If I have funds in a bank account, I know that I have a certain amount of fiat money available in that account, upon which I can draw more or less freely, according to the nature of the contract between myself and the Bank. The value of my account depends upon the value of the fiat money which it represents.
Bitcoins have no stated value. I cannot know the total value of my Bitcoins, until the moment I have exchanged all of them for a quantity of fiat money.
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At present, the owner of 1,000 Bitcoins thinks that he is the owner of over $4 million dollars. But he is mistaken; he will only have $4+ million dollars when he has sold them all for $4+ million dollars.
I cannot use Bitcoins to purchase anything directly from just anyone; in order to purchase something with my Bitcoins, I have to find someone who will accept them in payment of what I wish to acquire, and for which that person is willing to accept Bitcoins in exchange.
In such a theoretical operation, both the person who tenders Bitcoins in a purchase, and the person who accepts Bitcoins in a sale, are both of them calculating their exchange in terms of fiat money, not in terms of Bitcoins.
Thus the Bitcoin has no independent existence such as fiat money has. Its worth depends on the existence of fiat money in which to transact exchanges.
As long as there are more buyers of Bitcoin, than sellers, the value of the Bitcoin will continue to rise, and that will bring in still more buyers and its value may rise to the skies
But when the moment comes – as it must – when there are more sellers than buyers, then the value of the Bitcoin will fall; when the holders of Bitcoins begin to see a trend to falling value, there will be nothing and no one to stop the trend: owners of Bitcoin will rush in panic to sell their holdings – to other holders of Bitcoins – before its value falls further. With more and more owners trying to sell, there will soon be no buyers: no one will want to catch the falling knife! The value of Bitcoin will fall to practically zero. When the famous Tulip Craze of the 1600’s was over, the losers at least had their tulips to look at.
The Bitcoin rise in “value” that took months – or perhaps years – to take place, will be over in a question of hours.
The Bitcoin will become a history of mass speculation that came to grief.
Charles Mackay said long ago: “Men, it has been well said, think in herds; it will be seen that they only recover their senses slowly, and one by one”
In the special case of the Bitcoin, sooner or later owners of Bitcoins will “recover their senses”. But it won’t be “slowly”!
Bitcoin is a government run false flag operation being conducted to draw out those who operate, or want to operate, clandestinely outside the established system.
And it’s not done for benign reasons.
Hugo pretty much nails the exact problem I had when I was working within Bitcoin. Cryptocurrencies don’t have a stand alone value. You only know the “value” based off a government issued fiat. To redeem your Bitcoins you have to go through a third party.
While I still think the technology itself is promising in some function, there’s not a promising future with cryptocurrencies primarily because it seems very few who are involved in trading or infrastructure actually understand any monetary theory. Because they fundamentally don’t know anything about monetary theory there still hasn’t been a development noteworthy enough to create a flywheel effect to lead towards mass adoption. Kim Dotcom’s Bitcache is a step in the right direction, but he’s still having set backs in his attempt to launch it.
Over a year ago I got out after the oversees Chinese real estate bubble was collapsing. My prediction was once foreign real estate investments a la Vancouver dried up (Canada upped their taxes) there’d be a rush into Bitcoin and cryptos to stash money away from the Chinese government. Nailed it…
From everything I’ve observed Blockchain technology will be repurposed into something else a hell of a lot more boring, but useful. “Cryptocurrencies” function in an interesting way, but it’s not money.
I suspected for while that the only thing keeping bitcoin high (relative to fiat currency) is that bitcoin is a way station for Chinese, and others to transfer wealth without the constraints of official transfer mechanisms. It is safer for a Chinese billionaire, if he wants to purchase land / homes or other assets in a foreign land, especially with capital controls in place, by buying bitcoins, then exchanging them to fiat in whatever country you wish to buy the asset keeps government goons out of your business.
Anyway, the problem with any currency not sanctioned by a government is that the producers in that jurisdiction are bound (at gun point) to pay taxes to that jurisdiction in the sanctioned currency. So, if you wish to purchase a tangible object or service (which ultimately is what the purpose of all currency is, eventually) and you do not have the currency of that jurisdiction, you must exchange it. In bitcoin’s case, there is no jurisdiction that directly recognizes (for taxing purposes) therefore there is no way to use it for the ultimate exchange of services and goods. Crypto currency is also not safe (long term, or in large amounts) due to the IRS and other agencies having the ability to track the block chain. It is therefore now possible ( and always has been) to trace every transaction which the bitcoin goes through. Not good if you are trying to hide wealth. I am not a gold bug, but I would take gold any day before I would consider a crypto currency. Not for the exchange value (see problem above) but at least it has more anonymity.
Cryptocurrencies can function as money. The problem isn’t with cryptocurrencies themselves. The problem is that people have been brainwashed into thinking only in terms of dollars.
Cryptocurrencies are of fiat design…. just a promise….. nothing more.
Backed by nothing currencies are a boon to those who wish to exploit them, in ways that are detrimental to those who “trust” and invest in those currencies.
Like the author stated “at least the farmers still had the tulips leftover”
Like your forefather’s wanted: that you still had the gold or silver in the coins left over!
0’s and 1’s are easier to make than printed paper.
as long as you have reliable electricity.
This is Bitcoin’s extra Achilles’ heel: having no intrinsic value is bad enough, but requiring energy inputs to maintain puts it in negative-value territory absent pure speculation.
Bitcoen sounds more reliable… except on Saturdays. Trust me.
http://www.jpost.com/Diaspora/BitCoen-to-become-first-electronic-currency-specifically-for-Jews-501885
Hugo Salinas Price is a gold bug, and there is no more angry a woman scorned than a gold bug when presented with an alternate.
Not that I think Bitcoin or the other altcoins are great either.
The problem is HSP doesn’t actually understand how money works. Money represents value – it isn’t value itself. Gold bugs like HSP assume that anything that isn’t valuable itself can’t be money.
Well, the entire purpose of money was so that everyone could more easily buy and sell things. Trading donkeys for cotton is entirely too messy.
I’d also note that bitcoins and other cryptocurrencies do have intrinsic value. Their value is exactly like that of art. What is the intrinsic value of a Monet?
Cryptocurrencies are simply nerd art. Each bitcoin is unique like a snowflake and there is a finite number defined much like the number of Monets or Picassos painted.
That they are very attractive to nerd-libertarians only increases flow from those types, and that they can be used to circumvent currency controls also increases flow from mostly Chinese exfiltrating their money. But the prices of that increased flow is also usage for purchasing drugs, for cyber criminals collecting extortion and ransoms, and so forth.
Of course, with the rage in ICO (initial coin offerings) going on, the trick in the cryptocurrency scam is now being revealed: while bitcoin might have a limited number of units, you can keep creating new types of cryptocurrencies forever.
Ultimately, however, the real issue is that bitcoin and all the other altcoins put together only have a total value of $50B to $60B. That’s a literal drop in a boxcar of buckets compared to the value in any other single niche, much less any national currencies, which in turn underscores the danger of bitcoin/cryptocurrencies: with such a tiny total value, someone or a group of someones with a significant amount of cash can manipulate the value really easily and quickly.
Put another way: HSP talks about suppression of gold and silver prices. If that’s a real concern (and I actually think it is), then bitcoin/cryptocurrencies are literally orders of magnitude easier to manipulate.
Buyer Beware!
Hugo Price is absolutely freaking brilliant with a long record to back it up. Making the statement that he doesn’t understand how money works is ludicrous.
Hey Jake, I’ll exchange you 5 hugos for 1 price
Brilliant to gold bugs.
Doesn’t mean he actually understands money.
He is definitely a libertarian idol – but then again, those who follow him probably don’t know that he made his fortune loaning to peasants to buy appliances.
So clearly the sacredness of gold and badness of fiat only applies to others…
Money is not defined by “intrinsic value”.
So many uninformed posters on so many blogs when it comes to discussing cryptocurrencies. I’d suggest that you spend just a few minutes reading both Karl Menger and Ludwig von Mises for theoretical input on what constitutes money. There you might learn about the economic concept of marginal utility. You might also read Antal Fekete and Mark Weiner for an education on contemporary concepts. The latter’s commercial blog has some insightful essays about cryptocurrencies.
Money is emotional calibration with the other.
Yes, the libertarian idols.
Sadly, money is purely a utilitarian function.
All of those who ascribe “intrinsic value” are attempting a pseudoscientific endeavor.
Money, and more importantly credit, are just tools.
Those who already have it want money “hard” as in gold.
Those who don’t have it or need to borrow it want it “soft” as in fiat.
It is boring listening to the libertarians spout off about theories of money when ultimately all they really want is to ensure that what they have remains theirs. Admirable, but purely political since ownership of value has never been set in stone. Ask the peasants in Europe prior to feudalism, or the Native Americans over the past 200+ years.
The dollar system is just a crude electronic currency system. Only a very small percentage is in paper.
Do you prefer the tyranny of the Federal Reserve of debt money slavery?
I have been looking for a way out of our corrupt monetary system. The more I look at it, cryptocurrencies might be the way out. As long as people are free to choose which one they can use.
The biggest risk I see is that if the governments force people to use their own cryptocurrency. Then all transactions are traced and taxed.
I was talking to a woman whose daughter just moved to Shanghai to teach. She said that they can get anything delivered to their apartments, and that everyone uses their phones for payments.. similar to ApplePay (is that the name?). Nobody uses cash, it was reported.
I said I wouldn’t want to rely so much on a purely electronic system. She said “Oh, it’s not electronic—it’s through the phone!”. I squinted at her for an uncomfortable minute until she came back to reality. Still defending this wacky state of affairs, she asked, “Do you really write *checks* to pay bills?”, as though to do so were *gauche*, or potentially unhygienic, like spitting in the street.
I said, “All it takes is a power outage and then no one can do any transactions.. They’ll be like the folks in India whose cash was taken away recently.” I can’t imagine billions of people with no vernacular way to perform exchanges. The Indian situation floored me, and I have no idea how they are faring at the moment.
“…The more I look at it, cryptocurrencies might be the way out…”
A fool and his money are soon parted.
I’m not putting anything into Bitcoin, but this article’s premise is completely blown to shreds by the fact people can translate their bitcoins directly into property without having to translate into any other medium. There are venders who accept bitcoins directly for goods and services. This very site being one of them.
The other problem mentioned… don’t know the value till translated into the desired good/service… is true of every fiat.
“….this article’s premise is completely blown to shreds….”
razzle merits a fail.
You, razzle, have no reading comprehension. From above, the author states, “… I cannot use Bitcoins to purchase anything directly from just anyone; in order to purchase something with my Bitcoins, I have to find someone who will accept them in payment of what I wish to acquire, and for which that person is willing to accept Bitcoins in exchange……both the person who tenders Bitcoins in a purchase, and the person who accepts Bitcoins in a sale, are both of them calculating their exchange in terms of fiat money, not in terms of Bitcoins….”
That only says both you, and Hugo, have personally been involved in an exchange with someone who says “I can get X guns with Y bitcoins, I will charge Z bitcoins for A drugs in order to get my X guns”.
That you then go “Well EVENTUALLY they will consider this exchange in dollars” puts you back into the world that dollars, yen, pesos, gold, cigs, etc are also involved in this exact same calculus of exchange in every single person involved.
People translate time farming World of Warcraft bits into real dollars. They also get sex out of it. Are you going to say that the slut who gets a free drink in dollars from a horny dude in a bar is fundamentally different from a slut who gets a free piece of armor from a horny dude in a game?
Nothing personal here but if you wish to confuse reality with cybergames and to reason in circles, be my guest.
So… a person who goes from “I’ll give you X drugs for Y bitcoins so I can give Z bitcons for A guns” is not operating in reality? K!
Perhaps you’re mad that women have outsmarted you and used “cybergames” to generate material value for themselves thus bypassing your precious federal reserve?
Notice that Jim_N offers nothing of value. This is always the fundamental difference between those who generate value, and those who seek to define the proper way to exchange value.
If anyone, ever, tells you that your way of exchanging one thing for another isn’t correct, then you know for sure they seek to profit from regulating your exchange, not by creating value.
To which you should drive away quickly. Rope attached to neck optional.
Massive confusion here. Hugo states ” Bitcoin has no stated value”. Think about that. WHAT has stated value? There is NO absolute value to measure against. It’s all relative to the time and article desired. At some moment, I wish to exchange a number of bitcoins, ounces of gold, number of dollars, pounds of copper, gallons of gasoline, bushels of wheat, gallons of water, for that rifle I want. AAt that moment, the perceived value of any and all of the foregoing precipitates to the perceived value of the rifle. And after some back and forth between me and the owner of the rifle, we agree upon an exchange. In that moment, and only in that moment is “value ” determined. The next transaction most likely result in a different “value ” for any of the goods. That’s the way I see it. Am I missing something?
Value is perspective dependent.
Period end of story no further exploration needed.
HOWEVER… Certain smart folk have sought to unify the perspective of value.
There are good reasons to do so, and there are consequences for doing so.
Period end of story no further exploration needed.
HOWEVER… What are you surrounded by? Coconuts or Nuts wanting coco?
I’m somewhat confused by the notion stated here of “looking for a way out of the money system” or an “alternate place to put money”. I understand the thought process, but how on earth can you put anything in an alternate currency system where one minute it’s “worth” $5000 and the next minute $3000?? That type of volatility is not a money/currency system. It’s pure speculation…
Value/Exchange is ALWAYS speculation.
Any period of stable exchange is a product of the period, not an inherent aspect of the exchange.