Value of Bitcoin "Crashes" 709
souravzzz writes with an update on the state of Bitcoin. Quoting the Ars Technica article: "Bitcoin, the world's first peer-to-peer digital currency, fell below $3 on Monday. That represents a 90 percent fall since the currency hit its peak in early June."
That's still three times its value in April 2011.
Re:Bitcoin (Score:5, Informative)
Re:Valuable lesson in currency... (Score:2, Informative)
Re:Bitcoin (Score:4, Informative)
No, the real problem is that bitcoin is not backed by anything. Old currencies were backed by a precious metal. If you had one Pound Sterling, then the Bank of England would give you one pound of sterling silver. Modern fiat currencies are backed by a promise from the government that they will accept them in payment of taxes. Bitcoin was backed by some pointless computation.
If a bitcoin had been a promise to do some computation work in the future, then it may have had some value, because people need computational work done. For example, something like Amazon's compute cloud could potentially back a currency, because the service of running a VM for some number of CPU seconds is fungible and - importantly - people actually want it. No one wants the work that is done to generate a bitcoin, so the coin itself is worthless. Its value is based entirely on the premise that other people will want it in the future, but that's just a pyramid scheme.
Re:Bitcoin (Score:5, Informative)
Can anyone explain the purpose of "speculators"? When I ask "What do speculators produce?" the answer seems to always be, "Speculators produce liquidity in the market."
That sounds suspiciously like when my mom used to say "Because I said so."
When speculators are right, they even out price fluctuations by buying when they believe a commodity is unreasonably cheap, and selling when it's expensive. The act of buying makes the 'cheap' price more expensive by taking some of the commodity off the market, and conversely selling when expensive makes the commodity cheaper at that time. In non-price terms, speculators soak up surpluses when they exist, and add extra supply in times of shortage.
When speculators are wrong or generally stupid, all hell breaks loose. Careless/stupid speculators buy in a rising market, driving the price up faster, then all sell at the same time when they realise that prices can go down as well as up, causing and then bursting a classic bubble.
Re:Crash? More like correction. (Score:3, Informative)
I think BitCoin is a great concept
Except that decentralized digital cash is inherently flawed, since the tokens will always grow linearly in the number of transactions they are used for. In other digital cash systems, this problem is solved by having an issuing authority (bank, government, etc.) that accepts old tokens and issues fresh tokens. In the case of Bitcoin, no such authority exists, so the tokens are just going to keep getting bigger, and eventually they will be too large to be useful.
What? I think you may have misunderstood some aspects of Bitcoin. You can easily divide and combine bitcoins in any way you want. You can combine one thousand 0.001 bitcoins to a single bitcoin, or do the same in reverse and divide. The smallest possible unit is 0.00000001 BTC.
Bitcoin is not perfect, but this is NOT one of it's problems.
Re:Bitcoin (Score:5, Informative)
Let's be clear here -- no currency is backed by anything, ever. Sure, "old currencies" were backed by a precious metal. What was that backed by? The answer to "why do currencies have value" is that _nobody knows_. The different schools of economics all have different theories, but macroeconomics is not, despite what people say, a science.
The theory backing bitcoins is largely based on the (non-mainstream) ideas of Austrian economics; which claim that currencies have value almost entirely because they are scarce, fungible, and useless. That is, their value as an exchange medium far exceeds their value as physical objects. Incidentally, Austrian economics is pretty much the only school of economics to openly acknowledge that it is not a scientific theory.
Fiat money qualifies easily -- nobody is burning dollars for heat or using them for wallpaper, and the scarcity is guaranteed by the issuing government (although easily abused, and sometimes catastrophically, which is why Austrian's tend not to like fiat currencies).
Gold qualifies with caveats; it's clearly "money", but it suffers from portability and verifiability problems unless it's minted into a form that is hard to reproduce (the old-old-school approach) or vouchers are issued that can be redeemed for stored gold (the newer-old-school approach). The vouchers then become money in their own right, since their scarcity is tied to the scarcity of the underlying metal, and they're just as fungible and useless. But almost universally, governments (and unscrupulous banks, and sometimes even scrupulous banks) abuse the fact that the holder of a voucher can't see the gold to steal the gold; effectively disconnecting the scarcity of the two. Same goes for silver, though less dramatic.
It's surprisingly hard to come up with examples of things that are scarce, fungible, and useless that are have not been used as currencies. Even things that violate one of these things is often used as money in a barter sense or in the short term (i.e. cigarettes in prison, wampum among east-coast Native Americans, Facebook game fun-dollars, baseball cards, or the Iraqi Swiss Dinar).
So this is what Bitcoins are -- they are nothing but pure scarcity, fungibility, and uselessness. The portability is nice, except that transactions are tricky (since there's no real "receipt" mechanism -- verifying that a customer has paid his bill requires funky gymnastics), all use of it is dependent on the accessibility of the internet, and the scarcity is conditional on there being sufficient computing power applied to the problem. But aside from those, it really should work. And the fact that they are worth anything at all (that people are willing to buy them at any non-zero price) is a big deal.
In terms of price stability, this is a complicated phenomenon; Austrian's generally do not consider price increases to be the same as inflation (a purely semantic distinction). What causes price changes are complicated, and can not be reduced to a simple rule, because at any moment, technological progress and other myriad phenomenon are messing with prices that affect, to a small extent, everyone in the supply chain of every business in the world, and that effect get compounded over time. The most visible form of this is the supply chain of money itself, through the mechanisms of banking and credit.
So why is the Bitcoin value so volatile? (Now we're in the realm of pure speculation on my part) Because there's no supply chain to keep prices stable. No supply chain of any sort; a restaurant that accepts bitcoins can not buy silverware, or food, or paper cups, or cash register tape, or POS systems, or pay rent in Bitcoins. There are no mechanisms for loaning bitcoins; in either direction -- there are no banks that will pay you to lend them your bitcoins, and no banks that will assess your trustworthiness and income and lend you the money lent to them. So the price floats, while people try to figure out how to provide baseline services (like web hosting), s
Re:Bitcoin (Score:4, Informative)
So to answer your question, yes, it's directly comparable.
Re:Valuable lesson in currency... (Score:4, Informative)
"The gold price is more based on a circular logic: It's valuable because everyone thinks so."
Incorrect. It's called intrinsic value and gold has it. It's hard to dig up and there's not much of it. It never deteriorates (silver does) and is easy to work/subdivide (platinum isn't). It is also highly portable and easily storable (vs oil, wheat, etc). Aristotle laid it out pretty well when he wrote that something used as money should have the following properties: Durable, Portable, Divisible, Intrinsic Value
Those are the reasons gold has retained it's status for thousands of years, and continues to do so today. See my sig for confirmation even from one of our modern economic 'masterminds'. I would suggest that somewhere around nothing has changed concerning the status of gold since he said that. The fact that it looks nice and can be worn is just a bonus that influences the weak minded.
Re:Bitcoin (Score:3, Informative)
It's also skewed, because even if it is true that inflation promotes investment (debatable), it erodes the savings (irrefutable) that are necessary for a robust economy. So the relatively affluent (who have money to invest) benefit, the relatively poor (who are merely trying to put away some money for a rainy day) suffer.
As I mentioned before, there are horror stories about the "swings" in U.S. (and colony) economies in the past. But those swings were fundamentally different than the booms and busts we see today, because the money supply remained virtually constant over time, and purchasing power always returned to its former value after any inflationary bubble (which primarily occurred when government borrowed money to finance wars). You could bury money in your back yard, and your great-great-great-grandson could dig it up 100 years later and buy as much flour with it as you could.
Whereas for the last 80 years (it's true, you can chart it... it makes for a very alarming chart), the purchasing power of our money has been on a steady decline. It has never, even once, gone back to its former value.
The graph of purchasing power over the last 300+ years has three major kinks in it, each one representing an acceleration of inflation. They correspond EXACTLY to three events in our economic history, down to the precise year: (1) the creation of the Fed, (2) the removal of the gold standard, (3) the abolition of the last vestiges of a monetary standard by Nixon, in 1971.