Bitcoins

[ewmayer]

Originally Posted by TheMawn

I think this limit was chosen as sort of an experiment. Because they are "discovered", finding them must be difficult enough to not really justify mining for them. Think of it. If BTC stabilizes at $1000 per, everyone will at least give a quick thought to mining their own. That's a great way to cause your currency to deflate. One can imagine the same thing occurring with gold currency. Everyone mines, gold deflates.

That analogy is very worth pursuing, for anyone trying to figure things out here. How is mining gold similar to, and how is it different than, "mining" virtual currency?

Originally Posted by Prime95

Thanks for correcting me. Bitcoins are not a Ponzi scheme -- a bubble inflated by promising an excellent return, then using money from new investors to pay off earlier investors. Instead, much of the current bitcoin price is due to a classic bubble where the public euphorically chases after fabulous returns disregarding the true underlying value of the item.

I don't see much of a difference - with bitcoin the "excellent returns" are provided by luring late-to-the-gamers to pile into the scheme, inflating the price. Seems like a distinction without a difference to me. Non-U.S. readers may be more familiar with the "pyramid scheme" nomenclature, though, which also nicely visually evokes the structure of such schemes - one needs an ever-widening base of new-money incoming to keep the "returns" to the earlier "investors" going.

TomW's comment about hot-money trying to get out of China is also worth thinking about - if folks are that desperate to get assets out of there that they cause BTC prices to double in a week, one wonders what they think may be coming there. Or is this just the latest casino-gambling craze in that land of historically famous gamblers?

[chalsall]

Originally Posted by ewmayer

I don't see much of a difference - with bitcoin the "excellent returns" are provided by luring late-to-the-gamers to pile into the scheme, inflating the price. Seems like a distinction without a difference to me.

I completely agree -- this is a bubble. The current price of bitcoins is completely out of wack.

However, if I might point out, there was a "tech bubble" on the stock exchanges a little while ago. Even though many people lost (and importantly, made) a lot of money, that didn't correlate with smart tech being a poor investment.

But I would argue at some point equilibrium will be reached -- even in bitcoins -- particularly as additional respected vendors accept it for payments.

Originally Posted by ewmayer

TomW's comment about hot-money trying to get out of China is also worth thinking about - if folks are that desperate to get assets out of there that they cause BTC prices to double in a week, one wonders what they think may be coming there. Or is this just the latest casino-gambling craze in that land of historically famous gamblers?

I would like to suggest that the world needs to watch very carefully what happens with "virtual" currency.

If I may, in my mind this development is as important as Zimmermann's realization, and the resulting code and data-sets.

[TheMawn]

It's showing its instability. Close 1000, high ~1200, low 800. In one day. If this were the stock market, the moon would have smashed into the earth by now.

[Prime95]

Originally Posted by ewmayer

I don't see much of a difference ... Seems like a distinction without a difference to me.

A Ponzi scheme is a criminal act that purposely creates a bubble. The criminal is in on the ground floor and makes huge profits. The bitcoin bubble is legal in that it is caused by public speculation and irrational euphoria.

It is a minor difference with the same end result - a bubble where the last ones in get hurt.

[chalsall]

Originally Posted by Prime95

A Ponzi scheme is a criminal act that purposely creates a bubble. The criminal is in on the ground floor and makes huge profits. The bitcoin bubble is legal in that it is caused by public speculation and irrational euphoria.

It is a minor difference with the same end result - a bubble where the last ones in get hurt.

With the deepest of respect, I observe this statement somewhat along the lines of whoever buys gold, silver or helium last always gets hurt.

Perhaps I mis-understood you?

[TheMawn]

I think he's comparing Bitcoin to a Ponzi (it's verrrry similar). I think you understood comparing Bitcoin to Gold (also very similar).

[kladner]

I took it that Chris was extending the comparison to include high value commodities of all sorts.

I read this, and thought of an example in one of the later books of James Blish's "Cities in Flight" series. In this sequence, the star-traveling New York City returns from a long excursion outside normally-traveled parts of space. The city is in need of repairs, and puts in at a "Garage Planet". Repairs are arranged, based on the mistaken belief that NYC can pay for them.

However, it turns out that the medium of exchange in use when the city left well-traveled space (germanium(!): books are from the late '50's/early '60's) has collapsed in value, triggering a Galactic Depression. Germanium has been replaced as the Reserve Currency by the anti-aging ("anti-agathic", see link below) drugs necessary for interstellar travel.

Cities in Flight: http://en.wikipedia.org/wiki/Cities_in_Flight

Anti-agathic:http://www.answers.com/topic/anti-agathic

James Blish: http://en.wikipedia.org/wiki/James_Blish

[jasong]

Originally Posted by ewmayer

That analogy is very worth pursuing, for anyone trying to figure things out here. How is mining gold similar to, and how is it different than, "mining" virtual currency?

I think Bitcoins and currency are virtually similar. Basically, in both cases, you're relying on someone's reputation to keep something valuable. Bitcoins are slightly more reliable than currency because currency is probably easier to counterfeit than Bitcoins.

The problem here is people speculating, which has no connection whatsoever to whether or not Bitcoins is a legit currency. If US dollars are considered reliable, with US dollars based on the reputation of the government and bankers, then it's hardly fair to call Bitcoin fake, a Ponzi scheme, or whatever.

Edit: Gold is extremely reliable, since people will always want it and it's impossible, at least at the moment, to counterfeit.

[kladner]

If US dollars are considered reliable, with US dollars based on the reputation of the government and bankers, then it's hardly fair to call Bitcoin fake, a Ponzi scheme, or whatever.

This might be true, except that Ernst regularly derides US currency as "fiat", and possibly even worse terms such as "Ponzi" or "Pyramid." In that light, I submit that it is consistent for him to call bitcoins a Ponzi scheme as well.

[LaurV]

Originally Posted by jasong

Edit: Gold is extremely reliable, since people will always want it and it's impossible, at least at the moment, to counterfeit.

Gold is ridiculously high, too, about 5000 times higher that its fundamental value. Who wants gold? for what? You can not eat it. You can do nothing with it. You will see a crash on gold sooner that a crash on bitcoin... Even as a raw material, no matter what properties you are targeting, you will find a better and cheaper replacement for gold. Gold is slowly but sure pushed out from all the industries, because is bloody expensive (yes, including jewelery, where there are other better materials already, and rarer too, for who is targeting the value, but I was thinking more like electronics, aerospace, etc, where it was heavily used, and just few years ago it was indispensable, now is used less and less, there are different types of plating which have better chemical/mechanical properties, and are much cheaper). The gold's price is driven high by speculators, and by the governments/banks (the big owners, which years ago collected the gold from the population with the gun, too, and as they have 'almost' monopoly on it, they wanna sell it for the price convenient to them). Sooner or later people will realize that you must eat, drink, breath, etc, but you don't need spoiled shiny things, to live and be happy. The only advantage of gold, compared with fiat money or comodities, is the fact that is 'non alterable', it does not get burnt, spoiled by molds, fungi, rust, time, etc, so there is why the people may want to "keep" the value, a battle against time, somehow. Guess what: here the gold can be compared with only one rival! No, I am not talking about other metals, platinum, diamonds, other shinny stuff. I am talking bitcoins. Because the paper money are gone, the potatoes get spoiled, etc. Only the bitcoin can beat the time. And even better than the gold, and even you don't need to keep any, the network is keeping it for you. You just need to remember few numbers... And that is not like money which is artificially created (not physical existent) for wallstreet margin trading. You can not create new gold whenever you like, that is why it seems valuable too. Same for bitcoin. Not the same for paper money. But better then gold: you can "copy" each of your bitcoin, in millions of copies, and other people will store it for you, for free, so it will never get lost, but they can't spend it or cheat you out of it. Which you can't do with gold (you however can do with "plastic money", like credit card money, which do not exist physically, but those have the disadvantage - some will call it advantage - that can be created with a click of the mouse, by your bank - well, who controls the controllers? etc...

[chalsall]

Originally Posted by jasong

Edit: Gold is extremely reliable, since people will always want it and it's impossible, at least at the moment, to counterfeit.

This was not always true. The question was (alleged to have been) the driver of the development of the Archimedes' principle, after all.

And, this might not always be true. Gold et al are probably now more important as "ingredients" in our technology than being horded as backers of money.

Sadly, we tend to waste quite a bit of both rare elements and money....

Edit: I defer to LaurV's greater knowledge of the tech industries as it relates specifically to gold. But I would argue that there are many other "non-renewable" elements and compounds which enter the equation. Helium, for example; it's non-renewable, but yet we let children play with it as a toy because its safe.