Bitcoin Price Hits a New High as the Virtual Currency Grows in Popularity

It's pretty clear that U.S. federal officials hoped Bitcoin would dry up and blow away when they busted the Silk Road drug marketplace, but that's not what happened. That's because, as anybody clued-in (like our own Brian Doherty) could have explained, Bitcoin is useful for so many more things than purchasing illegal intoxicants on the Internet, not that there's anything wrong with such transactions. In fact, Bitcoin briefly hit an all-time high, price-wise, relative to U.S. dollars just today. The Mt. Gox exhange recorded Bitcoin as touching $272 at one point (the solid line in the chart below is volume; the broken line is price). As it turns out, Bitcoin isn't quite ready to go away, and people aren't losing interest.

Mt. Gox

Among the companies newly adopting Bitcoin payments is Tomcar Australia, a manufactirer of all-terrain vehicles that hopes to ease international sales by using the virtual currency.

Bitcoin has also become attractive for tech-savvy international investors intrigued by the virtual currency's resilience, and the fact that it can be manufactured only in finite quantities—unlike the U.S. dollar. Interestingly, the biggest Bitcoin exchange is now, apparently, BTC China, which just pushed past Mt. Gox and Bitstamp in volume. Bitcoin has apparently become popular in that country as a store of value, since few businesses actually accept payment in the currency.

Bitcoin is unlikely to be the final development, virtual-currency-wise. Use of Bitcoin still raises some privacy concerns, though following payments remains difficult if people make an effort to cover their tracks. But with virtual currency growing in popularity, improvements and new developments are guaranteed.

Comments

[Paul.]

It's pretty clear that U.S. federal officials hoped Bitcoin would dry up and blow away when they busted the Silk Road drug marketplace, but that's not what happened.

Serious question for the Bitcoin aficionados in the room:

How many bitcoints did the feds seize from Silk Road, and is it possible the value of bitcoin went up because those bitcoins were taken out of circulation, essentially making them more rare? Am I asking the right question?

[Paul.]

Apropos of this, can someone explain this:

virtual currency's resilience, and the fact that it can be manufactured only in finite quantities

[jdtuccille]

There's an absolute cap to the number of Bitcoins that can be issued: 21 million, I believe. So the currency in circulation can't be inflated ad infinitum.

[robc]

The mathematics behind it limits the total number than can ever be created.

The math is too deep for me to explain any further.

[SweatingGin]

The mining that gets talked about is really picking transactions, making a block out of them, pointing all unspent outputs (fees) to your account, and then doing work to find a magic number that will make the hash of the block what it needs to be.

Part of the thing you add is a transaction paying new coins to you, as well.

The new coins are created as a block reward, which halves every couple of years. If you tried to make it a different number than what it should be according to the equation, your block would be rejected by everyone else.

The reward is at 25 BTC / block (about every 10 minutes) right now, and halves in another year or so. It won't actually hit zero, but by 2140, it's essentially zero. Total mined comes in at just slightly under 21 million at that point. You can't mine substantially faster than 1 per 10 minutes, because if you do, the difficulty adjusts, so the time it runs out is pretty fixed.

[Paul.]

Ok, this isn't the forum for this, but your explanation, while interesting has only raised more questions for me. I've kept Bitcoin in the corner of my eye, but only in the corner, so I'm a bit confused on who or what agency or institution issues new Bitcoins etc.

It sounds like they issue themselves through a mathematical algorithm?

[SweatingGin]

That's correct. All the clients talk to each other, and pass new blocks around. If a block doesn't follow the rules of the client, it gets ignored. Whatever blocks make the largest chain, and are agreed on by the majority of the network, win.

A formula creates new bitcoins, with the rate of creation halving every few years, until it hits zero. No way to issue more, ever.

[SweatingGin]

Feds seized 27k from the mixer, IIRC (throw coins in, get other coins out), and it sounds like 144k coins from DPR himself.

Those ones being out of circulation could have a bit of effect on the value, but the thought is that they'll be sold/auctioned off eventually. They wouldn't account for this much of an increase, though. There's 11.9 million in circulation at the moment, so 1.4% or so.

[Paul.]

Thanks, that helps.

[Cytotoxic]

I'd like to note that the Feds were only able to get some of those coins. Many more were on an encrypted wallet so while the Feds have them the can't spend them.

[Almanian!]

WHEN IS THE BITCOIN BUBBLE GOING TO BURST??!!

[waffles]

When you buy some, silly.

[robc]

I own .08324 bitcoins.

So $21.50 at current rates.

[Mr Whipple]

I got you beat.

Welcome xxxxxxxxx
Account: 0.09609 ?
Orders: 0
Messages: 0

[Jayburd]

I predict plastic grocery bags will be the new currency.

[waffles]

I guess legislatures are trying to make them finite. But they aren't as useful as a bitcoin is now and not nearly as useful as bitcoin can be.

[robc]

btc is useful for playing online poker.

None of those nasty "rules" and "restrictions" and "regulations" that come with transferring money to and fro.

[SweatingGin]

Once you get setup with BTC, it's remarkably easy to send and receive. The addresses may be a bit ugly (changing with payment protocol RSN).

Once you mess with it, you start to realize that leaving your credit card information on file with everyone you do business with kind of sucks. Much nicer to just say "send x amount to y person, and done." The amount of info they need from you based on that is a lot less.

Ordering physical good? You need an address. That's it.

Ordering digital good, or donating to a kickstarter, or whatever? Nothing needed. Nothing at all. Just sent it, and that's it.

[Mr Whipple]

Also useful for buying Glocks and blow.

[Paul.]

I predict plastic grocery bags will be the new currency.

Banned in Seattle! Film at 11.

[Mr Whipple]

I usually take a dead spotted owl with me and just shove the groceries up its ass. I have several of them, and I am always on the lookout for more.

You can never have too many spotted owl grocery holders.

[Rufus J. Firefly]

Ok. Time for me to understand how all this works. Simply, I go on a bitcoin exchange and buy bitcoins with say Canadian dollars? So whatever the exchange is I get x-bitcoins in exchange for x-Canadian dollars?

I can then go on and buy a product from a business that accepts them who in turn simply convert them back into cash? So if I buy an Australian widget for 5 bitcoins the company who receives them keeps bitcoins or exchanges them?

What's backing the value of bitcoins?

I don't get this. Help!

[Paul.]

What's backing the value of bitcoins?

Without understanding the math of it, people's faith in its viability as a store of value. Just like, well, pretty much anything else.

Traditionally, thoughout human history, Gold has been a store of value. While it's been reasonably argued that the choice of gold as a store of value was arbitrary in itself, gold does have certain unique properties which tended to make it universally attractive.

From where I sit, bitcoin is a bit like Facebook as a 'store of value'. I don't see why someone couldn't invent a new bitcoin-esque competing currency, and everyone would suddenly jump to that, much like MySpace users did with Facebook.

I don't see this as a negative about Bitcoin per se, but just a neutral statement as I perceive it.

If enough people place their faith in the value of bitcoin, it will have value. Just like certain cultures put their faith in the value of seashells.

[Rufus J. Firefly]

Thanks Paul. You care more than Obama.

[Paul.]

PaulCare comes on 4 CDs, instead of the 22 floppy Disks Obamacare comes on.

[Mr Whipple]

The attractiveness of BTC is that it is decentralized and unregulated. The regulations that do come into play are the ones at the exchange level. However, technically, that's just more regulations on your fiat.

BTC is very useful in countries where there are capital controls, such as Argentina and Iceland, and previously Cyprus.

[SweatingGin]

Someone could invent the new bitcoin, but it would have to be radically better in some way to take any portion of market share.

Ie, if you were trading in gold, what would make you switch to platinum? The network effect is stronger, which is also why I'd say the alternative crypto currencies aren't going anywhere.

[Spoonman.]

So, I've had this idea running through my head, which is probably a bad one, but I'm not entirely sure why yet:

Bitcoin mortgages. Sort of a LendingClub setup, where individuals along with larger players can buy into loaning somebody some bitcoins to buy a house. The loan would be paid back in bitcoins as well.

Upside to lenders: Non-US people could easily invest in US real estate, payback in bitcoins potentially reduces the harm done by inflation.

Upside to borrowers: Lower interest rates because of the lender upsides above.

[itsnotmeitsyou]

The problem I can see with Bitcoin lending is that the value of a Bitcoin is too volatile. The currency is too young and the price moves too quickly and is continuing to climb.

Imagine if I lent you enough Bitcoins to buy a house a month ago. For ease of math, we'll say the house you buy has an equivalent value of 1,000Btc. So, I lent you 1000. A month ago market value of that is around $140,000 USD. Today, it's about $260,000 USD. You spent those BTC on a $140k house, which it is still worth about $140k. However, your debt to me is now worth about $260,000.

[Paul.]

I'm not sure that's a problem, but I don't know if I can articulate it in a comment, especially while I still haven't completely worked out why in my head. I'm just not sure.

You're comparing a store of value to another store of value. I'm tempted to ask why the lender would care if the value comparison of the bitcoin he owes you is volatile when compared to a different store of value that people are losing faith in.

There's a lot of circles of logic spinning around in my head on your point-- which i think is an excellent one, just not sure if I see it the same way you do.

[itsnotmeitsyou]

I had to use something to assign a recognizable value to BTC. I could have used goats instead and it works. I lent you a sum that would buy 1000 goats, but only a month later, you owe me a sum that would buy 2200 goats. Does that make more sense as to why it's a bad idea. Not for the lender, but for the debtor.

It's the same with inflation/deflation problems in lending USD. If I lent you $1000 USD today and over the next year we have some serious delfation, the $1000 USD I lent you has much higher buying power than from the previous year. Effectively meaning you owe me more money. The converse is true of inflation. If the buying power of that $1000 decreases, you effectively owe me less money.

Once the value of BTC stabilizes, lending will become worth the risks for both parties and Spoonman's idea could work.

[Paul.]

Ok, what about this though (and I may be over simplifying or just not getting your point).

If I owe you $10 which buys me one goat, then the next week, that $10 will buy two goats, if I have dollars in my pocket with which I will eventually be paying you back, those dollars are worth more to me, just as they are to you? I'm not sure why I, as the debtor, have been harmed by the change in value.

[itsnotmeitsyou]

The problem, for you as the debtor comes in how much money you are going to be repaying me.

In your example, I gave you enough money to buy one goat but you have to repay me enough money to buy two goats. The value of goats didn't cut in half, the value of your debt doubled. You don't have two goats, because when you bought it, the money I gave you would only buy one goat. So now, you have one goat, but the debt load of two goats.

[Paul.]

How is that any different from a 30 year load on a mortgage done in dollars?

The stuff my dollar buys now is considerably less than what my dollar bought back in 1979, but yet I'm still paying you back 68,000 physical dollars (with interest-- but interest in an amount that was pre-determined in 1979- presuming a fixed rate).

[itsnotmeitsyou]

Sorry, didn't see your response when I posted that other part.

The difference is mainly in the rate of change and predictability. Even though we have inflation in the dollar and buying power diminishes over time, it's more predictable than BTC and currently going in the opposite direction.

With the loan you got back in 1979, they were betting that rates of inflation would be predictable and charge interest partly to offset the loss of value in the money. Have you ever multiplied your monthly mortgage by the number of months it is to find out the total you are paying back? It's a hell of a lot more than $68k.

Back to the fact that BTC are currently increasing in value, not decreasing like most currency. From a lender's standpoint, this is fantastic. I could give you a loan at 0% and still make tons of money when you pay it back. In order to make it fair for both parties, I'd have to charge you negative interest so that you payed me back a similar value that I lent you.

[itsnotmeitsyou]

Your $68k mortgage would be repaid with somewhere around $250-300k over those 30 years. A quick lookup tells me that $68k of 1979 money is worth aprox $215k in today's dollars. So even though the actual number is much higher, the amount of value you're paying back isn't much more than what you borrowed. The bank isn't making $230k in profit on your $68k purchase, they're making about $40k (in today's dollars) overall.

[Paul.]

Have you ever multiplied your monthly mortgage by the number of months it is to find out the total you are paying back? It's a hell of a lot more than $68k.

Yes, that's because of interest.

Back to the fact that BTC are currently increasing in value, not decreasing like most currency. From a lender's standpoint, this is fantastic. I could give you a loan at 0% and still make tons of money when you pay it back. In order to make it fair for both parties, I'd have to charge you negative interest so that you payed me back a similar value that I lent you.

I was going to ask about the possibility of negative interest. I'm glad you brought that up.

So we can say that $10 = one goat.

Now the value of the currency doubles, so now $10 = two goats. Simplified, we can now say that $5 = one goat.

Ok, I think I'm beginning to get this.

I owe you $10, but the value of BTC has doubled so when I sell the next goat, I make half the physical bitcoins back in profits (because they're worth 2x) but I still owe you the ten actual bitcoins.

Hmm, ok, now you got me to thinking about this differently.

[itsnotmeitsyou]

Glad to hear I'm mostly making sense. Sometimes things make sense in my head but don't translate well to English.

Yes, you're paying back 4x the physical amount you borrowed due to interest. However, if it weren't for inflation, the rates that banks charge for long term loans would be exorbitant.

If currency value were static, making you pay back $300k for a loan of $68k would be usurious and nobody would take that kind of deal. But, because they have to account for the devaluation of the money. In other words, the $300k you pay back in today's money is only about $100k in 1979 money. So, if currency value were static from 1979 to present, you would only have paid them about $100k total, not $300k.

[SweatingGin]

The opposite, I think. Without inflation, banks would charge lower interest, as the money they are being paid back with has roughly the same value.

In a non-inflationary, commodity money standard, you'd probably *pay* the bank to store money for you.

Inflation benefits debtors at the expense of savers and lenders.

[Paul.]

Inflation benefits debtors at the expense of savers and lenders.

This, which is why I was scratching my head (at insight over my own comment) about paying back a $68,000 1979 loan at a fixed rate. If those dollars are worth a quarter of what they're worth 30 years from now, the lender got screwed. (Ignoring the fact that interest rates in 1979 were fuck-ugly).

[SweatingGin]

The lender sold the loan to Fannie Mae and got paid later the same day the paperwork closed.

[Paul.]

The lender sold the loan to Fannie Mae and got paid later the same day the paperwork closed.

Ed Zachary.

[itsnotmeitsyou]

The opposite, I think. Without inflation, banks would charge lower interest, as the money they are being paid back with has roughly the same value.

This is exactly what I'm trying to say. As I said, sometimes the brain to english conversion doesn't go as planned.

Yes, if there were no inflation, the banks would have to charge very very low interest rates to stay competetive.

If those dollars are worth a quarter of what they're worth 30 years from now, the lender got screwed. (Ignoring the fact that interest rates in 1979 were fuck-ugly).

Yes, that's why interest rates on mortgages are as high as they are. To offset the devaluation of money. Otherwise the lender would get screwed. I figured your mortgage was about 7.5% or higher (yeah, they were really ugly rates).

Let's say the bank had charged you 2.5%. You would have paid back only about $125k in today's dollars. If you convert that back to 1979 dollars, it's about $42K. So, you'd actually end up paying back less (in actual value) than you borrowed.

[Paul.]

I figured your mortgage was about 7.5% or higher (yeah, they were really ugly rates).

Well, no, I have a more recent mortgage at something like 3.5%. I seem to remember 70s rates approaching 19%? I'd have to research the Carter years and all the Stagflation that was going on.

[itsnotmeitsyou]

Also, just to address part of your response.

If I lent you that amount of money and you put it in your pocket and then a week later repaid me with the exact same money, it wouldn't really hurt you at all. That's not what's happening. What's happening is that you are taking the money I lent you and converting it to a different value. In this case, you're converting dollars into goats. You aren't going to be paying me back in goats, you're going to be paying me back in dollars, so you'd have to re-convert your wealth back into dollars.

So, some basic math. I give you $10.

Your assets: $10

You then take that $10 and trade it for one goat.

Your assets: one goat.

So we can say that $10 = one goat.

Now the value of the currency doubles, so now $10 = two goats. Simplified, we can now say that $5 = one goat.

So, nothing about your current assets have changed, you still only have one goat.

Now I come to collect (I've brought "Tiny" and his bat, so you better pay up)

You still owe me $10, but the assets you have are only worth $5. You either have to do some sort of work to earn that $5 difference, or Tiny is gonna rearrange your organs.

[Paul.]

I think the answer would be to default on the loan and let Obama bail you out. It's the only rational way out.

[itsnotmeitsyou]

Not to mention completely ethical and in no way immoral.

[Paul.]

You see, it's conversations like this that make me think progressives are by definition, completely beyond understanding this stuff. I mean, it's like they don't even care.

It's like explaining math to Baldric from Black Adder.

Edmund: "Ok, Baldric, if I take two beans, and give you two more beans, how many beans do you have?"

Baldric: Some beans!

Edmund: Baldric, was the renaissance something that just happened to other people?

[itsnotmeitsyou]

I agree with you, but I'm not sure I understand how you got that about progressives from this conversation.

Is it because they don't like facts to get in the way of emotion and are therefore incapable of having an intellectually honest conversation?

This conversation tells me that you, Paul, are an intelligent and intellectually honest individual. You came into this thinking one thing was correct and then changed your perception to fit reality. Progressives try to change reality to fit their perceptions. (at least I think that's where you were going with this)

[Paul.]

I agree with you, but I'm not sure I understand how you got that about progressives from this conversation.

It was a mental tangent I had about matters financial, stores of value, where value comes from, how price isn't what you say it is, it's what the market will bear (unassailable wisdom of the Lone Biker of the Apocalypse) interest, unintended consequences, and how progressives believe, really believe to the core of their being that they can just pass a law and none... NONE of the things we're talking about will matter. Because a law.

Just print more money! Just forgive the loan! Just make it illegal to charge more than X%! Just make it so everyone is guaranteed at least $x!

[Paul.]

This conversation tells me that you, Paul, are an intelligent and intellectually honest individual.

All those words are really never used in descriptive passages which apply to me. I'm going with what you said.

[Dr. Frankenstien]

You would almost need a futures market fo some sort in bit coin for lending. Although now that I think of it that's kind of what loans/credit market are right now.

[SweatingGin]

A lot of places are staring to offer discounts for purchases in BTC, expecting future increases in value.

[Cytotoxic]

More importantly BTC has lower transaction costs.

[Jull]

I can hardly get the idea of all the virtual currencies, though using them from time to time. I can realize how online loans until payday can improve my situation at least for a short period of time, but how virtual money can help me if financial difficulty is a little vague for me.