Thursday, November 7, 2013

Is Bitcoin a Bubble?

In recent posts, where I have questioned the long term value of Bitcoin, a number of commenters have responded to my charge that Bitcoin can be tracked by government with the non sequitur argument that their personal holdings of bitcoins have climbed in value. While this is most certainly the case given the recent climb in Bitcoin price, it has nothing to do with my argument regarding government capability of tracking Bitcoin.

As for the price of Bitcoin, I hold no opinion as to how high it will climb. I have seen some spectacular stock promotions go on for a very long time before they ultimately crash to earth. It appears there are some stock operators getting involved in Bitcoin, who are skilled at getting exposure for an investment. It appears they are involved in the current promotion phase of the Bitcoin price. They most assuredly will get the price up. Expect positive stock analyst reports to follow. (Current Fed money pumping will also help the climb.) Is it a bubble? Yes, in the very important sense that new buying is driven by nothing but the expectation that the price will go up, with no real reasoning as to why the price will go up.

In these cases, the price climb continues as long as new buyers drive the price higher, when the pool of buyers dries up, the jig is over. I have no idea how long the pool of buyers will expand relative to Bitcoin. It can be a matter of weeks or it can be a year or two. I just know it will end.  At that point, let's see what happens to all the "profits" Bitcoin holders think they have. And, note well, Bitcoin holders are all calculating their so-called money Bitcoin profits in dollars, because deep down even they know dollars are much more of a money than bitcoins.

Nothing can kill the enthusiasm of blind greed, there is a reason they call it blind, so I don't expect a lot of conversions to be made from this post, but for those who still think with their head, keep in mind that Bitcoin is simply not a good tool as a new real money, and new problems are popping up all the time.

Consider this report from Mashable:
Computer science researchers at Cornell University claim to have found a way to subvert the system driving production of the digital currency Bitcoin. 
The researchers call their technique “selfish mining,” through which individuals or groups of Bitcoin miners can collect more than their fair share of the currency. This could cause a chain reaction collapsing the system.
More here. 

Bottom Line: Bitcoin is turning into a very sophisticated promotion, the climb could be spectacular, but so will the crash. By the very mathematics of these things, a lot of people will eventually experience huge losses.


  1. I agree. Regardless I'm thinking of plopping a grand into the scheme just to see where it goes and see if I can get out before it takes its nose dive.

    I'll probably do something like a 20% ongoing stop loss and roll the dice. I guess my only concern is a $1000 daily withdrawal limit if Mt. Gox is the only major cash player.

    I'll have to root around and explore it a little more...but why not ride the wave of enthusiasm for a while before it comes crashing down?

    1. CampBX is a much better exchange, you'll get your money faster, more reliably, more securely, and they will take a smaller cut.

      One downside, you have to deposit with money order. Never had a problem.

    2. New exchanges are popping up every day. and are each doing the equivalent volume in trades - soon to leave Gox in the dust. You don't have to change your bitcoins for dollars though. You can easily "cash out" by buying gold & silver at Or, instead of "cashing out" simply start spending them directly at places like and - through them you can buy gift cards for many large retailers. Maybe you could add a new wing to your house by purchasing gift cards for Home Depot. You have lots of options - and they are expanding everyday. Enjoy the ride!

    3. So, just out of curiousity, I checked with Coinabul on the price of a 1oz Gold Eagle, @ current exchange rates its $1405

      You go over to Gainesville Coin and do a wire transfer and it's $1367.50.

      That's way to steep a premium to use Bitcoin for that purpose and reflects a similar check I did a few months ago using Bitcoin in comparing with cash.

      I don't have a problem dropping some cash into Bitcoin on a speculative basis, but it still doesn't appear to be a good way for daily transactions yet; unless you don't mind paying huge premiums for hopefully secretive transactions or going through the hassles of washing bitcoins.

    4. I advise against using Coinabul to buy precious metals. There have been several reports on the Bitcoin forums of people not getting the coins they bought and getting no help from the Coinabul customer service. Amagi Metals is another bullion dealer that takes Bitcoin. I have bought from Amagi a few times, and while they are sometimes slow to ship, even when the goods are marked "in stock," I have not heard of anyone being outright robbed by them the way people accuse Coinabul. The longest I waited for Amagi to ship me an order was about 3 weeks. The shortest was when they shipped as soon as my payment cleared.

    5. I always do small purchases with any dealer first to see how they respond. It's how I found out that NWT ships super ass slow. I like their "get out of dodge" series on silver because it's divisible, but their customer service sucks.

      Anyway, Amagi doesn't show Bitcoin pricing in their drop down...I wonder if they are charging extra premiums beyond the cash price for Bitcoin use like Coinabul.

    6. Amagi charges a 1.02% premium to pay in Bitcoin. I imagine that this is because profit margins for bullion dealers are pretty low, and they feel they need to recoup the cost of their payment processor (Bitpay). You can see their payment policy here:

  2. My point was that bitcoin is more anonymous than the banking system, much more portable and much harder to confiscate. If the trading is peer to peer rather than via exchanges, then it is pretty anonymous.

    That said, in a very new and illiquid market, bubbles can certainly form and pop. Bitcoin is supposed to be a challenge to the establishment. No one expects it to change human nature.

  3. "And, note well, Bitcoin holders are all calculating their so-called money Bitcoin profits in dollars, because deep down even they know dollars are much more of a money than bitcoins."

    Same could be said for gold (for 99% of the gold owning population anyways), your analysis of bitcoin is always clouded your obvious hatred.

    I pretty much only like BTC as a way to make sensitive transactions. Whatever you wanna say, it's better than anything else available now (excepting meeting someone in an alley with gold/cash which is not possible to do with someone hundreds or thousands of miles away).

    But I am not blinded to the point that I hold things against BTC that are equally true about gold and silver. Calculated in dollars? What isn't Wenzel? Go talk to Joe Schmoe on the street and see how he quanitifies any gain, even his buy one get one free burger coupon. He calculates it in dollars.

  4. 12 hours without spewing more Bitcoin hate. You are doing better Robert. Especially with all your incompetence on this subject staring you so hard in the face.

  5. In any long-term bull market you will see periods where the asset goes from being "undersold" to "overbought". The same with Bitcoin.

    Your last sentence is equally valid if changed to read:

    "By the very mathematics of these things, a lot of people will eventually experience huge PROFITS."

  6. All the traditional methods of "laundering" money work with Bitcoin - but with the added benefit that technology is creating new ways as well. We are currently in a situation where we will see giant transfers of wealth from those who understand the technology to those who don't. Which side will you be on?

  7. Disregarding Bitcoin as a currency for a moment, much of Bitcoin's value comes the payment network. Visa, Mastercard, Western Union, American Express...they earn billions of dollars from simply movings money across the globe and charging a fee. It is clear that Bitcoin has value in order to simply teleport fiat currencies around the planet and route around bank/payment fees. If you can't see this, well, see you at $1,000/btc :) Maybe then you'll notice there is real value in bitcoin.

  8. I bought at the top of the last two major bitcoin "bubbles" - once at $30 and again at $260 (before the last correction). I'm not hurting.