Covered at Reason 24/7: Bitcoin Now a Billion Dollar Market

Reason

The cryptocurrency bitcoin is becoming increasingly popular. All bitcoins now in circulation (there are about 10.9 million of them) are now worth more than a billion dollars. The debt crisis in Cyprus is being cited as one of the reasons that bitcoin is exploding in value as more Europeans seek ways to keep the government away from their money.

From Tech Crunch:

Hang around in the tech industry long enough and you or someone you know will be heard saying, "that's so crazy it just might work." Two years ago, if you'd have told me that an open-source, P2P currency would soon be a thriving, billion-dollar market, I would've told you that you were on a lonely bus headed to CrazyTown, U.S.A. But today, Bitcoin officially became a crazy idea that's actually working.

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Comments

[HazelMeade]

I'm not convinced.

While it is possible to exchange bitcoins for dollars, there is very little that you can purchase with bitcoins that has any material value. The value of bitcoin has been spiking lately, but that's probably a speculative bubble. Almost all bitcoin transactions involve online gambling. You can purchase a reddit membership with bitcoin, but what is that worth? The only reason to buy bitcoin right now is because you think bitcoin is going to be worth more in the future, and that's obviously what everyone is doing.

[Mo]

This. The key to a currency actually mattering is acceptance. Right now, bitcoin acceptance is somewhere between BerkShares and Liberty dollars.

[John]

Currently, yes. But there is nothing to say that won't change. Indeed, that is the bet one is making when buying them.

[kinnath]

is somewhere between Euros and Dollars you mean.

[Cytotoxic]

Microsoft and Amazon are accepting it as payment. More outlets are signing on everyday.

[kinnath]

Buy a virtual book with virtual coins. I like it.

[StackOfCoins]

That's undoubtedly snarky but, as you probably know, there are tons of hard goods on Amazon you can buy with your digital money.

[Mo]

No they don't. You pay a third party that will then use a currency that Microsoft or Amazon accepts. That is a completely different transaction flow.

[John]

But lots of things have little material value. What value does gold have? You can't eat it. Yes, it does have industrial uses. But its price and durability of value goes well beyond what strictly industrial demand would create. It is valuable mostly because people think of it as being valuable. Why can't bit coin be the same?

[Randian]

And I bet if you tried to give the gas station clerk the right amount of gold for a Clark Bar he'd tell you to eff off.

That doesn't mean you should throw your gold away.

[Death Rock and Skull]

It would probably be easy to convince somebody to accept any amount of gold for something like a candy bar, if they actually believed it is gold.

[Randian]

True, but the same could be said for BitCoin.

[Paul.]

Only because the gas station clerk couldn't verify the viability of the gold. Also, his employer doesn't have an easy way to transact it. But if you gave that same gas station clerk the right amount of gold (assuming the viability of the gold were verified) for something he was willing to sell off his back, he'd be a fool not to take it.

[SweatingGin]

also, if the amount of gold in a bottle of goldschlager is correct, after updating for price, that candy bar would be about 1/5 of the gold in the bottle.

[Smack MacDougal]

These people wouldn't buy a one-ounce gold coin for $50.

https://www.youtube.com/watch?v=7z6SAVjjXqo

[Francisco d Anconia]

Actually, it's valuable because the only thing that can make it is a supernova.

It's rare.

[kinnath]

It is useful and rare, so it has more intrinsic value compared than many other commodities. It is also pretty, so it has some addtional artisanal value over and above its intrinsic value. But salt was money at one point as well.

[John]

Lots of things are rare. But not every rare thing holds value like gold. Gold is valuable because people collectively decide it is.

[kinnath]

All the precious metals (cooper, silver, gold, platinum) have great utility.

[Emmerson Biggins]

But people collectively decide it is because it's rare, useful, transportable, fungible, hard to fake, etc. It isn't just an arbitrary superstition. If we lived on a planet were gold was really plentiful, but copper was super rare, copper would be worth more than gold.

[kinnath]

Aluminum used to be so rare that royaly used aluminum tableware as a sign of their wealth. Then someone figured out how to process bauxite.

[Rights-Minimalist Autocrat]

And you'd have gold wiring in your house.

[Paul.]

Gold has held universal appeal since it was first discovered by humans. It has unique properties which almost no other metal has, and it's sufficiently rare.

In other words, you're half correct, John. Gold has value because humans say it has value. But humans say it has value because it has unique properties that few other materials have.

If seashells were sufficiently rare and had unique properties, they too would become a standard of currency.

[heller]

But it has value as a non-state currency, its value is immune to inflation from monetary policy, sort of like gold. The value of gold isn't based on what it can buy, it's based on its independence as a store of value.

[phandaal]

This. Gold or some other easily-tradeable physical commodity can always be exchanged for whatever currency you need to deal in at the time.

[Randian]

See also Tide Laundry Detergent.

[phandaal]

You might be on to something there. I don't think Tide goes bad, either. It just kind of dries up.

[anon]

It's not him so much as urban areas using Tide to buy drugs.

[phandaal]

But can you use drugs to buy Tide? Dealers need to do laundry too.

[AlmightyJB]

If you look at it from their perspective they are. It's money laundering operation. ugh.

[ant1sthenes]

Reddit should devise a completing cryptocurrency and call it... wait for it... creddits. Get it?

[neonvirus]

Buying gold and silver with bitcoins isn't good enough?

https://www.goldsilverbitcoin.com

https://www.amagimetals.com

[Tim]

I'll know it's a success when the Feds decide to regulate it.

[AlmightyJB]

I don't invest in anything I don't completey understand. I don't see how anyone can price this accurately at this point.

[Rights-Minimalist Autocrat]

I didn't know much about it either, so I read the Wikipedia page, which contained this bit: "The large fluctuation in the dollar value of a bitcoin has evoked criticism of bitcoin's economic suitability as a currency."

I immediately thought that that might be a problem with the dollar, not bitcoin. Then I checked the source for that quote and it was none other than Krugnuts. So there might be something to Bitcoin after all.

[AlmightyJB]

Yeah, you can pretty much bank on the opposite being true whenever that idiot opens his mouth. So maybe I should purchase some:)

[Adam]

Someone should come up with a name for people who listen to him and then immediately say the opposite will be true. Like contrarian, but with Krugman's name, or "Krug", inserted somehow.

[StackOfCoins]

Krugtrarian? /obvious

[Sigivald]

I'm sympathetic, but no.

The dollar hasn't fluctuated that much and in that way.

(Reminds me of the gold bugs who assert that the dollar has lost 3/4 of its value in the last decade, because gold has quadrupled; since they assert that Gold Has A Fixed Value, that is the only possible cause.

Problem is, Gold has value as a hedge as well, and it's where paranoids go when other currencies look shaky - its value is intensely variable the same way all commodities are.)

If bitcoin doesn't simply collapse (possible), the value of bitcoins is liable to rise in the general, economic sense - because they're a strictly deflationary currency, once the entire set of possible bitcoins exists.

Problem is that's no guide to current investment, because we have no idea how much current bitcoin value is bubble-y, nor how widely adopted it might ever be.

(* If one was sure that bitcoin would eventually be The Currency of the world, one would be mad to do anything other than acquire as many as possible right now.

Revealed preference suggests nobody's all that sure about it.)

[heller]

Does it matter? If you had invested in bitcoins at its peak less than two years ago, you could sell today with a 170% profit.

[AlmightyJB]

That would only matter to my if I HAD invested in Bitcoins two years ago. Of course there was no way to know the return then, just as there is no way to know whether two years from now it will double in value or be as worthless as a beanie baby which also had pretty impressive increases in value when they were new.

[Cytotoxic]

I don't see how anyone can price anything right now.

Drug dealers use this. That means it's always going to have some value.

[kinnath]

I truly hope that bitcoin and other alternate forms of money become wildly successful in the next decade. I am supposed to retire in about 12 years, and I would dearly love to move my 401K beyond the reach of the vultures in D.C.

[anon]

Nah, if an alternate currency gains traction the Federal Hammer will drop. Always has, always will. Fear keeps the locals in line.

[AlmightyJB]

Absolutey true. If they feared everyone was going to trade- in their dollars for gold they would outlaw all gold transactions.

[Cytotoxic]

They can drop the hammer all they want. The internet isn't going anywhere.

[anon]

Oh really? China, Iran, Syria, Egypt, North Korea... Just a few of the many others that disagree with you.

[Adam]

You've got a good point, but I lived in Syria and I just talked with a friend of mine their on Skype today, which was illegal two years ago....but, everyone was doing it then anyway. Same goes for facebook, black market currency exchangers, etc...

That being said, I don't (yet) see why they couldn't outlaw it the way online gambling has been. The internet won't go anywhere, but what is keeping the FED's from coming down on this?

And while we're on the subject, why don't the Feds see Bitcoin the way they did the liberty dollar. I don't understand Bitcoin well enough to see the difference, aside from the fact it's a virtual currency and Liberty dollars were physical certficates with matching silver reserves?

[anon]

Because bitcoins aren't a printed currency, and hence the feds don't really grasp the concept. Yet.

Regarding the online gambling: They have outlawed it. Now you just have to transfer funds thru a third party to deposit them into your account.

[Palin's Buttplug]

There is no method of shorting Bitcoin, apparently. This portends big trouble if so.

[Paul.]

There's a method for shorting anything, Shrike.

Or do you really mean the particular boiler room you work for has no procedure for it?

[phandaal]

There's no such thing as a futures contract, apparently.

[Sigivald]

Once people care enough about Bitcoin for one to exist, one assumes it will come about...

(Per johnl, I wouldn't expect the Bitcoin market to be developed yet.

I'm not sanguine about Bitcoin's future, but the fact of a futures and loan market not yet existing is irrelevant.

For that matter, I don't expect a loan market unless it makes it to a First Rate currency; right now it's mostly being used as a way to buy drugs on the internet, or by mildly crazy people who think it will be The New World Currency.

The former buy for immediate consumption, so they don't have much need for a loan market.

The latter are equally - for obvious reasons - not intersted in being loaned a bitcoin; they want to keep them speculatively.

[johnl]

OK, who is lending Bitcoin? A developed market has to include lenders, borrowers, depositors, and such.

[anon]

Maybe one of the dumber things I've read.

[ant1sthenes]

It's shrike, what did you expect?

[anon]

Bitcoin is popular because it's used to conduct many transactions for commodities that are deemed illegal. This isn't really as much of a sign of Bitcoin's strength as much as the black market's impending victory in the WAR ON DRUGZ!

[Adam]

Sounds like a sign of Bitcoin's strenth to me. As above board merchants discover how easy it is to use for their transactions I don't see any reason they won't jump in.

[Sigivald]

But why would they want to?

Bitcoin's advantage of anonymity and being outside the existing monetary structure are huge for the black market.

But for the normal market, they're so close to worthless as makes no difference.

Who wants a second parallel payment infrastructure to take money from a tiny minority of people?

Plus, who wants to deal with exchange rates and trying to do something with those incoming bitcoins, as a business?

They're too hard to convert to the major currencies.

If bitcoin was trivially convertible to dollars, that would be another matter... but if it was trivially convertible, that'd be another reason not to accept it directly.

[anon]

Also, re: rarity vs value; Rarity is just one part of the equation to consider when valuing a currency. Marginal utility must also be considered. This is why central bankers love currency that has no inherent marginal utility, like paper; it's easier to "adjust" the value to whatever they think "right" is, which is also usually not good for the plebes.

When you use a commodity like gold, aluminum, platinum, etc for currency, you have variations in the currency due to mining operations, jewelry demand, electronics demand... pretty much anything anyone can dream up can alter the value of your currency, which makes a decent argument against using precious metals as a currency.

I'll preemptively add that I don't have a solution to the currency problem, I just know that neither Gold nor arbitrarily appointed government bureaucrats are the "right" answer.

[phandaal]

Don't forget the metallic asteroids that people are set to begin mining at some point in the future.

That being said, physical commodities, or something backed by a physical commodity, are way harder to mess with than fiat money. Gold has to be gotten out of the ground (or seawater) through a physical process that takes capital and labor, and it's finite. Fiat money is theoretically infinite and can be created essentially by writing a number on your balance sheet.

[anon]

That being said, physical commodities, or something backed by a physical commodity, are way harder to mess with than fiat money.

Yes, that was covered in the first part of the argument.

I'm not saying physical commodities are bad currencies, I'm merely saying they are subject to value variations that are largely unpredictable. There isn't a perfect currency is my primary point. That said, central banks are the solution to a problem that doesn't really exist.

[phandaal]

Seems like I read what you wrote and then forgot immediately. Brain meltdown.

I agree that no currency is perfect. I also agree that what central banks purport to achieve has nothing to do with what they actually do achieve.

[omaninom]

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[anon]

There's absolutely no reason I would want to help some random asshole that can't even make his own mortgage payment keep a house he obviously can't afford. Let it go and the property value adjust to a more correct position so that someone who's earned it can have it.

[HazelMeade]

Bitcoin WAS used for drug transactions, but IIRC the feds cracked down on silk road. I sort of doubt the cartels are using anything other than good old fashioned US dollars.

[np]

You recall wrong. Silk Road is still going on strong.

[Sigivald]

That wasn't about the cartels anyway; the Mexican gangs or the Central Asian drug lords weren't ever using Bitcoin.

They just smuggle suitcases full of dollars.

Plus my impression is that much of the traffic to Silk Road and its ilk is not US traffic; there's the whole Entire Rest Of The World!