Bitcoin has a price but no value... (long)

[andyrewwer]

So for school I had to write a long paper about Bitcoin, (like 3500-4000) words, I interviews two major economists, but I won't put the whole thing here, just like a TL;DR. 

The basic point is that Bitcoin has a price but no value, and will eventually crash. 

 

Essentially, Bitcoin is a new currency, so it is rivaling the US Dollar, Euro etc, the largest market in the world. It is not trying to beat PayPal, or MasterCard or whatever, it is trying to be better than the US dollar and therefore has the most competition and most barriers to entry. Since, Bitcoin is not a national currency, there is no-one who is backing this currency (this is clear when we see examples of fraud, theft etc and there is no compensation). Moreover, unlike the dollar which has the US government producing goods and a physical and known representative who can be held accountable, Bitcoin is trusting in 'Satoshi Nakamoto'. He could cheat, give himself several hundred Bitcoins and make a HUGE profit, we have no way of stopping him, other than 'trust'. 

Secondly, since Bitcoin is not the currency of a country, we have no way of knowing the relative price of basket of goods. (IE one way of comparing goods is the 'big mac index' how much does it cost to buy a big mac). Or how much it costs to buy 100 of a certain goods, except that with Bitcoin, there is no central OFFICIAL market and therefore any relative price of Bitcoin is exactly that, RELATIVE. It is whatever that individual believes the price SHOULD be. Since there price is so volatile it makes value hard to put down exactly. Value is knowing that today $100 is worth the same $100 tomorrow! 

Thirdly, one of the prime features of Bitcoin is that it has no Central Bank, this is not exactly true, every currency which distributes money, has a central bank! A Central Bank has two main roles: 

1) To control the flow of money into the economy

2) To facilitate transactions

Bitcoin has chosen to completely ignore one it's responsibilities, this is not appropriate, would we allow a parent to be like meh, I'm not feeding my kid, but i'll do everything else I am supposed to? NO! This choice of ignoring to control the flow is irresponsible because it means that the price is more volatile, and therefore harder to use as a currency in stores. What I mean by this is that if a storekeeper knows that the value of Bitcoin changes by $20 every day, they are going to be wary of accepting as payment because they do not know if they are being ripped off (if the price went down) or are ripping customers off (if the price increased)! The sheer amount of time it would require to keep up to date with all of this would cause massive problems, with business who barely have enough time to do what they are required to do. Moreover, by keeping the money supply fixed (not fixed rate, but fixed as in cannot be changed) it means that unpredicted increases or decreases in number of users leads to shortages or surpluses. Which, in the worse case scenario of each, leads to hoarding which drops the price to 0. 

Lastly, going back to the second role of the Central Bank, Bitcoin attempts to be anonymous, however, there are several key flaws as I see with this. First of all, all transactions are logged and remembered, yet why? If they refuse to return money after theft and fraud, why is there a PUBLIC record of all transactions... Furthermore, the recent shutting down of the 'Silk Road' (run by 'Dread Pirates Roberts') shows that the anonymity is not perfect since both his, and also the federal government's (several hours after the seizing of all Silk Road assets)  Bitcoin wallets and location were found. Not even the largest government in the world could be anonymous, what chance do the rest of us have? 

 

In conclusion, I believe that Bitcoin will fall because it has no inherent value, no goods that it creates and decides the value of, the price is arbitrary. Moreover, the volatility of the currency causes the price to fluctuate which means that the value of Bitcoin is hard to pin down, and therefore does not have one. Moreover, the Bitcoin ideal has failed, as I believe it will crash soon under the egotism of users, and the failure of it to keep to its core principles. 

 

There is more , but this is all I want to put in a forum post, sorry for the wall of text!

Edit: Couldn't find a way to upload the document here, so here is a google drive link!

Full essay:
https://docs.google.com/document/d/1zWCZiDdryuJAxrNpNly3bAL5ZUTj2hJeFNcziuVIrlM/edit?usp=sharing

[rhyseyness]

I'd love to read the whole paper.

This is interesting stuff (I loved A-level economics).

Not sure if there's any way you can send/attach the whole thing without posting in a reply :wacko:

[AMICLG]

Yeah I'm also interested in the full paper would you mind posting it.

[andyrewwer]

I'd love to read the whole paper.

This is interesting stuff (I loved A-level economics).

Not sure if there's any way you can send/attach the whole thing without posting in a reply :wacko:

 

Yeah I'm also interested in the full paper would you mind posting it.

 

OK, its a word document which I tried to post, and got the response 

"You are not permitted to upload this kind of file" ...

If you guys can help, I would love to post it! 

[Mac]

I'd like to read the whole paper if you don't mind, you could copy and paste the whole thing here?

 

 

What I mean by this is that if a storekeeper knows that the value of Bitcoin changes by $20 every day, they are going to be wary of accepting as payment because they do not know if they are being ripped off (if the price went down) or are ripping customers off (if the price increased)! The sheer amount of time it would require to keep up to date with all of this would cause massive problems, with business who barely have enough time to do what they are required to do.

 

With this, shops could use digital price tags under the products which change accordingly to the BTC price, and the same with the barcode of the product. It would cost a lot just to do that, but it would be pretty cool.

[andyrewwer]

I'd like to read the whole paper if you don't mind, you could copy and paste the whole thing here?

 

With this, shops could use digital price tags under the products which change accordingly to the BTC price, and the same with the barcode of the product. It would cost a lot just to do that, but it would be pretty cool.

Since there are lots of graphs and formatting, instead of copy-pasting I will just upload to google drive and send the link :-)

 

https://docs.google.com/document/d/1zWCZiDdryuJAxrNpNly3bAL5ZUTj2hJeFNcziuVIrlM/edit?usp=sharing

 

And yeah, to your second point, I agree it could be very awesome, although expensive and rather annoying since it would require constant internet access, and maybe digital price tags or something?   

[rhyseyness]

Since there are lots of graphs and formatting, instead of copy-pasting I will just upload to google drive and send the link :-)

 

https://docs.google.com/document/d/1zWCZiDdryuJAxrNpNly3bAL5ZUTj2hJeFNcziuVIrlM/edit?usp=sharing

 

And yeah, to your second point, I agree it could be very awesome, although expensive and rather annoying since it would require constant internet access, and maybe digital price tags or something?   

Dammit! Can't get on google drive at work :'(

Definately gonna give it a read when I get home

[MrSuperb]

Since there are lots of graphs and formatting, instead of copy-pasting I will just upload to google drive and send the link :-)

 

https://docs.google.com/document/d/1zWCZiDdryuJAxrNpNly3bAL5ZUTj2hJeFNcziuVIrlM/edit?usp=sharing

 

And yeah, to your second point, I agree it could be very awesome, although expensive and rather annoying since it would require constant internet access, and maybe digital price tags or something?   

 

ARE YOU FUCKING SERIOUS!?!

 

KILL THAT FONT NOW!

[andyrewwer]

ARE YOU FUCKING SERIOUS!?!

 

KILL THAT FONT NOW!

Sorry D: I didn't notice that!! 

THANK YOU FOR TELLING ME! 

[Ssoele]

Bitcoin is trusting in 'Satoshi Nakamoto'. He could cheat, give himself several hundred Bitcoins and make a HUGE profit, we have no way of stopping him, other than 'trust'.

 

First, there are other ways to stop this, Bitcoins relies on mathematical algorithms that have been checked time and time again. It is not just possible to generate Bitcoins other then "mining" a block.

 

Second, the value of a currency (BTC or USD) is determined by what people are willing to pay for it, not by the organisation backing it.

 

Third, Bitcoin might not have a central bank, but that is the whole point of it, it is a DEcentralised bank, more Bitcoins are created by verifying transactions, this solved the problem of having a centralised bank.

[andyrewwer]

Yes there are other ways to stop this, Bitcoins relies on mathematical algorithms that have been checked time and time again.

 

Also, the value of a currency (BTC or USD) is determined by what people are willing to pay for it, not by the organisation backing it.

My point was that it is a mathematical algorithm, but the person who programmed it might have back door (i.e. he/she knows what a Bitcoin is, and how it is created so perhaps he could create his own other way). But I know people are not idiots and I believe that this may not be possible. But in a literal sense, what is a Bitcoin block, other than a chain of numbers and letters, perhaps he could create his own without the algorithm? 

 

Secondly, granted the value of a currency is determined by what people will pay for it, but countries can inflate or deflate that value (look at China, it is massively deflating its currency, Switzerland is doing the same). Central Banks can change the interest rates (and later use quantitative easing) in order to keep inflation high or low which DOES affect the value of a currency.

[Ssoele]

My point was that it is a mathematical algorithm, but the person who programmed it might have back door (i.e. he/she knows what a Bitcoin is, and how it is created so perhaps he could create his own other way). But I know people are not idiots and I believe that this may not be possible. But in a literal sense, what is a Bitcoin block, other than a chain of numbers and letters, perhaps he could create his own without the algorithm? 

 

This is the whole point, there is no back door, fi you would read some more in the way blocks are generated, you will know that you need to have the correct number, this number depends on SHA256 hashes, SHA is not made by the creators of Bitcoin, so they can't have a back door in to that, also, if a flaw in the system would be found, Bitcoin would be forked to a version that fixes that (happened in August 2010).

 

 

Secondly, granted the value of a currency is determined by what people will pay for it, but countries can inflate or deflate that value (look at China, it is massively deflating its currency, Switzerland is doing the same). Central Banks can change the interest rates (and later use quantitative easing) in order to keep inflation high or low which DOES affect the value of a currency.

 

Interest rates have little to nothing to do with the value of a currency. Printing extra money however does, this also happens with Bitcoins (on average every 10 minutes 25 Bitcoins are created). However, the controlled timeset of this with Bitcoins make sure this doesn't affect the currency a lot. When a central bank does this, this can have huge consequences for the people using that currency (just look at the example you made with Iceland).

[RankUpGamers]

America's money has a price but no value. We were on the gold standard forever, but someone thought they'd fix it by making our money worthless... Anyhow, good read.

[andyrewwer]

America's money has a price but no value. We were on the gold standard forever, but someone thought they'd fix it by making our money worthless... Anyhow, good read.

In my opinion, America's currency has value because the government backs it, and produces something which the world recognizes has value (electronics, crops, etc). While Bitcoin does not... 

[RuecanOnRails]

In my opinion, America's currency has value because the government backs it, and produces something which the world recognizes has value (electronics, crops, etc). While Bitcoin does not... 

 

I have no idea how you cannot see the value of Bitcoin. It is very valuable, the distributed and decentralized ledger which solved the double spend problem is likely the most important computer science invention of this century.

 

Bitcoin has been tested and attacked by the best and still stands strong.

Bitcoin brings freedom to an abusively regulated financial system.

Bitcoin offers a method to transmit funds that is WAY ahead of the current system.

Bitcoin is not susceptible to inflation by greedy govts or corps.

Bitcoin is a better store of value than both fiat (inflation), and precious metals (storage, transportation, etc).

Bitcoin is not susceptible to regulation. If the US regulates US companies (they cannot regulate anything else), they will inflict massive damage on their economy as business moves overseas.

 

http://www.reddit.com/r/Bitcoin/comments/1r1xg3/how_to_for_crash_selling/

 

 

Bitcoin will, and is changing the world, even if the price of Bitcoin hits 0. The protocol holds great value. A currency was not the primary design nor was it the first app for Bitcoin. The protocol will be built upon similar to how the internet is more than an email and messaging app.

[Ssoele]

 

I have no idea how you cannot see the value of Bitcoin. It is very valuable, the distributed and decentralized ledger which solved the double spend problem is likely the most important computer science invention of this century.

 

 

 

Bitcoin will, and is changing the world, even if the price of Bitcoin hits 0. The protocol holds great value. A currency was not the primary design nor was it the first app for Bitcoin. The protocol will be built upon similar to how the internet is more than an email and messaging app.

 

 

Look for example at NameCoin, a decentralised domain name system.

[pGuerrerox]

Good writing, I don't entirely agreed with but is good indeed.

 

Bitcoin (cryptocurrencies) represents the very basic nature of human value exchanges, via modern or even futuristic ways.

 

Economist (closeminded ones) dont like Bitcoin because it lack of a physical regulator, but in fact Bitcoin does have a regulator who? Bitcoin regulated itself!! that cant be dont by any's country currency.

 

Another thing that people dont see is that Dollar (any currency) can be forged, and you might end up with a non valid paper in your hands, with bitcoin this cant happend, you even create a clon of the genesis block but that would be a whole different currency NOT BITCOIN, because the second block contains unique transactions that give it validity...

 

Cryptocurrencies are the future and will become the standard thing to use.... maybe not bitcoin nor litecoin. In fact U.S. (and the other top economist in the world) could create it own cryptocurrency and make it his national coin something like USC (United States Coin), RUC (Rusian Coin), CNC (China Coin), EUC (EuroCoin).

[Vitalius]

I disagree with this for one simple reason. 

This is the internet.

Now, before you bite my head off, I'm only speaking from experience. Every time something new comes out that is based on how the internet works (everything is instant and shared), the people with experience in something similar but not the same say it is worthless or will fail inevitably because it is not just like the inherent thing they are used to. 

Compare TV shows to Internet streaming services. 

Things like that. I believe it's the same principle. Just because BTC doesn't cover the two responsibilities that were listed doesn't mean it will ultimately fail. It may fail as a currency (since that is what requires those two responsibilities to be fulfilled), but then again, it's probably not exactly a currency. 

I guess, my point is, every time someone with experience with something outside of the internet, tries to give insight into something that is related to the internet, they tend to be wrong. Simply because the internet, and the new things that come from it, are all uncharted waters. They aren't the same thing, only similar. 

Nobody really knows how this will ultimately go. We all expect BTC to crash, but then again, as people have already pointed out elsewhere, everyone thought the same thing when BTC when from $0.20 to $2. Then from $2 to $20. And so on.

I believe it will keep rising in price until it is given a reason to be lowered (i.e. news or shorting).

[andyrewwer]

I disagree with this for one simple reason. 

This is the internet.

Now, before you bite my head off, I'm only speaking from experience. Every time something new comes out that is based on how the internet works (everything is instant and shared), the people with experience in something similar but not the same say it is worthless or will fail inevitably because it is not just like the inherent thing they are used to. 

Compare TV shows to Internet streaming services. 

Things like that. I believe it's the same principle. Just because BTC doesn't cover the two responsibilities that were listed doesn't mean it will ultimately fail. It may fail as a currency (since that is what requires those two responsibilities to be fulfilled), but then again, it's probably not exactly a currency. 

I guess, my point is, every time someone with experience with something outside of the internet, tries to give insight into something that is related to the internet, they tend to be wrong. Simply because the internet, and the new things that come from it, are all uncharted waters. They aren't the same thing, only similar. 

Nobody really knows how this will ultimately go. We all expect BTC to crash, but then again, as people have already pointed out elsewhere, everyone thought the same thing when BTC when from $0.20 to $2. Then from $2 to $20. And so on.

I believe it will keep rising in price until it is given a reason to be lowered (i.e. news or shorting).

While I agree with you that people are saying each time the price goes down it is the last, I believe that eventually it will crash and won't come back up. 

The reasons that it keeps coming back is that people believe it will go back up, as they have seen it go back up before so they continue to buy it. 

I believe the issue is when the price gets VERY high (like maybe 2 weeks, maybe more) when the value is so high, that the amount of money that can be made from each peak is diminished. This means that eventually people won't make enough money to make it worth it. And when this happens, I believe that Bitcoin will crash, and will not go back up!