Sunday, June 12, 2011

Bitcoin Crash on Friday

Daily Tech reports:
At the opening bell at Mt. Gox, the world's largest Bitcoin exchange, a single BTC cost $28.919 USD. By mid-day that total had plunged to $20.01 USD -- a drop of 30.8 percent.

As I wrote in my post yesterday about bitcoin: glance at the bitcoin site, especially after looking at their scrolling news, should be enough to scare anyone from keeping any money in bitcoins. If on the other hand, I am in need of some wala wala shoes that are normally only found on the planet Venus, I would have no problem converting dollars into bitcoins in an amount necessary to buy wala wala shoes.

The problem is that bitcoins are not a receipt for a dollar and they are not widely traded as an alternate currency. You need one of these two factors to consider an electronic currency a money, bitcoins are not either at this point (and they are unlikely to be anytime in the near future).

That said, it is completely possible that some type of electronic money could develop at some time in the future, but it is likely to emerge in a different format, as I wrote:
Somewhere something between a bitcoin and a traveler check type electronic currency could emerge, at some point. I'm not sure how it will emerge, or how payments and withdrawals will be made under such a system. My point here is that there is no theoretical reason that an electronic money could not exist as first a receipt for, say, the dollar, and then at some point become its own currency.

As I said in my initial post, if you need wala wala shoes that are normally sold only on the planet Venus, but only can find them on this planet through a merchant that will only accept bitcoins, it may make sense to use bitcoins for that kind of trade but I wouldn't hold any money in the form of bitcoins.


  1. Bitcoin was under $10 a month ago and its now at $18... I feel like you are playing the same tricks as the people saying that gold is volatile pointing at the beginning of the 80's.

    That said, it is normal for bitcoins to be volatile. Its a young project. Nobody should be surprised about that, and actually only the reporters of the MSM are "surprised".

    The advantage of Bitcoin against the system you propose is that its decentralized. Any centralized system will suffer the attack of the Federal government, like Liberty Dollars. Because it was centralized people lost everything. Any centralized system (like the one you propose) suffers from this problem. Its exactly what Bitcoin solves.

    Bitcoin is going to remain volatile for a while, but as more and more merchants start accepting it and there is more volume, the volatility will decrease.

  2. As brand new form of currency, of which is coming into circulation from now till 2140, there should be no surprise to anyone that Bitcoins are highly volatile. I found out about Bitcoins when they traded under $5 USD and this was just a few months ago. It is also quite reasonable that they could fall back to this level or lower in the near future.

    None of this, however, discounts the possibility that Bitcoins could take shape as a stable currency over time. I mine Bitcoins, and even traded $50 USD for Bitcoins back when they were $6.90 each, not as an investment but as an enthusiast of both technology and Austian theory. I say enjoy the great experiment that is Bitcoins and lets see what happens!

  3. Robert, I wonder if I could get your opinion on entering into a private short contract with a BitCoin holder. Do you think it would be a good play at this time?

  4. Bob-

    Saw your earlier comment. Still refining my thoughts on value and the role of gold in a primitive society and Mises is going to get another read, but I'm leaning towards calling BitCoins real money.

  5. It seems like many miss the point of a P2P digital currency. The biggest reason to use bitcoins is not that bitcoins are sound money, it's because bitcoins are stateless and completely out of the control of any government. While governments can shut down electronic currency exchanges that buy and sell bitcoins, unlike past attempts such as e-Gold, bitcoins are P2P and thus, can not be "shut down" by anyone as long as people choose to use them.

    If markets were free and allowed to determine the medium of exchange, it's very likely the market would have decided on commodity money and no one would have taken the time to develop bitcoin (no one that I know of has claimed bitcoin is the ideal medium of exchange).

    Bitcoins give us a way to grow the stateless, underground-economy. It's agorism. It's counter-economics. Bitcoins make it easier to move economic activity outside the purview of the state, starving governments of money and power. Silkroad has received the most attention but, right now, I can move any amount of bitcoin I want through customs without declaring them and neither the government of the country I'm leaving or the government of the country I'm entering has any idea. To me, this is much bigger than being able to buy substances banned by the government (which is still easy to do with cash in any western country).

  6. The bitcoin crash this past week is indicative of the end of QE2, and the logical derivations thereof. We are looking at a change of exchange coming with regard to the dollar and the Euro, none of which is entirely based upon the current ECB problems (though, they don't hurt).

    As we head into the end of June, we are going to see quite a bit of volatility in most asset classes (as if we haven't already), however, once QE2 unwinds, we are going to see a short dollar rally domestically. While the dollar index may not rise substantially (due to FX), prices of goods in America will see some decline- much more than the dollar index would express. This will be a short-lived event.

    In the more medium-term (as well as short-term, depending upon the good in question), I think that some asset classes will have softer declines-primarily commodities. Sure, there will be steep corrections in many commodity markets, but the commodity declines will not hold a candle to many equity classes. As this progresses, I see an increase in treasury yields due to the gap of demand at the extinguishing of the QE2 treasury game, and that even the smallest rise in bps in the interest rate will make the central bank weary of its decision.

    Therefore, the "get out" of bitcoin investment is not only a safe bet, it is the correct bet. You don't go all in on a penny stock when you know that it is going to lose value with no dividends to speak of (bitcoin is actually worse than that), you get out. So, as much as I am overall negative on the USD, I am confident that domestically the dollar will rise in the next month or two, and I will be more apt to use those dollars to buy the dip in commodities (tangible goods), or to try to call the peak in treasuries (collateralized obligations) before QE3 sets in; not some ether in the myst.

    Today, most bond traders are buying in the dip, they think that bonds will go down after the end of QE2 due to the dollar rally (standard yield theory), or they are taking a dollar position (standard hold). No, that is not how it is going to play out. The dollar is going to have a small rally, but I think that it is best to hold those dollars until the yield peaks, and then buy and ride it downward. Sure, it isn't going to make you a millionaire, but it is far better than buying into a nonexistent currency- especially one that is going to lose more value over the coming month or two.

    It often astounds me how those that hype the bitcoin complimentary currency do not understand foreign exchange, or trade. They are entirely ignorant of Mengarian theory with regard to goods, and they put blind faith into anything that is not connected to government. As much as I hate government currencies, I also know that they are collateralized, and that if government currencies were to go to their use value (paper), that bitcoin would be even less valuable. Bits and bytes simply do not cut it, I want to increase my own utility, and the only way to do that is through production. I would much rather that the production come from labor and capital (savings) than from bytes and derivatives.

  7. @Anon 5:32pm

    "With bitcoin, every transaction is written to a globally public log, and the lineage of each coin is fully traceable from transaction to transaction. Thus, /transaction flow/ is easily visible to well-known network analysis techniques, already employed in the field by FBI/NSA/CIA/etc. to detect suspicious money flows and ‘chatter’. With Gavin, bitcoin lead developer, speaking at a CIA conference this month, it is not a stretch to surmise that the CIA likely already classifies bitcoin as open-source intelligence (no pun intended)."

  8. @Anon 8:51 The Bitcoin community is well aware that Gavin is visiting the FBI. The first thing he did was post it in the forums.

    Now, Bitcoin is pseudo-anonymous. Addreses are public, but unless you make it public somehow, nobody can link you with a Bitcoin address. So Bitcoin is as anonymous or as public as you want to make it.

  9. @Anon 8:51 AM

    You directed your comment at me but did not reference anything in my comment. What's your point? You'll need to elaborate.

    If I had to guess, you seem to be implying that because transaction flow is recorded, you can't use bitcoin anonymously. If so, you're wrong.

    Sure, every transaction will identify one of many addresses or "keys" (something like "14K1mazY4HfyZsyMKsudFr64EwHqQT2njz") but that's meaningless if you can't connect any of those addresses back to an actual identity. If you want your transactions to be anonymous, know what you're doing and follow best practices (such as using a new address for every single transaction, using TOR, etc.), it would be almost, if not completely, impossible for you to be identified based on the transaction flow logs.

    Remember when Swiss bank accounts could still be trusted for anonymity? Even then, at least one other person had the ability to connect your numbered account to your identity. Imagine that scenario except you're your own Swiss bank (the account holder is the only person who knows the identity of the person holding the numbered account) and you create a new numbered account for every transaction you participate in. On top of that, thousands of other people are also acting as their own Swiss bank (indistinguishable from yours), using a new numbered account for every transaction. Sure, if you're not careful or don't know what you're doing, you could do something that allows someone to associate one or more of your addresses (account numbers) with your actual identity but, like I said earlier, if you want your transactions to be anonymous and know what you're doing, it would be almost, if not completely, impossible for you to be identified.

    If that wasn't what you were implying then, as I said, you'll need to elaborate.