Bitcoin - Sound Currency or Ponzi Mania?


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Bitcoin - Sound Currency or Ponzi Mania?

Bitcoin is a lot in the news recently.

What is a bitcoin (for those who do not know)?

Here is a three-and-a-half minute video from last January that does a pretty good job with the basics, especially the digital mining concept. Be careful with one point, though. Back then one bitcoin was worth $70. Now it is worth over $1,000 and climbing.



Here is one view:

Which Currency Is Up Over 9000% This Year and Sells for Almost as Much as an Ounce of Gold?
by Mike Opelka
Nov. 29, 2013
TheBlaze

From the article:

The Bitcoin, the relatively new digital currency, has been rising very rapidly as of late. Bitcoins are in the news today because the value of one Bitcoin has increased more than 9000 percent in 2013 and Friday morning was trading at or above the price of an ounce of gold.

. . .

Unlike physical gold, a Bitcoin only exists in the digital world. There are no Bitcoins sitting around in vaults or hidden in the back of sock drawers. They reside on computer hard drives.

Just today a British man announced that he threw away an old hard drive that contained digital data for 7500 Bitcoins worth between $7.5 and $9 million dollars. Unless he finds the actual hard drive in a landfill, that “money” is gone forever. The only good news — he probably paid pennies for each of the Bitcoins when he bought them back in 2009.

Will Bitcoin sustain the growth seen in the past few weeks? It’s difficult to say, but it is also hard to predict if there will be a Bitcoin bubble that bursts and sends the virtual coin’s value plummeting. Considering that the number of the coins are finite, and legitimate outlets are now accepting them as payment, it would appear that Bitcoin is here to stay. Only time will tell.


Here is another view entirely:

Bitcoins: The Second Biggest Ponzi Scheme in History
by Gary North
November 29, 2013
(His own site and at LewRockwell)

From the article:

I hereby make a prediction: Bitcoins will go down in history as the most spectacular private Ponzi scheme in history. It will dwarf anything dreamed of by Bernard Madoff.

. . .

the individual claims that a particular market provides unexploited arbitrage opportunities. Something is selling too low. If you buy into the program now, the person running the scheme will be able to sell it high on your behalf. So, you will take advantage of the arbitrage opportunity.

. . .

The individual who sells the Ponzi scheme makes money by siphoning off a large share of the money coming in. In other words, he does not make the investment. But Bitcoins are unique. The money was siphoned off from the beginning. Somebody owned a good percentage of the original digits. Then, by telling his story, this individual created demand for all of the digits. The dollar-value of his share of the Bitcoins appreciates with the other digits.

This strategy was described a generation ago by George Goodman, who wrote under the pseudonym of Adam Smith. You can find it in his book, Supermoney. This is done with financial corporations when individuals create a new business, retain a large share of the shares, and then sell the stock to the public. In this sense, Bitcoins is not a Ponzi scheme. It is simply a supermoney scheme.

The Ponzi aspect of it comes when we look at the justification for Bitcoins. They were sold on the basis that Bitcoins will be an alternative currency. In other words, this will be the money of the future.

The coins will never be the money of the future.

. . .

Here is an economic fact: the number of fools is limited. They are a scarce economic resource. As the price of bitcoins rises, more fools will be lured into the market. But this is a finite market.

In other words, bitcoins cannot possibly fulfill their supposed purpose: to serve as an unregulated currency unit. Bitcoins are not an alternative currency. They are something you buy in the midst of a mania, and you will sell at some point in order to get back your money. You are thinking of buying Bitcoins, not because Bitcoins will serve as a means of exchange, as originally argued, but because you want to get back lots more money than you paid for them. In other words, Bitcoins are not money; dollars are money.

. . .

When you see an offer of an investment which inherently cannot possibly exist on its own merit, and yet lots of people are coming into the market to buy the item, you know, without any question, that this is a Ponzi scheme. In other words, people are buying into the program, not because of an arbitrage opportunity, and not because of a capital breakthrough in terms of technology, but because somebody else bought it cheaper yesterday. You buy it today, not because you think it is going to offer a stable value, but because you think you're going to make a bundle of money when more people come into the market. Again, this is the classic mark of a Ponzi scheme.

In order for Bitcoins to become an alternative currency, there will have to be millions of users of the currency. There will have to be tens of millions of users of the currency. They will have to develop in a market on their merit as money, not as an investment of dollars in order to get more dollars back.


I have been burned by agreeing with North too quickly before (I would have to find it, but I had to issue an apology for being such a dork :) ). On first blush here, however, I tend to agree with him--at least most of the article. And I appreciated his theoretical grounding in The Theory of Money and Credit by Mises.

The only error I see in his reasoning is that his premise is one: that people are buying Bitcoins purely for financial gain. They are not. although obviously many are and this is growing as the boom grows.

I don't think he takes into account how pissed people are at The Fed and a few other similar intangibles. Bitcoin is not just money. It's part rebellion. This could give Bitcoin survival legs when the inevitable crash comes as the pool of new investors powering the price spike dries up.

I wish I had a spare grand or two lying around for gambling. I would put it in Bitcoin and try to play my nerves on when to cash out.

Oh well. I have an addictive personality, so it's probably all for the best...

:)

Michael

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This should throw some gasoline on the fire, too.

Alderney looks to cash in on virtual Bitcoins with Royal Mint reality
by Jane Wild
November 29, 2013
Financial Times

From the article:

The tiny Channel Island of Alderney is launching an audacious bid to become the first jurisdiction to mint physical Bitcoins, amid a global race to capitalise on the booming virtual currency.

The three-mile long British crown dependency has been working on plans to issue physical Bitcoins in partnership with the UK’s Royal Mint since the summer, according to documents seen by the Financial Times.


Man, if this thing explodes into a full blooming Ponzi, there are going to be a lot of pissed people in the world.

And probably a pretty good Hollywood movie. :smile:

Michael

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From the second article:

"Bitcoins are not money; dollars are money."

Neither is backed by gold. Bitcoins are less plentiful than dollars. I don't see any reason why bitcoins, or perhaps a different digital currency, could not be used as a medium of exchange once the mania is over. All it would take is a widespread enough acceptance. If someone can develop a stable digital currency that can be kept out of the hands of looters, then producers will be adopt it. It's early days, so who knows where this is headed. Imagine as system of exchange open to producers at the exclusion of looters. You can bet there are many minds at work trying to crack it. Any ideas on how it could be achieved?

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I wish I'd bought about $50 worth when they first came out. I heard they were originally selling for $0.05. I'd be selling them right about now, rather than buying.

Darrell

There are plenty of alternative currencies that are around $0.001 per coin.

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Do any of them look promising?

Of course, Bitcoin will probably come crashing down before the others get off the ground, and that will sour everyone's attitude toward alternative currencies. But, who knows.

BTW, I think that having a limited number of Bitcoins is going to be a problem. If Bitcoin were accepted as a currency, there would be constant deflation as the economy grew and Bitcoins became relatively more valuable. That would generate a tendency to hold onto Bitcoins rather than spend them which could lead to economic stagnation. I mean, why buy a car when you know it will cost half as much next week in Bitcoins?

Darrell

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Do any of them look promising?

Of course, Bitcoin will probably come crashing down before the others get off the ground, and that will sour everyone's attitude toward alternative currencies. But, who knows.

BTW, I think that having a limited number of Bitcoins is going to be a problem. If Bitcoin were accepted as a currency, there would be constant deflation as the economy grew and Bitcoins became relatively more valuable. That would generate a tendency to hold onto Bitcoins rather than spend them which could lead to economic stagnation. I mean, why buy a car when you know it will cost half as much next week in Bitcoins?

Darrell

I can't say if any of them look promising. I think Litecoin is the most promising, though, it isn't inexpensive any more. I haven't studied any eCurrencies outside of Bitcoin and Litecoin. I don't know how they are stored or how they are mined. A guy on a forum I frequent was attempting to set up his own eCurrency with its own mining clients, servers, and algorithms. The eCurrency was called Bloocoin. I downloaded the client miner, but the servers kept crashing. I think the entire project was discontinued.

Currently, there is an eCurrency called Worldcoin which is quickly rising. Unfortunately, you need to buy Bitcoins and use those Bitcoins to purchase Worldcoins. The transaction rates are pretty bad though. Whatever you do, good luck. It may not be a bad investment to drop $10.00 on any eCurrency. Though, it isn't possible for me to see the future of any of these eCurrencies.

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I do not own any Bitcoins. I also do not use a crypto-system for my emails. But I approve of both. I find it humorous that people claim that gold is real money, but dollars or Bitcoins are not. I can imagine conservatives in Sumeria warning that you cannot eat silver or plant it to get more.

During the Middle Ages bankers who tallied with a plethora of disparate coinages invented Pounds-Shillings-Pence as an abstract currency. They used Arabic numerals and double-entry bookkeeping and notarized letters; and they bought and sold every commodity known across three continents without ever touching a coin.

When Old Technologies Were New by Carolyn Marvin is about the telegraph and telephone. People were angry that clerks opened their letter to send the message over the wires. More than one person attempted to roll up their letter and insert it into a telephone.

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I started mining bitcoins a couple of years ago with some used video cards that I picked up on craigslist. Unfortunately I did not work at it very diligently so I am not a bitcoin millionaire, yet.

The ASIC processors have recently taken over bitcoin mining and made my video cards obsolete, so I have switched my video cards over to litecoin mining, and I am generating about 1 litecoin per day.

This cool graphic of the real time bitcoin traffic shows the rise of Chinese transactions:

http://fiatleak.com/

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  • 7 months later...

I don't think he takes into account how pissed people are at The Fed and a few other similar intangibles. Bitcoin is not just money. It's part rebellion. This could give Bitcoin survival legs when the inevitable crash comes as the pool of new investors powering the price spike dries up.

I wish I had a spare grand or two lying around for gambling. I would put it in Bitcoin and try to play my nerves on when to cash out.

Oh well. I have an addictive personality, so it's probably all for the best...

:smile:

Michael

Bitcoin is a computerized Tulip Bulb.

Ba'al Chatzaf

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I traded futures and derivatives for a long time as a stock broker and options and futures broker .

BRE-X , especially up here in Canada was just going bonkers with everyone saying why sell at 100 , 200 , 300 cause its gonna go higher .

Same things with tulips , and if anyone doubts this , try reading " Extraordinary popular delusions and the madness of crowds "

I think that there will be much more upside to these types of currencies for sure but a lot of people are going to get really hurt .

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Do any of them look promising?

Of course, Bitcoin will probably come crashing down before the others get off the ground, and that will sour everyone's attitude toward alternative currencies. But, who knows.

BTW, I think that having a limited number of Bitcoins is going to be a problem. If Bitcoin were accepted as a currency, there would be constant deflation as the economy grew and Bitcoins became relatively more valuable. That would generate a tendency to hold onto Bitcoins rather than spend them which could lead to economic stagnation. I mean, why buy a car when you know it will cost half as much next week in Bitcoins?

Darrell

Derrell,

Its a Keynesian view that spending is "good for the economy". This viewpoint is what the government takes because spending (money chaning hands in trades) is where a vast majority of the government's income comes from (taxation of sales (goods) and wages (services)). The government wants its sheeples to spend as much as possible and work as hard as possible, because thats what results in the greatest taxation income for them. Contrastingly, for the government, its good for the government itself's longterm longevity if it tries to produce (or gather more income/resources) than it consumes. Our government gathers resources by taxation, money fabricaiton, and the enforcement of their monopoly on money (so that the fabricated money can capture market purchasing power (with the side effect of dilluding wealth of wage earners)).

But to contrast this view is a simple Austrian view that simply its good to have production and savings exceed consumption... infact that consumption is bad, its the loss of resources. To improve people's standard of living, its better that people produce more, save more, and consume less. Running out of critically required savings/resources results in death.

So for example, in your "not buy a new car now, instead hold onto a deflationary currency to buy something else later" scenario: if holding onto the currency to spend it on something else later is expected to be more profitable/prosperous than spending it on a new car that one could use now... then the former is the best choice for that individual. If everyone made more optimal decisions like this, then production would shift towards things that make people more prosperous, away from shiny trinkets that have little or no positive impact on people's lives (like new cars (car bubble) and new houses (housing bubble)... and individuals would have more income and savings to spend when they needed it (instead of dieing (running out of resources = death)).

Cheers,

Dean

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Michael,

Surely bitcoin is not "Ponzi" because bitcoin does not involve fraud of balance sheets. In fact with bitcoin, the balance sheet of every account is publically known.

So more accurately, bitcoin could potentially be a "tulip mania" as Ba'al Chatzaf incessantly posts. Yet so far, it doesn't look like there will ever be more than 21 million bitcoins in the original bitcoin ledger. If a vulnerability is found with the software/cryptography then yes, its market trading value would evaporate just as quickly as if using tulips for money (where in response tulip farmers would flood the market). Its been 9 months now that bitcoin has been over $250 per... and no such vulnerability has yet been found.

We'll see. I sure as hell am happy to see a competator to the US dollar monopoly.

Cheers,
Dean

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Michael,

Surely bitcoin is not "Ponzi" because bitcoin does not involve fraud of balance sheets. In fact with bitcoin, the balance sheet of every account is publically known.

So more accurately, bitcoin could potentially be a "tulip mania" as Ba'al Chatzaf incessantly posts. Yet so far, it doesn't look like there will ever be more than 21 million bitcoins in the original bitcoin ledger. If a vulnerability is found with the software/cryptography then yes, its market trading value would evaporate just as quickly as if using tulips for money (where in response tulip farmers would flood the market). Its been 9 months now that bitcoin has been over $250 per... and no such vulnerability has yet been found.

We'll see. I sure as hell am happy to see a competator to the US dollar monopoly.

Cheers,

Dean

There are all kinds of competitors to that (a fiat currency), but not as money. Bitcoin is not backed by a bank or government or any taxing authority. It's a way to transfer wealth from one fiat currency to the same fiat currency or another. I cannot think of a more foolish thing to hang on to since it peaked at over $1000 per "coin." As a money laundering tool, it seems to have at least a temporary utility--one with a big bullseye painted on its back.

A better way to preserve wealth, aside from some gold held as insurance, is assets through asset diversifcation. Foreign real estate, equities, a functioning business or businesses, etc. If you own stock shares with a notational value of x dollars and the dollar goes to hell, the share price will merely be quoted in some other currency, maybe the replacment currency. Bonds are dollars with a coupon attached. They are only as safe as the dollars you lent to get them and dollars are what you'll get back--with the dollar interest due.

--Brant

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Instead of returning to the "gold" standard why not base the currency on a blend of hard assets, gold and other precious metals, petroleum reserves, commodities such as lumber, food, clean water as well as produced goods.

When a person goes for a business or even personal loan the banks are looking at what kind of assets you have against your debts and liabilities.

Governments need to be held to the same standard.

And ffs stop enslaving unborn children's ability to "cover the debt load" because in essence who is going to be paying down all this debt. 18 trillion? Not happening in our lifetime.

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Instead of returning to the "gold" standard why not base the currency on a blend of hard assets, gold and other precious metals, petroleum reserves, commodities such as lumber, food, clean water as well as produced goods.

When a person goes for a business or even personal loan the banks are looking at what kind of assets you have against your debts and liabilities.

Governments need to be held to the same standard.

Oil and Gold. What to name the units of currency? The unit of Gold Currency to be named the Trojan because gold is weight out in Troy ounces. The Unit of Oil Currency to be named the Sheik because much of our oil is extracted from Saudi Arabia and the Emirates. As you look in your wallet filled with Sheiks and Trojans you will know exactly what is being done to you.

Ba'al Chatzaf

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Instead of returning to the "gold" standard why not base the currency on a blend of hard assets, gold and other precious metals, petroleum reserves, commodities such as lumber, food, clean water as well as produced goods.

When a person goes for a business or even personal loan the banks are looking at what kind of assets you have against your debts and liabilities.

Governments need to be held to the same standard.

And ffs stop enslaving unborn children's ability to "cover the debt load" because in essence who is going to be paying down all this debt. 18 trillion? Not happening in our lifetime.

The debt is paid when it comes due. It's dollar debt. The government creates those dollars. It will create dollars to pay the debt when it comes due but the debt qua debt will merely be rolled over. It should not be reduced for that would be a tremendous deflationary pulse to the economy. Inflation is not an increase in the money supply. It is not just an increase in prices. It's when people prefer assets and services to dollars to a greater and greater extent and the velocity of money through the economy accelerates.

Hard currency means the debt must be paid back in hard currency. Dollars cannot be created out of thin air and the Federal Reserve is deprived of its power. This is simply not going to to happen. Owning gold is only insurance or a speculation on a currency collapse or worse. Take one ounce of gold and its buying power today. Now project the change in value forward a hundred years. It won't be much different and it will still exist in a sea of fiat currencies even if one of those is not the dollar. Now take shares of stock of equal dollar value in a giant American low cost mutual fund that tracks the S&P 500 and project that value forward a hundred years. Choose right now for that 100 year hold: the gold or the stock. (The shares of the fund are adjusted whenever a company enters or leaves the 500. Remember, we are dealing with probabilities. There is no guarantee for either the gold or the mutual fund and you will be dead so it's all for the heirs.)

The deficit should be reduced, not the debt. If the debt is reduced it shouldn't be reduced more than, say, by 200 billion/yr. To get rid of it all--last done in the Jackson Administration--would then take about 100 years. Don't bother; even if you did bother no governement over a hundred years would keep that reduction going. Even that small amount would negatively impact the general economy. The bigger question is the practical cost-benefit analysis of reduced government spending and making the government smaller and all the associated policy questions.

--Brant

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I believe it to be a sound, real digital money. There are lots of naysayers who either don't understand economics or who don't understand the technology. I think I understand both quite well being interested in economics and in computers for quite some time. And perhaps I'm young enough to not recoil at the idea.

It has all the characteristics of money.

1. Scarcity

If you read the white paper, you will understand, you cannot simply create a Bitcoin, it requires the input of CPU time and electricity to solve a hash problem to create a proof of work. This cannot be faked. The only way to do it is with CPU time and electricity.

2. Divisbility

Some have said it's bad that Bitcoin can be divided so much, but so can gold, that's the whole point. You can divide gold down to weight of one atom, technically speaking.

3. Portability

You can carry it on your phone, on your computer, or wherever. It's instantly wire-able. It is in fact better in this regard than traditional money gold and silver.

4. Objective

What I mean here is that it costs money to produce it. It costs people hardware and electricity. These inputs are objective, they cannot be faked. It will always cost money to produce bitcoin. They cannot be created ex-nihilo. They have to sell for more than they cost to produce or people will not produce them anymore.

There is no ponzi scheme involved. Early adopters got rich because the initial bitcoins were worth next to nothing, and mining them initially was much easier.

They are in fact more objective than paper fiat money which only costs the paper and ink required to print them, and which can be produced in any amount by simply putting more zeros on the end of number printed on their face. No such thing is possible for bitcoin.

Finally, no one controls them, and no one ever can. There is no central power here. That's the way money should be. There are not even any middle men.

BItcoin is superior money. I predict governments around the world will either ban them, or make Bitcoin accepting business pay exorbitant taxes on profits.

The real innovation here is the block chain technology which can be implemented in many ways. There are several alternative competing coins. This is exactly how it should be.

On the other hand, you still have to pay taxes in and receive payments in your national currency by law and threat of penalty. Still, I predict crypto-currencies will rise as people start to see the benefits and the markets mature with much less volatility.

Some will say it's not physical. Yes it is. A hard drive is physical, and the information stored on it is physically stored, it's just not often thought of in that way. I personally favour a Gold standard, but that won't happen. And making a private Gold backed currency gets you in jail. I see no problem with something like Bitcoin though. There is room for innovation even in the age old realm of money. Gold itself is backed by...? Why is gold the thing that you want backing your currency? Because it takes money to produce, it is scarce, you cannot fake it, it's objective, it's fungible and uniform, compact, and portable. Boom. All the qualities of bitcoin. The only thing gold has over bitcoin is that there is a market for it as Jewelry, as a non-monetary use, and there exists a long historical president for its use as money. I do not believe that to be fundamental though.

Disclaimer: I do not own any Bitcoin.

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