Bitcoins are worthless. They never had any value, and never will.
Valueless meaning they are as worthless as Bernie Madoff fund shares, Dutch tulip bulbs, Pets.com stock and Flooz and Beanz, Reichsmarks and confederate dollars and so forth. People might have been temporarily fooled into paying money for these things, but ultimately people realized they were worthless. Like a forged painting or counterfeit dollar.
Today I wrote a blog post about why they were worthless ( http://www.vartmp.com/blog/2013/08/21 ). Some interesting things came out of it. One was I did some research on Bitcoin. I found out that some of the idea guys behind Bitcoin actually anticipated my arguments and give their refutation of them. They're well aware of the fault lines of the argument.
The argument is whether the value of commodities or currencies are subjective, or whether they are ultimately derived from labor. Bitcoin partisans believe the former, I believe the latter.
As the subjective theory of value (STV) is false, Bitcoin certainly will, like Dutch tulip bulbs or Webvan/Pets.com stock, ultimately collapse to become worthless or near worthless. But the collapse will not disprove the subjective theory of value by itself - STV advocates can just say people stopped subjectively valuing Bitcoin.
On the other hand, if Bitcoins continue to hold value over the long-term, the labor theory of value will be disproved. It is impossible for a currency with no backing to retain value over the long term.
Not to get tangential, but this includes the US dollar, which was gold backed until 42 years ago. And which has a value today - it can be considered scrip that is accepted by army PXs, post offices and the like for goods and services in kind. That is also accepted by the government for taxes and such. It has no worth beyond that however. Currencies have no inherent value, whatever the Bitcoin people believe.
As I said, one thing I discovered putting my blog post together today was that Bitcoin people had anticipated the arguments of its worthlessness. Their counter is that Bitcoin value is based on their philosophical ideas, which as I said, I consider baseless, and thus, I know that Bitcoins will sooner or later, and probably sooner than later, be worth $0.
I also discovered something else while putting together my blog post. I had the idea that I could financially gain from this insight. I could just short Bitcoins. So I looked into that a little.
Various small hurdles are in the way of doing this, but most are navigable. Bitfinex looks like they allow this, although they may only facilitate it. Just for the principle of it, I'm going to short one Bitcoin (current worth = $122) for now, and maybe more later.
Bitfinex says to short a Bitcoin I "need to [borrow] bitcoins from others lenders". Hopefully Bitfinex can arrange this for me, otherwise I guess I have to go looking myself.
There is no way a Bitcoin can be worth $122 over the long term. Not that it can't temporarily - it can climb to $200, even $300. In the seventeenth century, during the Tulip bubble in Holland, 40 tulip bulbs sold for 100,000 florins, or what would be equivalent to about one million euros today. It can go up, but ultimately it must crash. As will Bitcoin. Keynes said markets can remain irrational longer than he could remain solvent, which is true. However, I feel pretty secure I could survive shorting one Bitcoin via an LLC or something.
I'm looking into how to short a Bitcoin via Bitfinex or the like. If anyone knows more about Bitcoin shorting or wants to go on the other side of the deal, I'd be happy to know.
I would argue Bitcoin has more intrinsic value than gold - it is easier to move, faster to move, more secure in its transit, harder to counterfit, and impossible to create more (than is already planned.)
It's intrinsic value comes from these very properties - similar to how gold's intrinsic value is that it's shiny, has been around for 2000 years, makes great jewelry, and some other things as well.
In this century though if you're looking for a digital, better kind of gold then Bitcoin is it - hands down.
Cow's milk is a commodity. It does not make a good currency. It must be kept refrigerated, and even with this becomes useless in a short amount of time. Nonetheless, it is a commodity and is useful.
Gold is a commodity. It makes a good currency - compared to many commodities it is easy and fast to move, can be moved securely, is hard to counterfeit and has a limited supply. It was used millennia ago to make goblets and the like, and has industrial uses today.
Bitcoin is not a commodity. It has no underlying use. So it is not a currency either. Because currencies are based on commodities.
I have written about government fiat money in other posts in this thread so I won't go into that tangent in this reply.
You went from the 'bitcoin has no intrinsic value fallacy' right to the 'bitcoin is not a currency fallacy' - seriously read the Bitcoin FAQ or something. All your points have been discussed to death for the last 4 years. You think after 4 years, hundreds of startups, and millions of dollars invested in Bitcoin that you are the only one who 'realizes' Bitcoin is a scam? Wake up, bitcoin is legit now. It's been vetted by larger forces than your 'blog.'
In your blog post you assert that "Gold and silver were valuable 2000 years ago and are still valuable" but you never explain why. What properties does gold and silver has that makes them valuable?
Gold's use as a currency is apart from its use as a commodity. It makes a good currency for several reasons - it is durable, storable, standardized, portable, easily divisible.
Beyond its use as a currency or as jewelery, I don't have much to say beyond what you could find at http://en.wikipedia.org/wiki/Gold#Applications . Dentists used to use it for crowns. It is used in photographic equipment. It is used in satellites. It is used in heat shielding. It is used in electronics.
Before the industrial revolution, gold was not used for industrial uses all that much - instead of good china for the dining room, people who could afford it would have golden goblets to drink from and the like. This, plus the lack of industrial mining methods, is probably one of the reasons why it is estimated that 80% of the gold ever mined has been mined since 1910 ( http://www.goldsheetlinks.com/production2.htm ).
You forgot that the supply of gold is limited. So if gold is durable, storable, standardized, portable, easily divisible and the supply is limited, then it's exactly like Bitcoin. Only gold is actually less portable, less durable, much less divisible and its supply is less limited than the supply of Bitcoin.
Now tell me, what Bitcoin doesn't have that Gold has (except for the industrial use, which you admitted didn't event exist before the industrial revolution, and, frankly, can only be attributed to a fraction of actual gold's price)?
Bitcoin can be used for secure timestamping and mutual funds locking without third parties. These are non-monetary features that Bitcoin provides. So it has some of them, just like gold.
> According to some very sound economic currency theory, you're 100% wrong.
I should first say that what that web site talks about is not a crank theory. They base their arguments on what many consider a very sound economic currency theory. I happen to disagree with the theory. But you're right in that the perceived value of Bitcoin is based on serious economic currency theory, which many prominent people consider very sound.
> About half the current value of a bitcoin is speculation. The rest is fundamentally supported by its trade volume
How much of the value of Pets.com, Webvan, eToys, Kozmo etc. was supported by trade volume in 1999?
> There is no way a bitcoin can crash unless its use in trade crashes.
I guess I agree - if people realize Bitcoin is worthless, they'll stop trading with it. The crash in price will be eventually followed by a slowdown in trading.
> The paper money I use every day, which can burn instantly in a flame, has no intrinsic value either.
I've talked about this in other places in this thread. As five current US dollars could not buy one 1972 US dollar, as throughout history every government fiat currency in history has eventually collapsed in value (while gold has kept its value), as the current fiat experiment in the US is only 42 years old, in essence I agree over the long term. US currency is completely based on the power of the US government and its willingness to support its currency. Translated into what I have been saying, it means you can go to places like http://www.usps.com and send the government dollars, and it will send you valuable items in return. You are right though that over the long term, US paper money has no intrinsic value.
Webvan died because its expenses VASTLY outstripped its earnings at the time.
But oddly, you didn't mention Flooz at all, which would have been a better (though still failing) argument than all of the dotcom bust stocks you mentioned.
Flooz was killed first by a lack of adoption, and second by an FBI case due to a Russian crime syndicate using them for money laundering. And of course, it was centralized, which means it could be shut down.
Bitcoin is growing in adoption, suffers from no central authority, cannot ever be shut down, may facilitate money laundering although the US government seems to only be prosecuting obviously nefarious cases such as the Liberty Reserve case and the Ponzi scheme guy and leaving bitcoin itself alone due to its potential economic value. Cash also facilitates money laundering, and I don't see that getting shut down anytime soon.
> if people realize Bitcoin is worthless, they'll stop trading with it
And if people realize the US Dollar is worthless, they'll stop trading in it too. If you're saying that the value of something is what people believe it is, then this argument holds for anything of any value, which is always subjective.
If you believe in "labor theory of value", Bitcoins require investment and labour to be created. All these computers from home CPUs to ASICs require some noticeable amount of work to be done to get assembled and then mine blocks.
Same thing with gold or anything.
Except, of course, labor theory was always wrong for a simple reason: the labor is expended because of expectation to satisfy a demand. So the value must already exist (or be anticipated) in a form of demand. Just because I waste my day and money doing some software won't create any value. There should be other people out there who could do something useful to them with my software, regardless of how much time I spent on it.
Costs and rewards are highly correlated on the market because of competition. If you make big profits, more people will go in and compete on the price with you. So it may seem that costs determine price, but it's the other way around. You expend work only in expectation of being paid for it afterwards (with some profit).
"As the subjective theory of value (STV) is false"
Here's simple counter-argument.
Gold was chemically always the same all these years. But it was valued differently in different places on earth and in different times. When you are in a post-war destruction, your gold may be worth less than a loaf of bread. Or not, depending on how you see your future.
Apart from moving units, Bitcoin is good for things like secure timestamping and mutual fund locking without counter-party risk. No other technology or commodity can do that.
> The argument is whether the value of commodities or currencies are subjective, or whether they are ultimately derived from labor. Bitcoin partisans believe the former, I believe the latter.
And what about the labor which went into designing and coding the bitcoin software, the exchanges, and so forth? Do you think all that labor was worthless (we don't even have to include the "mining" capital and labor in this judgement)? Well, then the value of labor is apparently just as subjective as the value of commodities. So I don't follow how a premise involving STV vs LTV can be used to make a logical argument about the value of bitcoin, or any software for that matter.
Labor goes into mining gold, extracting gold etc. But it can then be used for capping teeth, heat shields, photographic equipment etc., as well as for a currency.
Labor does go into "mining" bitcoins. People build Bitcoin ASICs, people pay people to drill oil to make the electricity that powers those ASICs etc.
But gold has a number of real use values. Bitcoin has no real use value. It is inherently worthless.
People have used all kinds of commodities through history as currency. Cows, rice etc. As precious metals like gold are portable, storable, easily divisible, standardized etc. they make good currencies. An ounce of gold is the same as another ounce of gold, while rice goes bad, cows die, and one cow may give more milk than another. But the value still comes from its underlying usefulness as an industrial metal etc. Bitcoins have no underlying value such as this.
But the industrial value of gold only accounts for a fraction of its price. The recent gold bubble/run-up shows that pretty clearly (the price changed much quicker and independent of its potential industrial uses). So the fact that gold has traditional and industrial uses doesn't really help to justify its "value" or its current price (especially when price is far above industrial demand).
Its true that bitcoin doesn't have an underlying value as an industrial metal (obviously). But it does have an underlying value, primarily that it is distributed/un-seizable e-cash. This differentiates it from previous e-currency systems maintained by a central authority: paypal.com, libertyreserve.com, e-gold.com, notice these are all tied to an authoritative domain name, whereas bitcoin is not.
The intrinsic property of being decentralized/p2p, enables the notable use-value of purchasing controlled substances from the tor hidden node Silk Road. There is no other way to purchase items from that market. This sort of use-value is comparable to the use-value we could assign to something like Facebook: that there is no other way to view the original content which others have posted there. Or to USD since there is no other way to pay taxes.
I think it'd help your argument if you compared bitcoin to other virtual economies/currencies (facebook or facebook credits, paypal, eBay etc). Its obvious that bitcoin is not like gold and won't be valued for the exact same reasons. But see if you can come up with unique reasons why facebook and paypal (note that shares in neither company pay dividends) should have value whereas bitcoin should not.
As I mentioned in other replies already, Bitcoin allows certain non-monetary uses that are not possible with any other technology. E.g. registering your document with a timestamp with no counter-party risk. Or mutually-locking funds without a 3rd party. Or using a third party arbitrator without giving it full access to the funds (only a fee and a right to decide where the funds go: to party A or party B).
Bitcoin is not just a payment protocol. It's a global unbreakable consensus mechanism allowing enforcement of complex contracts without any guns or policemen.
You're definitely on the right track, but you're omitting the factor which binds the value of money to the value of labor: taxes. Taxes force (upon pain of inprisonment) people living within the territory of an issuing authority to offer their output for sale in that authority's IOU's (fiat). This allows states to provision themselves using their own credit (that credit then becomes the private sector's financial assets).
I'm not as bearish on Bitcoin as a type of payments system, but it can never supplant traditional currencies (at least not without formal state endorsement, and subsequent deflationary problems).
BTC can be used in electronic black markets - not many currencies can be used for that, and that fact gives BTC huge value to many people.
It is analogous to how USD is the only currency the USG will accept taxes in, which you have mentioned.
Not to say that this black market might become unviable whatever reason down the track, but right now it's a big driver of value.
> BTC can be used in electronic black markets - not many currencies can be used for that, and that fact gives BTC huge value to many people.
I think it should be noted that if the silk road were to get shut down or disappear, bitcoin's value will completely tank. It's basically the backbone propping bitcoin up. Those people using it for black market purposes will try to unload their coins, which will trigger others to unload their's as well. It will spiral out and the result is the bubble popping.
Unless bitcoin has a much stronger infrastructure than it does today, I highly doubt it would survive something like that. Which if you think about it, says something about bitcoin's fortitude.
> In the seventeenth century, during the Tulip bubble in Holland, 40 tulip bulbs sold for 100,000 florins, or what would be equivalent to about one million euros today. It can go up, but ultimately it must crash.
Dutch tulip bulbs aren't even close to worthless right now, and they weren't worthless after Tulipomania either; for example:
> Even the magnitudes of prices for valuable bulbs and their patterns of decline are not out of line with later prices for new varieties of rare bulbs. Single bulbs in the eighteenth century commanded prices as high as 1000 guilders. In this context, the 1000–2000 guilder price of Semper Augustus from 1623 to 1625 or even its 5500 guilder price in 1637 do not appear obviously overvalued.
This is partially because all unique new bulbs depreciated very quickly, from the 16th century on, as they were propagated and the supply was able to increase to meet demand. If you really want to compare Bitcoin to Tulipomania without embarrassing yourself, you should read some modern historical work on Tulipomania like Garber's Famous First Bubbles, and not an utterly obsolete polemical work by a hack. I've summarized some of the relevant facts in http://www.reddit.com/r/Economics/comments/1bm9fl/the_bitcoi... & https://plus.google.com/115274377971493973150/posts/1qWmh7Cq... if you have enough time to blog but not read books.
(I would address your 100k claim, except a quick search indicates it is coming from MacKay's history, which gets many things wrong such as mistakenly taking a rhetorical exercise - 2 tons of butter, one silver cup, etc. - for an actual transaction. It's purely rhetorical, as one can quickly imagine by seeing how many tons of butter a Picasso or a Ferrari would go for.)
> There is no way a Bitcoin can be worth $122 over the long term. Not that it can't temporarily - it can climb to $200, even $300...I'm looking into how to short a Bitcoin via Bitfinex or the like. If anyone knows more about Bitcoin shorting or wants to go on the other side of the deal, I'd be happy to know.
You must be completely mad to short Bitcoin even if you were infinitely confident it was going to zero. Never has the expression "the market can stay irrational longer than you can stay solvent" been more applicable. (And you know that, since you even quote it!) The best I can say for your strategy is that at least the fraudulent aspect ("However, I feel pretty secure I could survive shorting one Bitcoin via an LLC or something.") may rescue it.
Although I wouldn't put as much stock in Garber's thesis (although I did enjoy the monograph) as you do, there definitely is value to his argument. I think it is also important to stress that the problem with the tulip bulb markets at the time was that there were people who were aggressively using leverage and they did not understand the ramifications of it's use.
Valueless meaning they are as worthless as Bernie Madoff fund shares, Dutch tulip bulbs, Pets.com stock and Flooz and Beanz, Reichsmarks and confederate dollars and so forth. People might have been temporarily fooled into paying money for these things, but ultimately people realized they were worthless. Like a forged painting or counterfeit dollar.
Today I wrote a blog post about why they were worthless ( http://www.vartmp.com/blog/2013/08/21 ). Some interesting things came out of it. One was I did some research on Bitcoin. I found out that some of the idea guys behind Bitcoin actually anticipated my arguments and give their refutation of them. They're well aware of the fault lines of the argument.
The argument is whether the value of commodities or currencies are subjective, or whether they are ultimately derived from labor. Bitcoin partisans believe the former, I believe the latter.
As the subjective theory of value (STV) is false, Bitcoin certainly will, like Dutch tulip bulbs or Webvan/Pets.com stock, ultimately collapse to become worthless or near worthless. But the collapse will not disprove the subjective theory of value by itself - STV advocates can just say people stopped subjectively valuing Bitcoin.
On the other hand, if Bitcoins continue to hold value over the long-term, the labor theory of value will be disproved. It is impossible for a currency with no backing to retain value over the long term.
Not to get tangential, but this includes the US dollar, which was gold backed until 42 years ago. And which has a value today - it can be considered scrip that is accepted by army PXs, post offices and the like for goods and services in kind. That is also accepted by the government for taxes and such. It has no worth beyond that however. Currencies have no inherent value, whatever the Bitcoin people believe.
As I said, one thing I discovered putting my blog post together today was that Bitcoin people had anticipated the arguments of its worthlessness. Their counter is that Bitcoin value is based on their philosophical ideas, which as I said, I consider baseless, and thus, I know that Bitcoins will sooner or later, and probably sooner than later, be worth $0.
I also discovered something else while putting together my blog post. I had the idea that I could financially gain from this insight. I could just short Bitcoins. So I looked into that a little.
Various small hurdles are in the way of doing this, but most are navigable. Bitfinex looks like they allow this, although they may only facilitate it. Just for the principle of it, I'm going to short one Bitcoin (current worth = $122) for now, and maybe more later.
Bitfinex says to short a Bitcoin I "need to [borrow] bitcoins from others lenders". Hopefully Bitfinex can arrange this for me, otherwise I guess I have to go looking myself.
There is no way a Bitcoin can be worth $122 over the long term. Not that it can't temporarily - it can climb to $200, even $300. In the seventeenth century, during the Tulip bubble in Holland, 40 tulip bulbs sold for 100,000 florins, or what would be equivalent to about one million euros today. It can go up, but ultimately it must crash. As will Bitcoin. Keynes said markets can remain irrational longer than he could remain solvent, which is true. However, I feel pretty secure I could survive shorting one Bitcoin via an LLC or something.
I'm looking into how to short a Bitcoin via Bitfinex or the like. If anyone knows more about Bitcoin shorting or wants to go on the other side of the deal, I'd be happy to know.