this pure fiat currency experiment of 40 years fails miserably bc governments keep printing. Bitcoin has all the features of money and is LIMITED. When these government currencies collapse as this debt crisis rears its ugly head again (as it must), everyone will flock to bitcoin (and to gold and silver to some extent). Detroit is merely the tip of the iceberg. Good luck!

    • dnordfors

      There exist perhaps 10 million bitcoins, right now fluctuating wildly around en exchange rate of $1000. That’s a market value of perhaps ten billion dollars. That’s quite a bit, I’d say. I hear you saying that the value of the Bitcoin lies in the doomed future of national currencies. I cover that scenario in my column.

  • Milly Bitcoin

    You are making a common mistake by investors in failing to see that Bitcoin is several things. A currency is a general terms that applies to anything that can be traded. Maybe you mean “legal tender” and Bitcoin is not that so that is an issue. It is not clear how such a thing will be used in the future.
    Bitcoin is also a commodity, a payment system, and an underlying protocol. You cannot separate all things when evaluating its value.
    As for volatility and adoption, Bitcoin is in its experimental stages and the liquidity among exchanges has not yet matured. I don’t see how you can make long term conclusions from what you see now.
    Bitcoin is seeing a steady linear growth if you look at software downloads, merchant adoption, etc. there is a huge increase in the number of people discovering Bitcoin and a lot of hype. However, there is still an underlying value.

    • dnordfors

      I think Bitcoin is thought-provoking and in many ways promising. I hope a working peer-to-peer delocalized system will emerge, something like an “Internet of economies”. I am concerned that Bitcoin won’t survive it’s own hype. How many people are there out there who put their money in Bitcoin because of the hype alone? Hype creates bubbles and bubbles burst. We need a Peerbuck that can’t be hyped and gamed, where the value of the Peerbuck always is set to enable the maximum value creation in the system: you want to live in a nice apartment, have good healthcare, send your kids to school, drive a car, take a vacation during holidays. You can do that if you live by the dollar, by the Euro and by the Krona. They enable us to commit to one another, to create and deliver value to one another. We can’t do that with Bitcoin as long as the best value in Bitcoin lies in putting it in a sock and waiting for it to rise against some other currency and get rid of it when we think it’s high enough. A currency enables exchange. Would you buy a house and set a mortgage in Bitcoin? If not, it’s a crappy currency.

      • Milly Bitcoin

        It is an experimental system that does not yet have liquidity. It is like coming to conclusions about the Internet in pre-Netscape days. It is overhyped at the moment but that not taken away from its fundamental value. The .com bubble is a good example, there was hype and overinvestment but you still have underlying value that may survive. If you try to compare to established systems you will most likely be disappointed.

        • dnordfors

          I am for testing new ideas. As I said, Let’s treat Bitcoin as an impressive technology, a financial experiment, a social phenomenon. Right now it’s an experiment evaluated to ten billion dollars and nobody can say what value creation or GDP that corresponds to. The innovation economy needs to learn how to introduce new groundbreaking ideas without them turning into bubbles. The .com bubble was a huge setback that cost a lot of people their savings and spread immense distrust. The “Subprime” bubble was the same, we are still suffering from it. All the people who own Bitcoins today have a strong incentive to keep the exchange rate going up. There needs to be built-in incentives, built-in feedback loops, that stops bubbles from happening.

          • Milly Bitcoin

            The exchange rate is external to the Bitcoin protocol itself. Bitcoin is so small and things like USD and Euro so large that people sometimes lose sight of the fact that exchange rates are relative to something else.

  • Joe

    It really don’t affect the merchants.
    When bitcoin is low eg 600, the merchants would like to keep
    it and exchange to USD later when the exchange rate goes up.
    When bitcoin is high eg 1000, the merchants would made the exchange immediately.
    whether the value of the bitcoin is high or low will be determined by the owner of the shop. The willingness to trade using a bitcoin will also be determined by the shoppers.
    I might not be willing to trade bitcoin to buy a laptop, since the value of the bitcoin tomorrow might go much higher. But I really dont mind to use bitcoin for a cup of coffee.

    • dnordfors

      What determines that 600 low and 1000 high? A year ago, 60 would be very high.

  • Guest

    I’m not even going to bother trying to explain bitcoin to someone who honestly believes central banks are their for your well-being

    • kittycatdestroyer

      HAHAH If I could bitcoin tip on this site you’d have made yourself a few satoshis ;)

    • Guest

      Im not even going to bother thinking somebody who doesn’t know the difference between ‘There’ and ‘Their’ can possibly understand anything about economics or how currencies work. If any of you out there own a single bit coin and have not sold by now….good luck to you.

      • Zefrum

        Thats pretty lame; lots of people mix up words that sound the same but are spelled differently, and by no means is this a reason, it is an excuse as a guise on the commenters impotence in argument.

  • dnordfors

    Here is a thought: IF Bitcoin becomes THE global currency in which EVERYTHING is traded, THEN ALL the money in the world, 5 trillion dollars, will be completely replaced by the 21 million Bitcoins that will come into existance. IF that will happen (I don’t think it will) ONE Bitcoin will be worth $250.000. This will happen next year at the present increase of exchange rate (20000%/yr). Does it seem reasonable that Bitcoin will replace all other currencies in 2014? I don’t think so. At present exchange rate, Now, the roughly ten bilion Bitcoins that exist today should at this moment, at this present exchange rate, have the value of 0.2 percent of all the money in the world money reserve. Money gets its value from trade, so in the case this is the true value of Bitcoin (and I don’t think it is) then 0.2 percent of the Global GDP should be in Bitcoin by now. The global GDP is about $85 trillion in purchasing parity, so the Bitcoin GDP should be roughly 200 billion dollars today. Unfortunately I can’t find the Bitcoin economy GDP listed anywhere, so it’s difficult to say. However, IF Bitcoin has a GDP of 200 billion dollars in purchasing parity, that would make it slightly larger than the economy of Finland today.

    • Zefrum

      You are on the right track, except currencys dont have GDPs, they have Market Capitalizations

      • dnordfors

        An economy backing up a currency has a GDP. When the GDP changes, the exchange rate of the currency is affected accordingly. GDP is a major fundamental indicator on the Forex market.

        • Zefrum

          This is true, but this is not how you speak about finacial products.
          Its like saying Stock XYZ has NNmm in revenue for the year. This maybe the case; but in finacial parlance, stocks are spoken of interns of market value, that is capitalization.
          Furthermore, when speaking about how big a currency or stock or crop maybe, we do not speak about their indicators neccisarily, but how much of it there is.
          Recall, the ‘Guest’ I replied to was comparing the size of Bitcoin to the size of other currencys. So why on earth would you think its suddenly currect to talk about their indicators? Just doesnt make sense.
          Dont you have a PhD in physics? You of all people should know about apples are apples and not oranges. Newton did anyhow…

          • dnordfors

            Yes I have a Ph.D. in Physics. Newton did NOT say that gravitation is different for apples and oranges. His whole idea is that it’s the same.
            Can you tell me how you calculate the correct exchange rate for Bitcoin? Present the Forex fundamentals.

          • Zefrum

            Omg, i was being facetious- that is the cliche of “apples to apples” when juxtaposing two things. I was not suggesting that heavier things fall faster than lighter.
            My questioning about you having a PhD in physics is that you should be able to perform actual analysis and not mix up terms!

            The fundamentals for Bitcoin are all over this articles comments, most are mine.
            But re-hashing, Bit Coin is a shift in paradigm; BTC has the potential to be a currency, not just money, where in its common to transact in AND no government can debase it and no government can fully restrict it. Bitcoin is the sole of the gold standard in a digital visage.
            Everything else are just details that the world wide market will decide as evident from its asked and bid price.

          • dnordfors

            It’s really not my fault that you connected Newton and Apples – everyone knows this points to gravity. You picked the one single guy in the universe that makes “apples and oranges” mean “DON’T separate them”. I like the twist.

            I see you saying Forex fundamentals can’t be applied to Bitcoin. I agree. Bitcoin is not a currency.

            Yes, Bitcoin is like virtual Gold. As I wrote in my column, gold is much seen as an air raid shelter for investors when currencies get shaky. The gold market is known to be very volatile. This is because gold is not well explained by fundamental analysis (except in times of financial crisis). Investment decisions are based on technical analysis, if any analysis at all. 100% speculation. I can not see how Bitcoin can become currency unless some country or a similar economic entity adopts it as its currency.

    • Zefrum

      Price discovery. Ok? Do you understand this is a new thing? And a lot of people have to first get this new thing before everyone know what this new things is worth?
      Oh and this new thing has only been used for less than 4 yrs.
      Yea, money gets its value from trade, but this new thing is not used yet for all trades, used used very little actually and thats why its not worth what you think it should be because your stupid calculations are not models for how things work on planet earth.
      A model has assumptions to correct what is the end result for time or anything else that exists in the real world. If you make the assumptions for adoption then BTC is worth what it is right now because the current market participants make it so. If you wanna say it will be worth XX in 3 months, all else being held equal, go ahead and say it, but rambling on about perfect fair value only makes sense if you take into account thise that are actually using it and have it and can buy stuff or sell stuff with it.
      Geezus!

  • dnordfors

    Here is a thought about Bitcoin. I’m shooting from the hip here, perhaps someone who knows economy can comment: IF Bitcoin becomes THE global currency in which EVERYTHING is traded, THEN ALL the money in the world, 5 trillion dollars, will be completely replaced by the 21 million Bitcoins that will come into existance. IF that will happen (I don’t think it will) ONE Bitcoin will be worth $250.000. This will happen next year at the present increase of exchange rate (20000%/yr). Does it seem reasonable that Bitcoin will replace all other currencies in 2014? I don’t think so. Now, the roughly ten bilion Bitcoins that exist today should at this moment, at this present exchange rate, have a value equivalent to 0.2 percent of all the currencies in the world today, from Dollars to Rupies.

    Now, money gets its value from trade, so if 0.2% of the cash is in Bitcoin, then 0.2 percent of the Global GDP should be in Bitcoin by now, right? The global GDP is about $85 trillion in purchasing parity, so the Bitcoin GDP should be roughly 200 billion dollars today. Unfortunately I can’t find the Bitcoin economy GDP listed anywhere, so it’s difficult to say. However, IF Bitcoin has a GDP of 200 billion dollars in purchasing parity, that would make it slightly larger than the economy of Finland today.

    As I said, I am not an economist, I don’t have any reputation to lose if I am wrong. This is what’s so great about having a degree in quantum physics. I can go around talking garbage and still be considered intelligent. So come on punks, make my day!! Prove me wrong! And you know, I’ll be happy to be wrong on this one!!

  • darkside

    Reminds me of the .com erea, crash of the housing market, banks.Where someone got the idea of cashing in on innocient investors. an idea backed by nothing,supported by nothing,and worth only what the speculator has hiped it up to be worth. conjecturing. an investment involving risk with hopes of large profits.
    To fish without a hook is senseless, Use a hook and might snag a fish. But bait the hook and put it in the water you surely will catch a fish eventually.
    This seems to be what is happening to the people that have been told that the United States is falling off a clift and have gotten scared and are taking the bait. Of course there will be a few that so called got in early and made it big. ((bait that was planted several years back.)) now bragg about how much they made,sucker in now blindly shocked and scared here is my money let me have some of this gold mine Fully believing it a good deal.
    Now the real money is here. In the begining some made a drop of money but only a drop in a 10,000 gallon barrel.The creators of this bitcoin go to the camen islands undetectable,ever wonder why ? So you or anyone else will know for sure who was behind the start of this bitcoin deal in the first place. and we are stuck here after the crash with the dollar rising and bitcoin falling and you will be spending $500,$1000,?$ for a gallon of milk with bitcoin Just my 2 cents .

    • Joe T

      It only reminds of dot.com and real estate bubbles bc the price is going up. When u think about it, it’s the complete opposite of a bubble: NO ONE YOU KNOW OWNS IT (compare to dot.com and real estate where ALMOST EVERYONE had it and many were borrowing to buy more); ALSO in dot.com and real estate, the average person who would not otherwise be an investor was invested heavily in it. ALSO, those bubbles were determined to bubbles after the fact, not while they were occurring. Bitcoin is an investment which almost NO ONE owns, almost everyone hates, the average person doesn’t even know what it is, and those who comment on it generally “know it will fail” and that “it’s a tulip bubble.” An investment that is hated more than gold and silver were hated in 2002 has only one way to go.

    • kittycatdestroyer

      and you are one of the jackasses who cant wrap his head around the fact that bitcoin is easily dividable and does not require one bitcoin as the smallest unit of value.

      compare these two:
      http://bitcointicker.co/
      http://www.usdebtclock.org
      I for one prefer a deflationary commodity to a trash inflationary currency. Being severely mishandled by the government that makes it “more legit than non currency” psh. let the market dictate what it is worth. Not the swindlers in the fed reserve.

  • http://guppylake.com/nsb/index.html Nathaniel Borenstein

    That was a very thorough and convincing article, even though it only included about 10% of the good reasons to be skeptical about BitCoin.

    • kittycatdestroyer

      hahah go ahead be skeptical. Meanwhile its made many of us millionaires

      • Tyhudg

        It can make me a millionaire? Are you saying I should buy bitcoins? Or waste electricity trying to mine them? Its not going to make people millionaires now, it is going to do much the opposite.

        • kittycatdestroyer

          hold hold hold.

  • paulej

    For some reason that I don’t fully understand, people seem to think Bitcoin will replace fiat currencies. I don’t think any of the long-time supporters of Bitcoin believe that, and I certainly don’t think that was the intent from the outset. Rather, it is a competing currency that derives its value from global usage, ease of use, etc.

    What Bitcoin really means to the world is that anyone can easily buy goods and services over the Internet, across borders, and without paying fees (e.g., 3% “foreign transaction fee”) or, in the case of merchants, being punished with “charge backs” and hit with 2.9% + 0.30 in transaction fees. Bitcoin is a currency built for the Internet.

    Bitcoin’s value rose significantly this year, but it’s still only a very small number if you look at it. The total value of all bitcoins is less than the *profit* Apple earns in just one quarter. That suggests there is still a tremendous amount of room for growth. Nobody denies that it is a speculative market. However, given the size of the addressable market, there is still significant growth potential.

    Now, I said I don’t believe the creators set out to create something to replace the fiat currency. That said, if the fiat currency in some country does fall flat on its face, then Bitcoin is a good substitute. The value of Bitcoin is supported by the global economy, not just the national economy. I think this is why there is such an increase in interest in countries like Cyprus.

    I think the author totally missed the point and value of Bitcoin trying to compare it to the tulip bulb,

    • Hmm…

      Well stated Paul. Like many, I’m still trying to get my head around
      this bitcoin thing. At first it seemed like a scheme. But because of
      its efficient, e-commerce benefits, it promises to become a successful
      means of transferring wealth and purchasing products and services.

      That said, there seems to be a few issues to consider:

      1) I’ve heard peoples’ accounts have been hacked! Do I want to risk losing my funds when using this commerce tool?

      2) Volatility. If I purchase a car for 20BC (~$18,600), I would not want to learn that it ended up costing me $20,600 because of BC to $ exchange rate changes. Granted, this issue may be a short-term issue until more people use the BC service and things get stabilized.

      3) Price/bitcoin. If there are only 21 million bitcoins and the world net
      worth is ~$223Trillion, and if the Bitcoin becomes universally
      accepted, the world will be worth 21 million bitcoins. Then, each
      bitcoin will be worth $10.6 million dollars and it will cost you
      0.000000094 Bitcoins to buy a cup of coffee. Could be a bit awkward….

      4) What is the deal with the mining? I guess it is to ensure the bitcoins get handed out slowly, but I’m not sure why this matters. Perhaps it was a pseudo-random method of distributing the bitcoins.

      5) Transparency. Does anyone know who is controlling this process? If it “breaks” who’s gonna fix it? Can anyone explain the mining algorithm to us? Seems to be a lot of blind faith involved with this system. Yes, we do the same with our US-based system, but there is SOME transparency and responsibility integrated into that system.

      Will be interesting to see how this all plays out!

      • paulej

        Just to reply to your points:

        1) Yeah, hacking is an issue. If one does not properly secure his bitcoins, they are susceptible to theft. And like cash, if they are stolen, they are gone. Most of the hacking has been related to people using exchanges or using something called a “Brain Wallet” where the passwords are easy to guess. Some even build robots that look for wallets using a set of passphrases. There are some solutions that companies like Coinbase could offer. I look at Coinbase as like the “Bitcoin Bank”. They could securely store your coins for you, much like banks stored your gold or dollars. There is also a physical device one can use to store coins called “Trezor”.
        2) This has been a problem, but fortunately bitcoin has generally risen in value over time. So, volatility is not such an issue as people make it out to be. It generally hurts those who wanted a short-term “investment” for a quick profit. Those who hold coins and those that buy coins for the purpose of immediately making a purchase are largely unaffected.
        3) Indeed, but there has been a long-established solution for that. Things are priced now in mBTC (milli-bitcoin) and there is also micro-bitcoin and satoshi units. (There are others in between). Your cup of coffee would be 9.4 satoshis.
        4) Making money from mining is a side benefit. The purpose for mining is important: that is what establishes the “block chain”. Basically, miners insert transactions users make into a “block”, solving a complex math problem as they do that. The complexity is there to reduce the rate of bitcoin rewards (goal = 10 minutes per block) and the produced work everyone benefits from, as it serves as evident that you sent or received coins.
        5) There is no central control over Bitcoins. It is a protocol that was defined and– there it is. There are several different bitcoin clients that implement the protocol. There are extensions being developed to the protocol, but the underlying protocol is not owned or controlled by anyone, and everything else is done in collaboration like other open source projects. If something breaks — and it has before! — then those maintaining the open source projects will fix it. Go to bitcointalk.org and you’ll find things are extremely transparent.

  • Quarkcoin

    Your last point about the latte is completely irrelevant and a prepubescent analysis of a non-existent problem. You can probably answer your own question if you spent a few minutes to logically think about it. This is economics/logic 101.
    If you want an answer, look into companies such as Bitpay or Coinbase and stop posting your subjectively premature criticisms of a tehcnology that you obviously don’t understand

    • dnordfors

      You are not answering my question, you are shifting the burden of proof. It seems common among Bitcoin proponents. That does not reflect well upon Bitcoin as an economy. OK, so let’s take something else than a latte, then: Explain Bitcoin exchange rate in terms of the Big Max Index, the “guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services” as the Economist puts it. I’m guessing you will say the Big Mac Index, too, is an “irrelevant and prepubescent analysis of a non-existant problem”. You will be right, it’s not relevant and it’s not an existing problem, because McDonalds would go bankrupt if they priced their burgers, set the wages of their personnel and wrote rental contracts in Bitcoin. If Bitcoin is a good currency you want to make business with it. But you don’t.

  • kittycatdestroyer

    That wasn’t a pun. What area does your expertise lie? because It obviously isn’t writing, and due to your flawed logic of value and bartering makes me think you couldn’t have a degree in anything mathematical past about a 4th grade level. Leave the math to the experts buddy, do some research.

  • http://www.facebook.com/profile.php?id=1103976604 Barb Short

    “It is not backed by an economy using it as the standard medium of exchange.”

    That’s the heart of the matter and that’s your mistake.

    Bitcoin has a small — too small — economy using it as a standard medium of exchange, and bitcoin will succeed only if it gains a _large_ economy where it now has only a small one. The concerns about wild fluctuations put the cart before the horse. A large economy using it as a standard medium of exchange is the thing that can stabilize prices. It is vain to hope that prices will stabilize first and then later that economy can grow. The bitcoin economy is growing. Whether it will grow enough for bitcoin to succeed remains to be seen.

    • dnordfors

      Barb, launching a new currency is a chicken-and-egg thing. I dare write a rental contract in Swedish Krona because I know nine million Swedes are doing it and they are doing OK. I would consider myself reckless to write a rental contract in Bitcoin. Bitcoin can gain reputation by publishing the number of long term commitments – such as employments, rental contracts, service contracts etc – that are made in Bitcoin.

  • Ibrahim

    Wow, how is it that people keep saying bitcoin has no intrinsic value? Paul Krugman is humiliating himself…

    Bitcoin is a store of value and a currency that is backed by its value as a payment system. Furthermore, the volatility is an asset because it acts as a draw to speculators. Although gambling is wrong, the desire to get rich quick pulls people into the ecosystem. It would be better if people got involved to stop supporting the corrupt banking system.

    Bit coin is a perfect storm, combining a revolutionary decentralized payment system, an antidote the fundamental flaw of national central banks and their paper money (not backed by anything? Sound familiar???), a fix to the difficulty of dividing gold into exact change, and a pyramid scheme that can engulf the whole planet as fast as the growth of the internet.

    Humans fear what they don’t understand. Then they criticize what they fear. People instinctively don’t like bitcoin because they know it represents the end of an era. To quote bob Dylan “you better start swimming, or you’ll sink like a stone, for the times they are a changing.”

    • Zefrum

      1. You cant say its a “store of value” and also its “volatility is an asset”. Thats a contradiction in terms.
      2. Gambling is not wrong.

      Ibrahim, welcome to America; where what is wrong and what is right is defined by secular law, according to the Judeo-Christian ethic.

    • dnordfors

      Actually, I really like the idea of distributed, self-organizing systems, based on peer-to-peer interactions. If they can emulate what central banks do to protect currencies, perhaps it can work?. Bitcoin is showing very serious flaws in its self-organization. It’s gone into a positive feedback loop – the microphone is too close to the loudspeaker. The next experiment – I hope there will be one – should include something in the protocol to take care of it.

  • jbringer

    My problem with bitcoin is the open-source platform. While open-source can be great for a lot of applications, I feel it creates a real security problem if everyone has access to the code. On another note, I don’t think the way users currently earn bitcoins is sustainable. These activities (at least how I understand it) will inevitably be replaced by a bot at some point in time.

    • dnordfors

      I agree with you that way Bitcoin is uses is not sustainable, this is the main reason I believe Bitcoin has failed – because there seems to be no mechanism for attenuating hype and counteracting bubbles. I’m supportive of open-source, distributed systems and peer-to-peer, in principle. Security in Unix is not worse than in Windows.

      • kittycatdestroyer

        Bubbles are not bad. Bubbles are natural. Bitcoin has also not failed.

        • dnordfors

          Bubbles are not bad? The recession we’ve gone through, following the subprime bubble, has not been bad?? The Spanish real estate bubble that by now has led to 25% unemployment is not bad?

          • kittycatdestroyer

            nope. That is market correction to government manipulation of the value of the global currency, and the demand of goods/services.

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  • Brad

    The simple fact that one cannot use “bitcoins” without stating how many “dollars” it is worth in the same sentence, makes it doomed for failure and forever tied to other currencies. Those who truly think bitcoins are the future wouldn’t need to worry about the “dollar value” that it currently has, if the dollar and all other currencies are going to zero in the end right?

    Stated another way. People say they have been able to “make millions” (which sure they have as of now, if they exchange back) but why would they care if these millions will soon be worthless as they so think

    • Zefrum

      Its called a trade; and if your logic were true, then no one could make money on any financial instrument at all!

  • Dennis

    I like you article David, but speaking of Tulips: Prices stabilized over time and and tulips have become the success story of the Netherlands, contributing a large portion of their GDP with flowers ;)