Bitcoin's Wild Ride Shows It's Not Real Money(bloomberg.com)
bloomberg.com
Bitcoin's Wild Ride Shows It's Not Real Money
http://www.bloomberg.com/news/2013-04-11/bitcoin-s-wild-ride-shows-its-not-real-money.html
14 comments
If you're not planning to buy groceries with bitcoins any time soon then bitcoin isn't going to be a currency any time soon.
What do you call a volatile commodity used as an ephemeral financial instrument for the (anonymous) transfer of value, which is immediately converted into a more stable commodity (e.g. a currency) after it's received?
"Non-fiat cheques", perhaps?
"Non-fiat cheques", perhaps?
The same thing you'd call a tulip bulb, or a share of Pets.com stock. The only basis you seem to be using to qualify Bitcoin is that it (often) has a spot price.
Indeed: Bitcoin isn't, fundamentally, "a currency, but digital"; it's simply "bits on a computer that have a [market-discovered] spot price" (a unique thing among bits-on-computers.) Any conclusions about its usefulness or lack thereof should be made based upon that fact.
Which is to say, it's not a very good currency--and anyone who is taking a long position that Bitcoin will somehow replace or surpass any real currency is a fool who this bubble is going to bankrupt. But, if you just need some bits that hold a (however-ephemeral) value--not a high value, just any defined value--without any central authority needing to back that value, then BTC seems like a good option.
A good example of a use for "bits that have a spot price regardless of any central authority" might be, say, a market for CPU cycles for agents within a distributed computation mesh (somewhat ironically, a dual to Bitcoin's own mining process.) Picture a version of, say, the Erlang VM, where processes could voluntarily surrender some part of each allocated timeslice to other processes who they "owed." Agent processes would need to create highly divisible units of currency to pay other agents on other (untrusted!) systems in exchange for their time.
"Real money" would be very hard to use in this system--if every single agent had a real bank account, transaction fees would quickly overwhelm the system's usefulness. And "fiat play-money" (machine-hour-tokens or something) would only work if everyone could agree, across the whole distributed mesh, that they were worth something, and either there was a "central bank" with which all transactions had to coordinate (turning the distributed system into a hub-and-spoke design), or all systems could be trusted to allocate agents units of of currency only in proportion to productivity.
Bitcoin is something a machine can make, and which will have a price for long enough for it to use to pay another machine for useful work. Also, it cannot be made without doing work proportional to the cost of making it. This combination of factors makes Bitcoin unusual enough to be useful in some limited cases. Just not any of the ones people are hoping for. :)
Which is to say, it's not a very good currency--and anyone who is taking a long position that Bitcoin will somehow replace or surpass any real currency is a fool who this bubble is going to bankrupt. But, if you just need some bits that hold a (however-ephemeral) value--not a high value, just any defined value--without any central authority needing to back that value, then BTC seems like a good option.
A good example of a use for "bits that have a spot price regardless of any central authority" might be, say, a market for CPU cycles for agents within a distributed computation mesh (somewhat ironically, a dual to Bitcoin's own mining process.) Picture a version of, say, the Erlang VM, where processes could voluntarily surrender some part of each allocated timeslice to other processes who they "owed." Agent processes would need to create highly divisible units of currency to pay other agents on other (untrusted!) systems in exchange for their time.
"Real money" would be very hard to use in this system--if every single agent had a real bank account, transaction fees would quickly overwhelm the system's usefulness. And "fiat play-money" (machine-hour-tokens or something) would only work if everyone could agree, across the whole distributed mesh, that they were worth something, and either there was a "central bank" with which all transactions had to coordinate (turning the distributed system into a hub-and-spoke design), or all systems could be trusted to allocate agents units of of currency only in proportion to productivity.
Bitcoin is something a machine can make, and which will have a price for long enough for it to use to pay another machine for useful work. Also, it cannot be made without doing work proportional to the cost of making it. This combination of factors makes Bitcoin unusual enough to be useful in some limited cases. Just not any of the ones people are hoping for. :)
Pets.com stock isn't being put forward as an immediate medium of exchange for services and goods, though. And if it was, we might want to have a word describing that commonality with BTC. As long as BTC is nothing more than an investment, I agree.
The dollar is more than just a commodity with a liquid market. It is also a store of value that is stable enough that it can be used as a unit of account. Bitcoin can't currently be: its value could double tomorrow, or go to zero.
If the dollar doubled or went to zero tomorrow, Bitcoin would be irrelevant, because there wouldn't be an Internet to transact in it over.
The reality is that every item for Bitcoin-denominated sale has an underlying intended value denominated in dollars; the correspondance between BTC and USD is (a) virtually always unbreakable and (b) wishful and fraught for (depending on phase of moon) buyer and seller alike. The notion of Bitcoin as "money" is counterfeit for the overwhelming majority of its users; for one group, BTC is a P2P alternative to Paypal; for the other, they're virtual tulip bulbs.
If the dollar doubled or went to zero tomorrow, Bitcoin would be irrelevant, because there wouldn't be an Internet to transact in it over.
The reality is that every item for Bitcoin-denominated sale has an underlying intended value denominated in dollars; the correspondance between BTC and USD is (a) virtually always unbreakable and (b) wishful and fraught for (depending on phase of moon) buyer and seller alike. The notion of Bitcoin as "money" is counterfeit for the overwhelming majority of its users; for one group, BTC is a P2P alternative to Paypal; for the other, they're virtual tulip bulbs.
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Contraband?
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Currencies don't "stress test".
I don't own any Bitcoins, but the concept interests me. (I'm no economist either so these musings are probably entirely wrong or unfounded.) I can't help but feel like all this hooplah about Bitcoin's "price" on the dollar is missing the point of Bitcoin. People are measuring Bitcoin's worth by how many dollars it costs; is that really the measure of worth of a currency, or simply the measure of worth of a dollar?
It would be much fairer for people to measure Bitcoin's worth by (for example) how many gallons of milk or how many pounds of rice you could buy with it. But since we need to somehow know how much this medium of exchange is worth, and since Bitcoin still has very low adoption, we're using the dollar as a way of assigning worth to these imaginary collections of bits, and that makes it a target of speculation and bubble mentalities. In other words, we should tie its worth to something useful you could actually spend it on, instead of just using as it as a Monopoly-money "investment vehicle".
IMHO Bitcoin will never be able to be taken seriously until the price is pegged to some physical product of real-world value. Until then, it'll just be a USD proxy and thus functionally worthless to anyone but academics, speculators, crypto-nerds, and black marketeers who don't understand that Bitcoins aren't truly anonymous. The system has a chicken-and-egg problem of adoption, and right now given the poor PR it's receiving it looks like it's heading in the wrong direction.
It would be much fairer for people to measure Bitcoin's worth by (for example) how many gallons of milk or how many pounds of rice you could buy with it. But since we need to somehow know how much this medium of exchange is worth, and since Bitcoin still has very low adoption, we're using the dollar as a way of assigning worth to these imaginary collections of bits, and that makes it a target of speculation and bubble mentalities. In other words, we should tie its worth to something useful you could actually spend it on, instead of just using as it as a Monopoly-money "investment vehicle".
IMHO Bitcoin will never be able to be taken seriously until the price is pegged to some physical product of real-world value. Until then, it'll just be a USD proxy and thus functionally worthless to anyone but academics, speculators, crypto-nerds, and black marketeers who don't understand that Bitcoins aren't truly anonymous. The system has a chicken-and-egg problem of adoption, and right now given the poor PR it's receiving it looks like it's heading in the wrong direction.
Isn't this circular? Call the value of 1 BTC "x number of dollars", or call it "the amount of corn x number of dollars will buy you".
The problem is the same whether you do your accounting in dollars or in sorghum: BTC's value is unstable, wildly so, and it's unstable for predictable reasons.
The problem is the same whether you do your accounting in dollars or in sorghum: BTC's value is unstable, wildly so, and it's unstable for predictable reasons.
I guess what I'm trying to say is that if merchants selling products for Bitcoin simply peg its worth to USD (like most merchants today to) then nobody can ever be sure how much you can actually buy with 1BTC.
Bitcoin is unstable in part because this habit of using it as a USD proxy creates uncertainty as to the medium's real worth. This in turn encourages speculation which perpetuates the vicious cycle of volatility.
Bitcoin is unstable in part because this habit of using it as a USD proxy creates uncertainty as to the medium's real worth. This in turn encourages speculation which perpetuates the vicious cycle of volatility.
Merchants today don't peg BTC to USD. The value of BTC in USD floats.
Sure they do, look at Coinbase. You can (for example) buy Reddit Gold for $3.99 USD, or the equivalent in Bitcoin, which changes based on some USD-based exchange rate they figure out. Or look at Namecheap, which can refill your account in Bitcoin--but you enter a USD amount before they tell you how much the Bitcoin cost will be. Maybe they don't look at MtGox every day but most merchants without a doubt peg their Bitcoin amounts to some USD exchange rate.
The exchange rate on services like Bitpay are a smoothed-out version of the current spot price. Nobody will fix a USD/BTC rate for even a day. In dollar-denominated terms, the price of items for sale in BTC floats throughout the day.
I think we're just using the word in two different ways.
I think we're just using the word in two different ways.
Overall, well said. But IMO there's nothing wrong with BTC being "only" a proxy currency. It'd solve a technical problem. (in particular, it'd be a decentralized Paypal).
http://blockchain.info/charts/n-transactions
Anyway, this is the graph I watch actually. Every bitcoin transaction is public, so it is possible to count every single one, as well as it's value. The more transactions there are, the better it's adoption rate.
BTC price is missing the point. The real story is how many people are _using_ the damn thing.
http://blockchain.info/charts/n-transactions
Anyway, this is the graph I watch actually. Every bitcoin transaction is public, so it is possible to count every single one, as well as it's value. The more transactions there are, the better it's adoption rate.
BTC price is missing the point. The real story is how many people are _using_ the damn thing.
Your issue is against using the dollar as the numeraire [1]. Fine, pick gallons of milk, oil, etc. and you'll see that the charts of recent days, when expressed in "real" terms and not in nominal/dollar terms, will look THE SAME.
At t his stage, dollar inflation and depreciation against other currencies is just measurement error when compared to BTCs fluctuations.
The second bit, I didn't entirely got. We can't PEG BTCs price to anything, as its price is market-determined.
[1] http://en.wikipedia.org/wiki/Num%C3%A9raire
At t his stage, dollar inflation and depreciation against other currencies is just measurement error when compared to BTCs fluctuations.
The second bit, I didn't entirely got. We can't PEG BTCs price to anything, as its price is market-determined.
[1] http://en.wikipedia.org/wiki/Num%C3%A9raire
This has come up several times. The buying power of a dollar has changed very little in the last month but the buying power of Bitcoin has increased, no matter how you measure it.
But you can't really claim that Bitcoin has any buying power, because there's almost nothing you can buy with Bitcoin where the merchant hasn't pegged the Bitcoin price to USD. Bitcoin has, functionally, near zero buying power; in practice people are simply using it as a USD proxy.
I'm far from bullish on Bitcoin, but this article strikes me as irrational nonsense. Why is the fact that Bitcoin is volatile today proof that it will always be volatile? There's no secondary analysis, just reiteration of this one axiom as if it were an irrefutable fact. The whole article sounds like someone in finance making their bet against Bitcoin and being really loud about it in hopes that everyone else will agree and it becomes a self-fulfilling prophecy.
Isn't the onus on bitcoin to prove its stability?
All anyone needs to do is say "hey, bitcoin is not a suitable currency right now, don't use it". There is no contractual requirement for them to review the long-term potential of bitcoin, they aren't bitcoin salesmen. If bitcoin boosters can't make a strong enough case for the currency to override the objections of the moment then that's on them.
All anyone needs to do is say "hey, bitcoin is not a suitable currency right now, don't use it". There is no contractual requirement for them to review the long-term potential of bitcoin, they aren't bitcoin salesmen. If bitcoin boosters can't make a strong enough case for the currency to override the objections of the moment then that's on them.
But that's not what the article says. This sentence seems to summarize the thesis:
> This level of volatility, along with the difficulty of buying Bitcoins in the first place, and the substantial security risks, is what will stop Bitcoin from being a true alternative to state currencies
He is clearly predicting the future of Bitcoin here, all the while willfully missing the point that of course something that is truly a new form of money and can't be understood strictly by existing economic models is going to first see uptake driven by speculators and can only hope to become something akin to traditional currency much further down the line.
To your question, yes the onus is on bitcoin to prove its stability, but not through rhetoric. It will either happen or not in due time.
> This level of volatility, along with the difficulty of buying Bitcoins in the first place, and the substantial security risks, is what will stop Bitcoin from being a true alternative to state currencies
He is clearly predicting the future of Bitcoin here, all the while willfully missing the point that of course something that is truly a new form of money and can't be understood strictly by existing economic models is going to first see uptake driven by speculators and can only hope to become something akin to traditional currency much further down the line.
To your question, yes the onus is on bitcoin to prove its stability, but not through rhetoric. It will either happen or not in due time.
> Isn't the onus on bitcoin to prove its stability?
You mean its future stability. It's empirically unstable right now, and I don't think many people will deny that. But you seem to be talking about burden of proof for future events, which seems pointless.
You mean its future stability. It's empirically unstable right now, and I don't think many people will deny that. But you seem to be talking about burden of proof for future events, which seems pointless.
How do you go from "A: bitcoins aren't a suitable currency today" to "B: bitcoins will be a suitable currency tomorrow" without going through a point where someone somewhere argues that bitcoins will be stable in the future?
And if there's no good argument that bitcoins will inevitably become a stable currency, then why bother with bitcoins ever?
And if there's no good argument that bitcoins will inevitably become a stable currency, then why bother with bitcoins ever?
I don't think anyone should be arguing that bitcoin will inevitably become stable, but I also don't think anyone should be arguing that bitcoin will inevitably always be unstable. I find it odd to claim a null hypothesis either way.
Bitcoins stability is enforced by the market, not a single controlling party (large holders manipulating the market excepted, but their ability to do so has a hard limit). This is a mathematical fact that can be proven with a scientific proof. Contemporary currencies on the other hand are veiled in secrecy in process, and the market simply accepts them as stable for the benefit of society, which is taken advantage of regularly by those who control those currencies.
The market is doing such a good job at stabilizing BTC prices. </sarcasm>
There's a reason why modern currencies are not controlled purely by the market. The past few months of BTC have proven that.
There's a reason why modern currencies are not controlled purely by the market. The past few months of BTC have proven that.
I guess you're not planning on sharing that reason and you expect me to let my imagination run wild for the benefit of your argument?
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Att: 1HB5XMLmzFVj8ALj6mfBsbifRoD4miY36v
I would be happy to assist in this transfer. Please deposit the funds in the attached bitcoin wallet. I believe the trivial nature of this exchange should only necessitate a small fee, 1% would be quite generous, would you agree?
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Bloomberg blogs are only slightly better than Forbes article with respect to their credulity.
(and I've read Bloomberg News practically every day for the last two years...)
(and I've read Bloomberg News practically every day for the last two years...)
'Real' or not, there's just not enough stuff priced in BTC (regardless of the exchange rate) and not enough volume of trade by market making sized traders yet. The more of that stuff that happens the more 'real' it gets.
It depends on how you define 'real money.' Bitcoin is a real medium of exchange. It offers advantages that you cannot get from any centralized currency. It is cryptographically protected, it runs on a distributed network, it's (relative to other currencies) easy to use anonymously on a global scale, and it has a large userbase.
Bitcoin's volatility is a weakness, but it's not an achilles heel. Bitcoin has many strengths that are completely unmatched by any other currency. People use it for these strengths, and people will continue to use it for these strengths regardless of how much it is worth. That's why bitcoin will not die until there is something to replace it.
Bitcoin can't be used to store value (due to volatility), but that doesn't mean that it can't be used as a medium of exchange. (USD -> Bitcoin -> Silk Road, and vice-versa)
Bitcoin's volatility is a weakness, but it's not an achilles heel. Bitcoin has many strengths that are completely unmatched by any other currency. People use it for these strengths, and people will continue to use it for these strengths regardless of how much it is worth. That's why bitcoin will not die until there is something to replace it.
Bitcoin can't be used to store value (due to volatility), but that doesn't mean that it can't be used as a medium of exchange. (USD -> Bitcoin -> Silk Road, and vice-versa)
Bitcoin is harder to use anonymously than cash. Transactions are between pseudonyms and there is a huge amount of information one can get from that. From some view points, it is worse than credit cards since all of the data is public. Now, that might be fixable, but as of right now it is a problem. see :
https://news.ycombinator.com/item?id=5535321
https://news.ycombinator.com/item?id=5535321
If I hand you 50 cents there is no way to back track it whatsoever. With bitcoins every single transaction is public. So I fail to see any inherent ananimity advantage. Some peole might like the fact that current bitcoin banks are unregulated, but in just about every way that counts to normal people bitcoins are worse than cash.
PS: Want real ananimity online, buy visa gift card with cash.
PS: Want real ananimity online, buy visa gift card with cash.
Actually, gaining acceptance in the financial markets is probably the best thing that can happen to BitCoin long term. If BitCoin slowly but surely keeps providing utility and gains financial market volume, it will eventually stabilize in price. It's volatile now because the outstanding value of BitCoins is about$ $1 Billion, but the amount of investors trading it are capable of causing it take big swings. This makes it an attractive market to play in since the amount that can be made in a single day is high. This should eventually increase the number of investors in the market, increasing the total value of the market. If this goes on for long enough, the outstanding market value will grow and BitCoin will stabilize further and further, making it more suitable as a currency.
BitCoin right now is like the market for a low volume commodity like Caviar. But it could eventually become like the market for a high volume commodity like corn, but with all the benefits of being able to spend it electronically anywhere.
Basically, investor interest in the volatility now will eventually drive it to becoming a better currency faster.
BitCoin right now is like the market for a low volume commodity like Caviar. But it could eventually become like the market for a high volume commodity like corn, but with all the benefits of being able to spend it electronically anywhere.
Basically, investor interest in the volatility now will eventually drive it to becoming a better currency faster.
Given the volatility you may doubt the longevity of bitcoin as a currency, but since you can exchange it for some goods and services it looks like Real Money to me (at least right now).
There are places you can exchange packs of cigarettes or boxes of Tide detergent for goods and services, too.
If we get down to the basics I think anything that is a medium of exchange is a currency. So in some circles cigarettes and Tide work as currency. Though these "currencies" are not legal tender.
Money is a store of value, a medium of exchange, and a unit of account.
A store of value is something you could accept in payment for work and hold on to.
A medium of exchange is something a shoemaker can use to obtain bread from a baker who doesn't want shoes.
A unit of account is something with a value stable enough that you can measure the value of arbitrary goods with it; like the Bloomberg article says, it's what enables a cheesemaker to put a price tag on cheese without forcing her to become a currency speculator.
Which of these functions does Bitcoin have?
A store of value is something you could accept in payment for work and hold on to.
A medium of exchange is something a shoemaker can use to obtain bread from a baker who doesn't want shoes.
A unit of account is something with a value stable enough that you can measure the value of arbitrary goods with it; like the Bloomberg article says, it's what enables a cheesemaker to put a price tag on cheese without forcing her to become a currency speculator.
Which of these functions does Bitcoin have?
Bitcoins slipped into speculative realm a couple of weeks ago and probably after the crash the speculators will exit the market. A stable bitcoin can easily serve the three functions you listed above. As I said in my first comment this volatility raises questions about longvity of bitcoins but they have not ceased to be real money, at least for now.
It is just a 3-4 year old technology lets wait and watch how this plays out before writing it off completely.
It is just a 3-4 year old technology lets wait and watch how this plays out before writing it off completely.
What makes you think the price of Bitcoin will ever stabilize? (You know, somewhere besides zero).
I dont know if bitcoins will ever stabilize or go down to zero but I also believe that no one can be so sure about how a free market is going to behave to just write it off at this moment.
The words "free market" are not a talisman that dispels common sense. Currencies are fundamentally backed by trust. Trust in the US Dollar is based on the status quo (the Nash equilibria of our adoption of the currency, &c), the degree to which our interests are aligned with those of the government (not 100%, not 0%) and the basic economics of taxation that is dollar denominated, a gigantic federal payroll that is dollar denominated, and the fact that the federal government --- the world's largest buyer of everything --- conducts all its business in dollars.
Bitcoin has none of this; it appears to substitute the moral equivalent of a Yahoo stock message board.
Bitcoin has none of this; it appears to substitute the moral equivalent of a Yahoo stock message board.
"after the crash the speculators will exit the market"
Why? Now's the time to get in at the ground floor!
Why? Now's the time to get in at the ground floor!
Bloomberg is giving another view here: https://www.youtube.com/watch?v=6SLPy89gPE0
What!? Bloomberg took advantage of Bitcoin's unregulation to criticise it? I wouldn't have expected it!
what an awful title. i wonder if the title was changed by someone who didn't write the article? "real money" doesn't appear in the text (which is concerned with whether it is stable, not real) and is obviously going to trigger, well, see posts here...
Most headlines are not written by the article author.
While euro is?
Really? The Japanese Yen is acting a lot like BitCoin the last few months, only it's going down, not up...
The Yen has fluctuated between 125 per USD and 75 per USD over the past 10 years. BTC has fluctuated between $260 USD per and $120 per over the last 10 days. These are horses of a different color.
The Yen has lost close to 25% of it's value in the last few month. We are talking trillion+.
Bitcoin is like thousands of times smaller, so volatility adjusted for size/time, the two are similar.
Bitcoin is like thousands of times smaller, so volatility adjusted for size/time, the two are similar.
Yes and no.
Because international exchange values are not always completely relevant to real currencies. Exchange rates impact the cost of exports and imports, and a weak exchange rate can actually be a good thing sometimes because it makes export goods more competitively priced. Meanwhile, back home the cost of bread, or housing, or smartphones may not fluctuate at all so the currency is still plenty stable.
With a pseudo-currency like bitcoin that is dominated by speculation the exchange rate is pretty much everything.
Because international exchange values are not always completely relevant to real currencies. Exchange rates impact the cost of exports and imports, and a weak exchange rate can actually be a good thing sometimes because it makes export goods more competitively priced. Meanwhile, back home the cost of bread, or housing, or smartphones may not fluctuate at all so the currency is still plenty stable.
With a pseudo-currency like bitcoin that is dominated by speculation the exchange rate is pretty much everything.
This is true for a rather extreme value of "a lot":
The USD is worth about 7.3% more JPY today than on January 25, and 300% more BTC today than yesterday.
The USD is worth about 7.3% more JPY today than on January 25, and 300% more BTC today than yesterday.
I think you might have missed yesterday's bitcoin events, the bubble popped.
But that's okay, because bitcoins aren't "real money".
I'm not planning on buying my groceries with bitcoins any time soon, but saying a four-year-old currency in the first throes of popularity and stress-testing, and using inadequate means for it at that, is "not real money" seems awfully shortsighted.