Anyone here into Bitcoins?

[Johann]

...the technology needed to "mine" them was becoming too complex and that the bitcoin of the future was something called litecoin, which the radio operator was "mining" at a rate of about $20 per day.

There have been 54 "Bitcoin" clones (including Litecoin) established since April. Do I need to say "bubble" one more time?

"Mining" consists of earning rewards by using a computer to verify transactions for vendors (proof that the bitcoin hasn't been "double-spent"). The work involves computer solution of very complex math, for any digital currency.

Lite-coin says its "mining" system opens to the doors to owners of more "average" computer equipment. Effective Bitcoin mining mandates very upscale computer hardware. I'll pass on both - and the other 52.

Johann

[ejcompere]

Problem with that is the coins take about as much energy to make as they are worth. IE: You'd pay almost the same amount for the electricity and equipment needed to make the result.

Intriguing quasi-serious proposal in this morning's newspaper: pay off the national debt with Bitcoins.

[Daithi]

I'm not an economist or even a business major. However, I do enjoy learning, and I've been spending a fair amount of time researching bitcoin and how money works in general (lot's of biased opinions and I'm sure I am no different in holding a biased opinion). In any event, the following is how I see the case for and against bitcoin.


The Case For Bitcoin

1) The Chinese are investing heavily in bitcoins.

a) It is hard to get money out of China and bitcoin is one path to solving this problem for rich Chinese citizens.

b) The Chinese want a viable alternative to investing in the dollar via loans, and the Chinese would love to see bitcoin become that alternative, because it can't be printed at a governments whim and doesn't suffer from the effects of inflation.

c) For political reasons the Chinese would like to see the entire world move away from the dollar as the world's primary reserve currency. Anything that takes the U.S. down by a peg or two has a certain appeal. I'm sure China isn't the only country with this desire.

2) Bitcoin has reached close to critical mass, unlike the 50+ other competing digital currencies. Anyone is free to create a similar digital currency, but it only has worth if people embrace it. Once a Facebook, Amazon, Google, etc. is established it is very hard to unseat them (but not impossible). This also applies to bitcoin.

a) Bitcoin received a cautious blessing by Federal Reserve chairman, Ben Bernanke, during a recent U.S. Senate hearing on bitcoin, where he stated that it has "long term promise."

b) Bitcoin has recently been recognized by Germany as private money.

c) Bitcoin has had major exchanges set up in China and Japan where people can exchange hard currencies for bitcoins.

d) Bitcoin is increasingly becoming the darling of Silicon Valley entrepreneurs and venture capitalists.

4) Bitcoin is like gold -- only better.

a) There is only so much gold in the world and you can't print gold. Bitcoin is similar in that there are finite number of bitcoins. Technically, the bitcoin money supply is growing at a predetrmined rate (kind of like mining gold), but it's growth is slowing, and once it reaches 21 million coins the growth stops. This is in contrast to the dollar (and other fiat currencies) where the money supply is manipulated by government (or quasi-government) entities. For example, the Feds QE-1, QE-2, and QE-Infinity programs where they are basically printing money to try and stimulate the economy. Other examples include the printing of German Marks during the Weimar Republic and more recently the printing of currency in Zimbabwe. Gold, and bitcoins, cannot be "printed" so they don't lose value due to inflation.

b) Bitcoin has two major advantages over gold. The first is that divides really easily. You don't have to use an entire bitcoin. You can use just a fraction of a coin. The 2nd, and even more important advantage, is that bitcoins were built for electronic commerce. You can exchange bitcoins over the internet and without the transaction fees associated with dollars (e.g. Visa, Mastercard, Paypal).

5) If bitcoin takes off like Facebook, Amazon, etc. then the early investors will make a financial killing. It is not too hard to envision that a decade from now bitcoin has grown into a major currency. It could become the kind of currency that is widely accepted by both online and B&M businesses (remember, no transaction fees). It could become the preferred method of payment where people would rather use a simple app on their phone to exchange money instead of even cash. It could even supplant the dollar as preferred currency world wide.

[Daithi]

The Case Against Bitcoin

1) IT SMELLS LIKE A BUBBLE!!!
Bitcoin has exploded in value over the last year. It has gone from a single bitcoin making news when the value of one coin surpassed the U.S. dollar to now a single bitcoin costing more than $1,000. The biggest fear facing bitcoins is that they are starting to look an awful lot like Dutch tulips.

2) Bitcoin has some technical problems. The mechanism for verifying transactions is a little convoluted and so is the corresponding "mining" / built in growth feature. Bitcoin may survive these "features" as it has a major head start in becoming the dominate digital currency. However, MySpace once had a major head start in social media but was overtaken by Facebook. Similarly, Google overtook Yahoo.

3) Bitcoin could get crushed before they really take off.

a) The Chinese have not tried to stop investment in bitcoins, but that could change tomorrow. Bitcoin is nearly anonymous easily abused on the blackmarket. The Chinese could easily decide that supporting bitcoin is no longer in their best interest. Currently, the biggest bitcoin exchange, where people exchange dollars and Chinese yaun for bitcoins, is located in China (the 2nd biggest exchange is in Japan). The Chinese government could easily shut this exchange down tomorrow, and the price of bitcoins would plummet.

b) The U.S. government could also put an end to bitcoins for U.S. citizens. All they have to do is declare bitcoins illegal as currency and make it illegal for U.S. financial institutions to transacts business with bitcoin exchanges (this is how they shutdown internet poker sites to U.S. citizens). Yes, you could meet up with someone on craigslist to buy bitcoins with cash, but the reality is that if the U.S. government shutdown access to bitcoin exchanges then the U.S. market in bitcoins would collapse. One again, the price of bitcoins would plummet.

4) If bitcoins ever do takeoff and become a dominate currency then people may soon realize that there was reason the world moved from the gold standard to fiat currencies.

a) Currencies like gold, and presumably bitcoin, may not be inflationary, but they have the other problems. Their biggest problems are that they are deflationary and also very volatile.

i) If you have a gold coin that is worth $100 today, but will be worth $200 next month, and worth $300 the month, and maybe more even later then you would be a fool to spend your money today. This is what often happened with gold. It often appreciated in value, so people stopped spending it and saved it (or hoarded it). This forced companies that were making widgets to lower their prices to entice someone to spend their money. This was deflation. It may sound good at first, because as your gold appreciates it can buy more and more stuff (widgets). However, it isn't so great when the company for whom you work closes down because it can't sell the widgets you are making.

ii) Eventually, people need to buy stuff, so at some point they will reluctantly part with their gold. Goods start selling again, and people start getting employed again, and then people start hoarding again, and it is a vicious cycle. Booms and busts and volatile gold prices with big swings in unemployment rates. But the predominate trend is deflationary.

iii) People who borrow gold coins, and presumably bitcoins, also get screwed (yeah, it's a technical financial term invented by Keynes -- go look it up). Suppose you borrow $100,000 in gold to buy a home and you have to pay back the load in 10 years. Well, because of deflation, your $100,000 in gold today has the purchasing power of $500,000 in gold 10 years from now. This means that 10 years from now you are obligated to payoff a house that is now only worth $20,000 in gold. Or another way to look at it is your $100,000 in gold would buy a $500,000 home in 10 years. Lenders get screwed under inflation, and borrowers get screwed under deflation.

b) World governments could create their own digital currency (spoiler: my biased opinion follows). It is possible to create a digital currency that is beyond government manipulation and that is neither inflationary or deflationary. It is a form of money that holds its own value based on a "basket of goods." For example, suppose there is a basket of goods that reflects the world's output of goods in terms of GDP. So, oil and natural gas might make up 12% of this basket, and housing 10%, and healthcare 5%, and so on. Then the value of a U.N. coin (a bitcoin alternative) would be set to float on the value of this basket of goods. In other words, you would have more or fewer U.N. coins as the price of goods fluctuated. However, this would probably not apply to the vast majority of people, because you would have to have a massive net worth to be affected by price fluctuations. The benefit of this U.N. coin is that it would be neither inflationary or deflationary as it is fixed to the value of the goods it can purchase. However, over time, as the world becomes more productive, our purchasing power would increase.

(An exercise for the reader. How would this effect poor countries? Would they be better off or worse off? In other words, the buying power of the U.N. coin would likely be different in various countries. How would that effect them? What about currency manipulation of a country's currency that doesn't switch to the U.N. coin but floats or pegs their currency to the U.N. coin?)

c) Item b is just one possible world currency that could displace the bitcoin. There are lots of other possibilities that aren't so rosy and involve government mandates. Governments don't like money that they can't control, can be used on black markets, and can't be traced for income tax evasion and fraud. I have a hard time believing that something like bitcoin would be allowed to exist long term.

Bottom Line: I think the bitcoin could see a short term growth in popularity and has the possibility of being the next biggest thing on the internet. It could result in early adopters making lots of money. However, there are no guarantees. I also think early adopters need to be very careful as it is VERY likely that bitcoin will not last long term. I have to believe governments will step in at some point. That's my take anyway.

[Johann]

Daithi - I like your analysis. Very thorough job.

One thing I would disagree with: "Bitcoin is like gold - only better." I'll take that awful, problematic gold any day, over Bitcoin. It's got thousands of years of history - Bitcoin's a bit newer.

One thing I agree strongly with: The US government could make Bitcoin illegal for its citizens at some point - like they did with Internet Poker etc.

Yep - they could. Say, they did that with GOLD once, too...when was that? 1933? Yeah - right when they repealed Prohibition. Had to forbid something, I suppose.

Johann

[EI2HCB]

Not only that but they confiscated it too and stored it up! A pre 1933 gold coin is worth many times the spot price of gold. Then they removed silver from circulation so I guess bitcoin will follow a similar fate at some point in the future. Unless we all adopt Daithi's U.N currency and move towards a one world government. If my country Ireland had the ability to print and control its own money its economic situation might be moving at a different pace so the value of money control is only really felt when its lost. I wonder about the inflationary and deflationary cycles Daithi noted regarding how they effect people who have amassed all the goods they need (say preppers) and have eliminated their debts. I'm neither but I wonder of the value of such positions, for example how much stuff would be enough to put away in a deflationary cycle to prosper in an inflationary one.

[Daithi]

From a Reuters article today:

Dec 5 (Reuters) - China's government banned financial institutions from trading in bitcoin on Thursday, in what analysts said was a restrained first step towards regulating the digital currency that has exploded in popularity in China and soared in value in recent months.

The article also mentions that Bitcoin has now fallen in value by 11% and that an expert they spoke with said--

[he] would not be surprised to see the value of bitcoins fall as much as 50 percent over the next week or two.

[Johann]

...people who have... eliminated their debts.

Been there. Done that - for only one reason. When I die, I don't want creditors chasing all over Hell after me!

Johann