If nothing else, watching the up's and down's of Bitcoin is a motivation to think about what life would be like in an economy where currency is volatile.
When I was young in Brazil we had an inflation rate that was crazy ( 1985+ )
I remember my parents getting their paychecks and running with me and my brother to the supermarket which was CROWDED to get the whole month supermarket done. If you waited 3 days or so you would not be able to buy all the food you needed.
It is terrible I can assure you that.
Here is the kind of inflation I am talking about.
"It stayed in the 100% level until the mid-80's and then grew to more than 1000% a year, reaching a record 5000% in 1993." Wikipedia.
I have some "over printed" bank notes and postage stamps from the Weimar Republic. The money would be worthless by the time they got it printed, so they just ran it through another press to add more zeros. My grandparents lived through that.
That is a great way to establish an aristocracy, where only people who are already wealthy can ever start or maintain a business. What do you think venture capitalists are? They are creditors, whose loans enable people to start businesses they could not otherwise afford. Your great idea for disrupting some old entrenched industry will almost certainly need to be funded, and if you are not already wealthy that will mean taking on debt.
Not only that, but there are plenty of people whose businesses need to take on short-term loans to remain competitive. Maybe your business is profitable but you do not have enough capital to fill a really big order -- which could be a great opportunity for your business to grow. If you are not going to take on any debt, then the really big order will be given to your competition, and eventually your business will fail.
Debt is not universally bad; there are a lot of cases where debts make sense. Debt is bad when you cannot repay it, which is why deflation is bad.
I would argue that if the global economy operated on a fixed-supply currency, there would be no aristocracy. Those with the largest stash of currency would have to spend some of their wealth in order to realize its benefits. This spending would naturally result on a more even distribution of wealth.
It also wouldn't be the end of debt - just the end of the ridiculous debt-for-life system that most people live like today.
"I would argue that if the global economy operated on a fixed-supply currency, there would be no aristocracy. Those with the largest stash of currency would have to spend some of their wealth in order to realize its benefits. This spending would naturally result on a more even distribution of wealth."
You are assuming that the richest people in the market would not have any income at all. I think that assumption is pretty dubious. Sure, they will spend some money; but all they would need to do is balance their budget, and they would remain rich perpetually since the currency has a fixed supply. In fact, if their income was larger than their spending, they would actually become wealthier over time, as they removed more and more money from the market and took advantage of deflationary effects.
Yes let's turn back the economy to the situation before 1940, when most normal people couldn't get credit. What could go wrong ?
The GFC being the a chain reaction started by ~2% less borrowing you say ? Nah, that won't happen "this time".
Like it or not, our economy is based on forgiving debt at the rate of inflation. And it's better than what came before. Can we please stop deluding everyone else ?
No. Like if you have a debt in a deflationary currency.
Start with this: you owe 10% of your income this year as payment for debt. Suppose this is a mortgage and you'll be paying the same amount for the next 15 or 30 years.
Assume that under either inflation or deflation your salary/income changes each year with the inflation/deflation rate. [1]
Inflation rate of 3%
Deflation rate of 3%
So year one you pay 10.00% of your income to debt.
Year two: Percent of income paid to debt under inflation is 9.70%. Percent of income paid to debt under deflation is 10.30%.
Year ten: Percent of income paid to debt under inflation is 7.66%. Percent of income paid to debt under deflation is 13.05%.
[1] We already know this isn't true for many people under inflation, though it hopefully averages out to better than inflation over several years (between bonuses, pay raises, pay bumps from changing jobs). The same will likely be true under deflation.
With deflation (i.e. prices drop so the purchasing power of $100 rises over time) you lose if you're selling a product/service with fixed costs or paying off a loan while your salary is dropping. With high inflation (i.e. prices rises so the purchasing power of $100 drops over time) you lose if want to buy a certain amount of products/services and your income is not rising as fast. I'm not an economist but both are bad.
This is exactly like how nobody ever buys cellphones (or any other electronics), because those prices are always falling and you could just wait and buy a better one next month.
The worry with deflation isn't that all of a sudden everyone will literally stop spending money ever again. It's that it creates enough incentive to delay purchases and removes enough incentive to invest savings (rather than stuffing the money under a mattress) to shift the economy as a whole to a lower gear. The last time the USA experienced a period of significant deflation, for example, unemployment jumped to 25%. People tending to hold onto cash is the same thing as people tending to not be willing to pay others for work.
...which is an interesting use case as bitcoin as an alternative currency. Africa is full of migrant workers in less stable economies who need to send money home at low cost and with no delay. e.g In South Africa you can buy a code at a grocery store that you can SMS to your family back home, they go to their local branch of the store and get the funds by giving the code. But it costs and it's slower than BTC. Also banking in Africa is notoriously expensive due to the low per-account balances depositors keep. You pay to put money in, you pay to take it out.
A fertile environment for a currency ruled by the laws of nature and math rather than assholes and exploiters.
It's OK, thiagoperes, even people on TV have already confused HyperINFLATION with bitcoin price DEFLATION, so you don't really need to feel so embarassed.
In the end, the only people who know you did this are people in this reddit thread, and your userid is semi-anonymous.
What does he have to be embarrassed about? He was responding to a comment on the volatility of a currency. Hyperinflation and hyper-deflation are both forms of currency volatility.
The point of his response was that the extreme currency fluctuations led to prices constantly changing, as much as several times a day. (I had a client that once did business in Zimbabwe. On a trip to meet with local business partners in 2007, he purchased a meal outside the airport for roughly $1 billion Zimbabwean dollars. On his way back to the airport that afternoon, that same meal cost $10 million ZDs!)
The inevitable result of hyper-volatility in either direction is that market participants will simply resort to using alternative currencies that are more stable and more predictable. This is a problem for Bitcoin since it is an alternative currency.
Big sell off end of the year, but I'm hedging by trying to buy some now. It's a finite commodity of real utility and value. It's recognised as legal by the US government (and it's not anonymous).
I will be laughed at but I'm going to suggest this time next year it'll be worth $10000 per bitcoin :-D
A lot of people bearish on Bitcoin's future claim that it cannot last and the fad will be extinguished because it isn't backed by something, like gold, or a government. I would like somebody to explain why gold is inherently valuable, or why government support is necessary. All I've really read on the subject is that "gold is inherently valuable because it's always had value, historically." Could someone elaborate?
Gold is inherently valuable because you can use it to do things like protect circuit contacts from corrosion, or protect astronauts from solar radiation.
Government-backed currency isn't inherently valuable, per se, but for residents of many countries it's useful stuff to have because you need it to pay your taxes, and there's often a statutory obligation to accept it as a form of payment for settling debts.
Neither of those uses necessarily accounts for 100% of the value of either gold or fiat currency. (Arguably, not even close.) But they do place a kind of floor under their values. For gold it's a fairly absolute floor - there'll always be uses for gold, so it'll always have at least some value. For a national currency that isn't necessarily the case, as the case of the Zimbabwean dollar famously illustrates. However, when the currency is backed by a nation with a strong, stable economy then in theory (and, so far, in practice) that provides sufficient protection against the worst extremes of volatility.
Bitcoin, by contrast, is working without a net. Naturally that isn't a problem if it doesn't need a net. But there's an argument to be made that every currency is primarily fueled by human psychology, and every Dumbo likes to have his feather to hold.
Interesting, thanks. That puts it in more perspective for me. Although, still, it seems the term "inherent" might be a poor adjective to use to describe the system.
People bearish on Bitcoin's future price are usually the same people who are pissed that they didn't buy any bitcoins.
But often, something happens - they realize how incredible the technology is. Then they buy it, and suddenly they're bullish because they want the price to go up.
The price of gold is probably going to be killed to a very low ($50-100/oz?) price because the only thing keeping its value so high is how convenient it is as a store of manipulation-free value. However, bitcoins are far, far more convenient. And they will be even less subject to manipulation.
The features you just described are equally applicable to different kinds of metals/alloys. Arguably, other metals have even more practical applications. Why shouldn't those be more valuable than gold? In addition, the practical applications of gold you've just listed are, I expect, not what gold is normally used for. Economies, hopefully, aren't defined by whether their currency can make space equipment or electronics (especially since those are modern developments that predate the value in gold). So while what you've just said is true, it still doesn't fully answer the question.
> In addition, the practical applications of gold you've just listed are, I expect, not what gold is normally used for.
Exactly. Several countries have kept a reserve of gold for centuries, but probably not out of a fear that they will suddenly need a bunch of ductile metal.
The current price of gold is far greater than the values of all those things. If gold price was based on intrinsic value alone it would be worth considerably less than it is now.
I'm not arguing that the current monetary value of gold is appropriate; I'm simply answering the parent's question as to why gold was "chosen" to be valuable: it has many practical uses.
1. It's shiny: it can be used for jewelry and thus display wealth and power to fellow citizens.
2. It doesn't corrode, which means it keeps it value over time. You can store it in a a chest or a basement. (And like many metals, you can melt it into whichever shape you want, which makes it easy to seize from your enemies or taxpayers or whatever...)
All the scientific and practical uses you cite are recent (last century).
Before that, warriors didn't make swords with gold (other than decorative motifs), and craftsmen didn't build ships with it either.
"Investing" in metals today isn't limited to gold, you can invest into silver, platinum and other metals which aren't that different from gold with regards to interesting properties.
That's not the point. The question was why government support is necessary. What if the courts refused to recognize that Bitcoin is an asset? What if the courts ruled that a Bitcoin debt could be settled by simply starting your own Bitcoin alternative and making a payment with that?
Something I've been thinking about is if the entirety of currency in the US was represented in bitcoin (bitcoins were the currency rather than dollars), how much would each be worth?
So there is about $1.2 trillion in circulation [1]
and the cap for bitcoins is 21,000,000
This is actually... an interesting question, though badly put. The naive answer is that a 'correct' price is what someone else will pay for your good, and different people in different markets are willing to pay different prices.
The thing is, the prices at which trades are executed on different exchanges vary by more than 10%, and as far as I can tell, there's nothing stopping a single actor from participating on all exchanges at once.
Now, if the difference between the odds one bookie is offering on next week's met's games and another bookie is greater than the vig, someone is going to come in and arbitrage it.
at this moment
MT.GOX 954.00
BTC-E 858.21
Now, I'm pretty sure that none of the bitcoin exchanges take a 10% cut, so what's going on here? how come nobody is buying on the lower priced exchange and selling on the higher priced exchange? (or rather, how come that behavior hasn't resulted in fairly even prices across exchanges?)
It is difficult to withdraw USD from MtGox. There are large fees for bank transfers and it can take weeks for mtgox to process. For this reason, there are fewer sellers on MtGox which means the price is inflated.
There were a number of answers, but if you actually work out the math, outside of big jumps where one exchange may be moving too fast for people doing arbitrage, with all the fees and transfer costs, the prices work out to be about the same. So, BTC-E has a 1% fee, plus whatever cost it took you to do the International Wire Transfer (say $35 bucks). That already gets you to ~$900. So, you get into Gox and sell. Well, that's 2200 JPY, you have to pay for the wire, $920, plus your bank probably charges you $20 for receiving a wire, $940... and that's before the 4 weeks+ it takes for Gox to get you your money + the trading fees. It may look like there's room for arbitrage but the price differences, for the most part, do take all costs into effect.
(PS Yes, I know the wire transfer fees can be lowered in terms of percentage of the cost by transferring more money at once; it's just a simple illustrative example.)
It is EXTREMELY difficult to get money into BTC-E. You have to go through multiple currency exchangers which each take a cut of the action. It takes a lot of time and is annoying as hell.
The exchanges are illiquid as all hell, so arbitrage carries a lot of risk. Bitcoin is a nice demonstration that market efficiency isn't magic, but has underlying rational-actor mechanisms that will break down in exceptional circumstances.
There's no "correct" price. The price is dependent on exchange - it's a supply and demand aspect. All the exchanges do is reflect what the latest transactions respectively.
You could buy bitcoins in a private transaction for any price.
There is obviously some potential for arbitrage here but it's probably risky given the volatile nature right now.
As I understand it, exchanges where it's hard to get your money out as USD (e.g. Mt. Gox) have high USD exchange rates, whereas places where it's easier (e.g. BTC-E) have lower rates.
In theory if the exchanges were all equivalent in this regard then the rates would pretty quickly stabilize, because people would use USD to buy BTC low on BTC-E, send it (as BTC / for almost free) to Mt. Gox, then sell the BTC high on Mt. Gox for way more USD, and repeat and profit until the rates converge. (see "arbitrage") But it's not easy to get USD out of Mt. Gox last I checked, so that doesn't seem to happen.
Each exchange's price is correct - it's just price variation based on multiple factors, similar to how a can of coke can be priced differently in various shops. E.g. if you intend to trade with MtGox, their price is the one you should be concerned with. Virtual currencies are still a relatively minor market so there's more discrepancy between exchanges compared to, say, mainstream currency or stock trading.
"Which one is correct" is a philosophically hilarious notion!
but, the prices are different primarily because of cost (in terms of fees for wire transfers and third parties) of getting money in and out of the exchange, ease of doing so (gox is pretty cheap but is taking like 30+ days to get paid), and just access (much harder for chinese to be on gox than btcchina and china also has strict capital control laws that bitcoin seems to be an easy loophole around).
Similar to why cocaine is cheaper in colombia (or miami) than NYC or bumfuck kentucky.
https://cointhink.com/arbitrage/btcusd charts mtgox/btce/bitstamp and calculates the amount of arbitrage between the exchanges. It uses the orderbooks of each exchange to tally the amount available for arbitrage.
I'm not sure that the volume is reflecting an increase in demand, at least not a tenfold increase in demand in just a couple of months.
The increment in volume can be the consequence of increased daytrading activity. Once the price started shooting a lot of volatility was introduced in the system, which allowed daytrading. Many arbitrage opportunities also opened up, which probably moved the volume up as well.
Yes, it seems like bitcoin is catching up some speed, but I don't think that this sudden spike in price is demand driven.
Given that demand started from near zero in China, tenfold growth after legalization of Bitcoin doesn't surprise me at all. The movement in the BTC-USD market looks like arbitrage catching up to the Chinese activity.
In Hong Kong, they gamble more money on horse racing in a single day, than the UK does in a whole year.
In Macau, single card draw is popular, for an instant adrenaline rush, nobody wants to sit around a poker table all day to win what you can win in a few minutes.
How many people buying bitcoins are investors and how many people are just trying to buy something with a transaction that can't be traced back to them? That's a big draw to Bitcoin right now.
To investors, the price you pay matters. To people just trying to buy goods and services with it, it doesn't matter if Bitcoin is at $50, $100, $2000 or $20000.
It will, if the timeframes for these fluctuations are rapid enough. Imagine converting $1000 of USD you've converted this morning, and by tomorrow when you actually go in to place the order, the price has dropped to $800. You've lost $200 worth of purchasing power overnight!
Pretty sure no human is buying BTC at $1k, this spike has got to be HFT bots arbing across exchanges or making tiny trades, every human is thinking "cool im smart so ill buy when it crashes"
Litecoin is nearing $20 as well, and still relatively easy to mine. In fact, many of the altcoins are skyrocketing in value now that the Chinese exchanges have opened.
Would someone please explain how to interpret this or link me to explanation? The y axes are not labeled, and I am not familiar enough with exchanges to infer. Thanks!
The graphs are pulled from http://bitcoinity.org/markets which, if you click on the "wtf?" link in the top right, provides an explanation.
The line graph shows the current market price of 1 BTC, using the right y-axis which is in US dollars. It's overlaid on a bar graph of trading volume in BTC, which uses the left y-axis.
At least a tulip is an actual thing that looks nice, bitcoin is some data in a file that was created by pissing away energy, the perfect embodiment for the ridiculousness of modern economics.
It is mindboggling to me that people take it seriously. It is a perfect example of a tulipmania-like house of cards.
Anyone can still get into the market - you can pay $10 and receive a certain amount of Bitcoins in return. It's not like the housing market where high prices mean you can potentially not make a purchase.
EDIT: To clarify my comment - I meant the housing market as in the ability to buy a home outright.
Anyone can get into the property market with $10, there's lots of managed funds out there that deal with property.
But the reason people don't see the value in these is because you want to gamble low and win high.
These managed funds more accurately show the real market, not the in your head looking at the few people who bought really low and sold really high while ignoring people who have lost money.
(Yes housing is a little different since in many places there are tax advantages on property you'll only get if your name is on the dead.)
What they claim to expect and what they actually expect are probably a bit different. It wouldn't be surprising to see them sell much earlier than they publicly indicate.
1. As profitability goes up, more people join in, increasing the difficulty factor, reducing the profitability.
2. If deflation continues, you're probably better off just investing in coins.
Here's a profitability calculator where you can play with values (it starts with some reasonable defaults). (I can't tell if it accurately captures earnings from transfer fees though...)
