Bitcoin: It's not just loopy tulip land, it's worse

Bitcoin: It's not just loopy tulip land, it's worse

Summary: Bitcoin's erratic value and irrational cheer squad of speculators are proof this digital currency is unlikely to ever be workable for everyday transactions.

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Congratulations, libertarians, your clever little digital currency based on nothing but arithmetic, arrogance and faux-revolutionary Kool-Aid has been smeared in US Senate-love and slid all the way up to the US$1200 mark. Bitcoin is being taken seriously in serious quarters, it seems. Well done. So now it's time to build some structure and regulation around it.

Cue the sound of a million crypto-currency fans screeching a thousand well-parrotted slogans that "explain" why every other monetary system will soon collapse and nations-states will crumble — and why anyone who disagrees is just an ignorant slave to outmoded economic thinking.

Actually, the "why" is never explained, it's just asserted.

Back in April I discussed how Bitcoin is more ideology than trustworthy currency, noting such fun facts as Bitcoin's value seeming to track the number of people searching for it on Google, and that even boosters like Pirate Party founder Rickard Falkvinge consider it "still far from ready for prime time".

The comments in reply were a fascinating jumble of ideas, admittedly not all of which were completely loopy. But you'll get a much better idea of the effervescent assertions emanating from the Bitcoin wonderland by following the Twitter account @bitcoin_txt, which picks out the highlights.

These recent examples illustrate the image problems Bitcoin needs to overcome before ordinary non-geek folk can start taking it seriously.

Bitcoin as magic: "BitCoin will end ALL Hunger & Poverty (at last) through humanities caring and sharing, by instantaneously providing funds to those in need" and "BitCoin heralds the end of the misuse of money and other ponzi schemes including, pensions, copyright, patents, insurance, etc."

Bitcoin is for real men: "The Rise of Bitcoin: Why I for one welcome our new Neckbeard Overlords and how it will lead to Game-Over for Feminism" and "You cannot suppress the free currency. Go back to your clan of ugly, hairy, women" and "Feminism will suffer if crypto currencies take off simply because of reduced tax receipts; no more feminist suckling at the State teat." and "Not only are men going their own way, but they're starting their own currency and economy separate from the feminist system."

Bitcoin as infinite money: "Sigh. Bitcoins are worth at least 126k dollars each." and "a lot of assumptions are made, but i think eventually the bit coin might be worth 1 million or even more."

Bitcoin as alternate history: "THIS IS HUGE! The stuff we are working with is what scared Bill Gates into retirement!"

OK, it's easy to ridicule an idea by focusing on its loopiest supporters. But if Bitcoin wants to be a serious contender for an everyday digital currency, it doesn't need any more of this over-the-top rhetoric, it needs stability and trustworthiness — and while its monetary value may have been soaring on the back of rampant speculation these last few months, those two key attributes haven't exactly been keeping pace.

Bitcoin's wild price swings represent a risk factor that should prevent any sane business from entering into contracts based on the currency. But even if that risk can be hedged against, there's the core issue of trust — not trust in the integrity of Bitcoin's seemingly robust cryptographic protocols, although researchers have warned of fundamental flaws, but trust in Bitcoin's financial community.

When young Australian TradeFortress had a million dollars worth of Bitcoin stolen last month, he didn't report it to the police. "The police don't have access to any more information than any user does when it comes to Bitcoin," he told ABC Radio, seemingly oblivious to all the news stories about law enforcement's access to network data and his own responsibilities as a good-faith custodian of other people's money — although perhaps he was also worried about what the police might think of some of his other online activities.

When some $100 million worth of Bitcoin was stolen from the Sheep Marketplace a few weeks later, we see a few lone hackers trying to track the bandits, but once more no professional law enforcement activity — but given that Sheep Marketplace was a successor to Silk Road, we can guess why.

People accept the risks inherent in handling physical cash because they can mitigate against them with appropriate security procedures. There are specialists to help them, and when cash does get stolen the police are generally brought in to help.

But with Bitcoin, at least so far, the balance seems all wrong. The computing power devoted to transaction-verification and mining is now 256 times the power of the world's top 500 supercomputers combined — does that strike you as efficient? — but rather less effort seems to go into building a trustworthy community.

Meanwhile the speculative Bitcoin bubble continues to inflate. Hard-core Bitcoiners are presumably getting sick of it being compared with the tulip mania of 1637, but the parallels are obvious, what with the constant hype about the ever-soaring value of some random commodity — because Bitcoin is generally being treated as a commodity rather than a currency.

But personally, I'm with former president of the Dutch Central Bank, Nout Wellink, on this one. "This is worse than the tulip mania," he told students this week. "At least then you got a tulip."

Topics: Privacy, Emerging Tech, Security

About

Stilgherrian is a freelance journalist, commentator and podcaster interested in big-picture internet issues, especially security, cybercrime and hoovering up bulldust.

He studied computing science and linguistics before a wide-ranging media career and a stint at running an IT business. He can write iptables firewall rules, set a rabbit trap, clear a jam in an IBM model 026 card punch and mix a mean whiskey sour.

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51 comments
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  • Value

    The basic value of Bitcoin is it's usefulness and cost efficiency. With credit card processing so expensive it is impossible to see how it can fail, what merchant is not wanting to jump at the opportunity to accept bitcoin once the technology exists to make this more accessible?

    The basic sum for the value of a bitcoin is (amount of local currency user wants to hold in bitcoin * number users) / no of bitcoins available.

    As the number of places accepting bitcoins increases (possibly with discount incentives) then both the average holding amount and the number of users will increase, pushing up the value.

    Of course the capitalisation period is going to be bumpy as people speculate, but that is to be expected.
    ringsting
    • bitcoin will save all the ordinary people!

      bitcoin is the same like the dollar is = backed by nothing but with very small fees
      therefore bitcoin is the only real future of preserved freedom

      just paid article by the fascistic US gov or banks stealing more and more
      Jiří Pavelec
  • Experimental Protocol

    Bitcoin is still an experimental protocol. If you listen to the investors Bitcoin has the potential to be a disruptive technology for such things as Paypal, Western union, etc. and generally is an attempt to fix a broken and outdated payment system that was not designed for the Internet. It is also seen as a competing currency rather than a replacement for government currencies. When the Internet was starting you also had a group that wanted to ban advertising on the Internet.

    Just because there is a mania over the potential does not mean the underlying system does not have value.
    MillyBitcoin
  • Beta

    Bitcoin is the beta test. It is the tulip bulb of 21st century.
    paul2011
  • How to explain...

    Where to begin...

    The problem that "experts" have with understanding bitcoin is that this is version 1 of the technology, you can't expect the 1st design of anything to be perfect it has to be built on like any other technology. When Henry Ford came out with the model T he didn't sell it perfect, it was improved to compete, eventually it no longer was made because a more powerful successor was developed. I believe bitcoin has started something that will never go away, and if it was such a "loop" officials would not have came out to try to discredit it with their little fraud and illicit activity BS-PR speeches, like any other fiat currency doesn't experience the same, yes there is some inherit flaws with the system but I assure you they will be solved, insurance, policy and efficiency. People tend to discredit bitcoin because you have no physical asset, nothing really tangible except a value. Our credit system works in simular ways, you pay with a card that card represents a set of credits/notes and bitcoin does the same except with more control and privacy of your finances, the downside is its not commercially accept... yet.

    We already are seeing more secure and efficient currencies like QuarkCoin (QRK), the missing links that will make digital currencies more widely accepted are being developed I assure you and eventually banks will have to accept it if they are going to want to survive. So chill out have a beer and watch one of the greatest thing to happen to monitary policy unfold... Banking 2.0 is coming regardless of what "experts" think.
    xymantec
    • Quarkcoin

      I'd beware Quarkcoin. I heard some talk about it the other evening on YouTube.

      the basic discussion question

      Does anyone know where Quarkcoin came from and how did it blow up so fast?
      djenkins555
      • ... Google it...

        Here is a good place to start...
        https://bitcointalk.org/index.php?topic=260031.0

        You can check out the source code and everything on Github, Its written in C and looks like you can even compile your own source.

        https://github.com/MaxGuevara/quark

        Like I said if you do enough research you can get any answer. BTW, no one nows who Satoshi Nakamoto is but it didn't stop bitcoin

        Good Luck :)
        xymantec
  • Bitcoin price...

    Is the increase due just to its popularity or also the fact that the US government printed off a couple of billion dollars at the weekend? ;-)

    The big difference between the Dollar and Bitcoin is that Bitcoins have a finite number of coins that can be "mined", the US Gov can always print off a few billion more, now that it is no longer a gold standard.
    wright_is
    • P.S.

      I'm not a big bitcoin fan and I haven't invested in it.
      wright_is
      • Neither am I but some of the arguments against bitcoin are not good ones.

        My concern for my position (anti- bitcoin) is that I have yet to hear a really good argument as to why it won't work. Most of the arguments you could apply directly to all the major currencies in use.

        But I just don't trust it.
        DevGuy_z
        • Money is a universal barter

          used to value dissimilar items. Money can either be something of intrinsic value, or something backed by the regulatory authority of the state. Bitcoin is neither. As a poster below stated, bitcoin is currently best described as a commodity. The problem is that it's only intrinsic value is circular: It's considered valuable because people consider it valuable. It has no intrinsic universal appeal like precious metals, no industrial or economic value like oil, food or other tangible commodities, and it is not supported by any governing legal authority like fiat currencies are.
          baggins_z
          • "no intrinsic value"

            is the definition of a fiat currency. What exactly does "supported by any governing legal authority" mean anyway? I also disagree with equating Bitcoin to a commodity, it's actually the opposite of a commodity.
            frylock
          • "No intrinsic value" is apt

            It's precisely why I have called Bitcoin a fiat currency, even though it is not issued or recognized by any government and it's not legal tender anywhere in the world. Bitcoin is money *solely* because a group of people have decided to treat it as such, even though it is absolutely worthless, *except* as a medium of exchange.
            John L. Ries
          • Risk Management

            I disagree. The value of an investment is its return on capital, and return on capital is determined by risk. Bitcoin has tremendous value in terms of risk management. If you don't see that then you don't understand its value... The people getting rich on Bitcoin are the people that recognized this from the beginning.
            financepro137
    • Myth

      No they can't. The idea that we just print more money is a common popular myth. And it really isn't relative as much as you think to the G.S. It is still supply and demand. If you print more money then it is just worth less than it was before. The amount of available cash is closely controlled. IOW they both print and burn money to control the value. This is how the dollar competes on a global market.

      The GS worked better before there was a lot of trade. Today currency is traded, just like goods and if you fix the price, you can be under cut. That is why no major government remains on a gold standard.

      A fixed price also makes the economy less stable as there is no way to damp out dangerous positive feedback.
      DevGuy_z
      • Gold and silver are less susceptible to inflationary pressures

        than fiat currency, but it is still possible to manipulate the money supply even on the gold standard. Back in early America, there was huge pressure by the farm lobby (the farm lobby has always been extraordinarily powerful in American politics) to value, by law, gold as equivalent to silver so farmers could pay their debts in silver, which was much more common than gold. It was a way to inflate the money supply. Also, serious inflation occurred with the huge silver strikes in Arizona that flooded the money supply with silver.

        So while a gold standard currency is less prone to inflation than fiat currency, the money supply can still be manipulated.
        baggins_z
        • Go back a little further

          Back when the US dollar was first created in the 1780s, it was a silver coin, not a gold one. The legal definition passed by Congress in 1792 was based on the weight and purity of the Spanish Peso (popularly called "dollar") which was a silver coin, not gold. Gold dollars were first issued in 1834 and silver was not officially demonetized until 1900.

          And after considering the issue, I think that if William Jennings Bryan's program for free coinage of silver had been adopted in the 1890s, we'd probably have a bimetal standard today instead of purely fiat currency. It's important to remember that bimetal standards have existed since ancient times, but the international gold standard promoted by the UK endured for less than a century. The gold standard was destroyed by the Great Depression followed by WWII, but I think a mixed gold/silver standard would have provided enough flexibility to endure.
          John L. Ries
      • DevGuy & Nature of Money as Debt

        Not only do we 'just print money money', the government isn't even where most U.S. Dollars are created. They are loaned into existence by banks. Private Banks.

        Fractional Reserve Lending is a horrifying concept once you wrap your mind around how the shell game works.
        BINGBONGEMPIRE
        • Not quite

          Only Federal Reserve Banks are allowed to issue paper money in the US (that's been true since 1913). Money is created when Federal Reserve Banks lend money to commercial banks and destroyed when the loans are paid back (but there has long been more lending than repaying).

          And can you think of a way a commercial bank could operate profitably that doesn't involve fractional reserve? If banks had to keep all the cash deposited on the premises, how could they lend money at interest?
          John L. Ries
          • Quite.

            BINGBONGEMPIRE is correct, Mr. John L. Ries. Devguy_z, of course, is completely wrong and apparently has no idea how the currency system works.

            Most money in our economy - for example, the electronic "dollars" in your checking account - is balanced, on the liability side of the accounting equation, against commercial paper (short-term bonds) issued by banks and other financial institutions. This gets propped up against other assets, often valuated incorrectly, bad mortgages, things of that nature. I have personally seen multi-trillion dollar (not a typo) accounts where these messy details get hidden. So long as shoddy assets get offset by a multi-trillion dollar liability (short-term bonds) then the total line item will add up to about $0 or some amount below the materiality theshold and you don't have to tell the shareholders! Two wrongs really do make a right!

            Paper money is a tiny fraction of the "money" in circulation. It is printed by the mint and sold to the Federal Reserve at cost. It is balanced by government bonds issued by the Treasury.

            Money is created when the Fed lends to commercial banks, that part of what you said is true. However, you forgot to mention that when the commercial bank lends to consumers, more money gets created and multiplied by a factor of up to the reserve rate. When that money gets deposited, they can lend it out again, and so forth. Look up 'Fractional Reserve' on Wikipedia or something. Duh.

            If you can't think of a way a commercial bank could operate profitably, then maybe you haven't noticed all the hidden fees that banks charge whenever they think you aren't looking. Likewise, banks could earn more money on interest, lending money that belongs to them...that they actually earned by providing services to their customers. Imagine that.
            financepro137