Bitcoin Bonanza

Five years ago it was worth $0. Then, a month and a half ago it went to $150 a piece. On Monday it shot to over $600. On Tuesday, the value rose to over $900, meaning a 6, 445%-increase in value since the start of the year. It plummeted to $531 at midday today and then recovered reaching $793 while being traded on the Asian markets. Bitcoin: it’s the bonanza of the century.

Volatility and hikes are based on nothing except speculation and the desire to make a mint, thinking that you can predict what the markets are going to do. But, will that Bitcoin volatility lead to a bubble? Or is it bringing in a new era of a new type of currency that people are willing to use and that merchants are now being forced to accept? It might never become a legitimate currency in the future, but that’s hardly important when you can make a profit from it. Of course central banks are at risk from the use of virtual currencies as it would mean that they would have little control over what we spend and how transactions are carried out. Is Bitcoin the death of our central banks?

"This does not bode well for Bitcoin's future. It strongly suggests an endgame where handfuls of individuals sit on very large stockpiles of BTC that they refuse to part with for anything short of astronomical sums, while the rest of us merely ignore them and continue using more established currencies with more predictable day-to-day trade-in values. These "Sirs" will steadily cash out, one by one, as they come to the same realization that they need to convert their BTC to USD in order to turn their theoretical wealth into actual Ferraris and mansions and yachts. They will mostly sell solely amongst one another; every time one of them decides to cash out, the ones who remain will agree to pay his insane prices because they'll each believe that they in turn will be able to ask for higher prices still when it's their turn. At some point you'll have basically one guy (or a group of guys) literally owning all the money in the world; he'll own all the BTC, expecting other people to give him goods and services in exchange for them at a rate of $1B per BTC. And we will all laugh at him, and he won't understand why he's still renting a small cockroach-infested apartment despite being obscenely "rich". "

As I posted earlier, I believe you've hit upon Gresham's Observation in economics that “bad money drives out good.” While certainly a likelihood for one reason Bitcoin is increasing in value, I think there are a myriad of reason. One big reason is its utility. There are no middlemen, no large transaction fees, and no limits on amounts sent to anywhere in the world. Transactions are fast, and secure for the most part. If the "Kill Switch" is thrown on the internet, many other process will be impacted, including regular fiat currency transfers.

This high utility value is a big reason to use Bitcoin and not leave it under a mattress speculating it'll increase in value and make you rich. Keep it mind there are at least a half-dozen other crypto-currencies being used. Litecoin is the next most thought of and its system allows for four times the number of Litecoins to Bitcoins.

I agree with your observation: if a currency is stored instead of used, the infrastructure to be able to use it will not develop and become a self-limiting factor in its use and eventual value. While to some extent true, the infrastructure needed to use any crypto-currency is easily implemented and deployed at little cost, maintenance, or expertise required. Your background in IT should tell you that.

This is a new ballgame, how popular it becomes depends upon people, not governments nor its adversarial competition...

“One big reason is its utility. There are no middlemen, no large transaction fees, and no limits on amounts sent to anywhere in the world. Transactions are fast, and secure for the most part.”

Transactions aren’t *that* fast. One can easily spend 20 minutes or more waiting for one’s transaction to be incorporated into a block and signed into the chain — and this is especially true for small transactions. This makes it cumbersome to use BTC for the single most common kind of transaction: small POS cash purchases.

Using physical BTC coins has been one proposed solution, but it’s a non-starter because it implies the existence of a single consolidated mint entrusted with producing said coins.

Using a brokerage house similar to VISA is a viable option, but introduces serious capacity concerns. Not to mention that such a brokerage house would indeed charge transaction fees (after all, transaction fees are *built into* the Bitcoin algorithm, to incentivize miners to include your transaction in their next block).

Anyway, these are perhaps minor nit-picks. What concerns me is when they’re coupled with this:

“This high utility value is a big reason to use Bitcoin and not leave it under a mattress speculating it’ll increase in value and make you rich.”

So, the high utility of BTC is tied to its convenience. That utility has to be greater than the opportunity cost of holding onto your BTC. If it’s not, then it’s irrational to spend your BTC; you lose more in the process of spending them (i.e. their potential future value) than you gain from the convenience of the transaction.

There is a positive feedback loop at play here. The more people choose to hoard, the less BTC infrastructure is developed. The less infrastructure is developed, the less convenient it is to use BTC. The less convenient it is to use BTC, the lower the utility of engaging in BTC commerce. The lower the utility of BTC commerce, the more people are likely to hoard.

I agree, but then a long period of stable prices and competition from other crypto-currencies is also at play. Bitcoins actually have amazing stable prices, albeit rising, if you look at the long term chart.

No doubt Gresham's law is at work as with PMs when it comes to fiat.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.