On Bitcoin, Tulip Mania, Volatility and the new World

[indigopete]

Folks & fellow Avalon Travellers:

I started this new thread because so many contributors to other bitcoin threads have been bringing up the issue of "tulip mania" and the problem of Bitcoin's volatility making it unsuitable as a currency. Instead of grappling away all over the place on different threads (like here (http://projectavalon.net/forum4/showthread.php?65935-Bitcoin-passes-1000-mark-Keiser-Report-Bitcoin-is-Beautiful--E526-&p=764712&viewfull=1#post764712)), I thought I'd address these two central points of misunderstanding here.

First of all, as I said on another post, Bitcoin and all of it's cryptocurrency brothers and sisters is *base* money. There are (broadly speaking) 2 types of money categories in the officially-defined money supply:

[1] - base money (M0)
[2] - credit money (M3)

(See: http://en.wikipedia.org/wiki/Money_supply)

The difference to me and you is that "base money" is central bank money and "credit money" is an "IOU" for central bank money. As we all know by now, there are about 10 "IOU"s produced by the commercial banking sector for every 1 unit of central bank money (See the section called "Fractional Reserve Banking" in the Wikipedia article above).

Cryptocurrencies (of which Bitcoin is only one) are *base money*. What that means is that they are not a proxy for something else (in the sense that the IOU was proxy money for the bike in my post about the plumber above).

Another way of looking at base money is that people seek it as an ultimate store of wealth - like gold. There is nothing special about gold, it's basically a useless metal, very heavy (usually a bad thing) and doesn't have many industrial uses that are not substitutable by other metals. It is also a soft metal (another negative from an industrial point of view). The only thing gold had going for it was that it was impossible to counterfeit, had a limited supply and was a good conductor of electricity. Plus 1 other *very important* attribute of base money - the ability to attract a sense of "Tulip Mania" from its holders. This leads me on to addressing the main criticism of Bitcoin:

****************** TULIP MANIA ******************

The so called "Tulip Mania" phenomenon is an absolute essential attribute of any commodity that is a candidate for "base money". i.e. that people want it for no other reason than the fact that everyone else does and that it's a scarce resource.

It happened with Gold which has been the subject of "Tulip Mania" for thousands of years. The only difference between gold and the 1637 Dutch Tulip phenomenon is that:

a) - Tulips are not very durable, whereas gold is
b) - Tulips are not very limited in quantity, whereas gold is

Well, guess what, those same 2 distinctions apply to crypto currencies in the context of electronic trading (which now forms 90% of all the worlds trade).

So now on to the second point - the inability of Bitcoin (or any of it's fellow currencies) to function as a currency due to its volatility:

****************** DAY TO DAY TRADING ******************

The ability of cryptocurrencies to facilitate day to day transactions (like supermarket tills) is immaterial. When we carry out a payment at a point of sale terminal, we are not actually transferring money, just numbers which are a 'proxy' for real money.

What those numbers represent is the problem. Nobody really knows, and they don't care either as long as those numbers hold an exchange value for a box of Conrflakes down at Tescos. The problem comes when they don;t have any ecxhange value any more.


****************** VOLATILITY ******************

The most important measures of anything as its ability to function as a currency are:

a) - it's ability to respond to variations in supply and demand and correctly reflect this balance using a property called "price"
b) - it's resistance to counterfeiting

It is very easy to show that the cause of Bitcoin's price volatility is due to the first of two items above. What this means is that Bitcoin is actually functioning perfectly as a currency by correctly reflecting the variations in its supply and demand.

Secondly, its resistance to counterfeiting is about a million times more perfected than banks have ever been able to do with printed money (again, because we are dealing with 'base money', it's always harder to copy the genuine article than it is a proxy for the genuine article).

****************** BANK MONEY ******************

In all of the current furore about the explosion of cryptocurrencies, it's easy to miss the real phenomenon occurring in the world financial system - the implosion of value of credit money (M3). i.e. what we have in our bank accounts. If you don't believe me, at least believe the ECB (European Central Bank):

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/11/Europe%20loan%20growth.jpg

Look at the correlation between M3 (the numbers we have in out bank accounts) and the amount of private sector debt - they are one and the same. i.e. the only way that M3 money can be created is through people signing up for mortgages.

On the other hand M0 money (such as cryptocurrency money) is not dependent on central banks. This fact is starting to dawn on the Chinese. Once it dawns on the rest of us, its curtains for the commercial banking sector (and along with it the 'numbers' in out bank accounts.

It's a no-brainer that cryptocurrencies are going to create a whirlwind which will devastate credit money like fish in a barrel. Here's some links for you people so you can watch the world changing in realtime:

Chinese Bitcoin price in Yuan: https://vip.btcchina.com/

Fiatleak: This shows geographically where Bitcoin is going in realtime: http://fiatleak.com/

Realtime Bitcoin Price in Dollars (Click the cogwheel for different exchanges): http://preev.com/btc/usd/source:mtgox

Watch realtime trading of Fiat into Crypto (This one's amaxing): http://btccharts.com/

Market Capitalisation (This shows how much capital has flowed into Cryptocurrencies independently of price on a minute to minute basis): http://coinmarketcap.com/

[Cidersomerset]

I like the Fiat link I was getting mesmerised watching all the Bitcoins being bought
in China just now. The Gong goes off every now and then...LOL
I was trying to put the live graphics up ,but it would not let me how I normally do...


http://fiatleak.com - watch the world's currencies flow into BTC in realtime

http://kwout.com/cutout/w/7z/hc/36t_bor_rou_sha.jpg


Each trade results in a bitcoin being sent from the currency counter in red to the
country on the map. The value in BTC is listed in green and plotted across the map.
The last exchange rate for each currency is listed in @purple and updated for each
trade.

Hide animations?... Play sound when rate is ... BTC per second or higher?

[ThePythonicCow]

Folks & fellow Avalon Travellers:

I started this new thread because so many contributors to other bitcoin threads have been bringing up the issue of "tulip mania" and the problem of Bitcoin's volatility making it unsuitable as a currency. Instead of grappling away all over the place on different threads (like here (http://projectavalon.net/forum4/showthread.php?65935-Bitcoin-passes-1000-mark-Keiser-Report-Bitcoin-is-Beautiful--E526-&p=764712&viewfull=1#post764712)), I thought I'd address these two central points of misunderstanding here.

First of all, as I said on another post, Bitcoin and all of it's cryptocurrency brothers and sisters is *base* money. There are (broadly speaking) 2 types of money categories in the officially-defined money supply:

[1] - base money (M0)
[2] - credit money (M3)

(See: http://en.wikipedia.org/wiki/Money_supply)

The difference to me and you is that "base money" is central bank money and "credit money" is an "IOU" for central bank money.
Both "base money" and "credit money" are lent into existence by the central bank. One is lent to the central government, and the other lent to various other lesser governments, to corporations, and to individuals.

The argument that base money is somehow superior to other credit money is essentially that base money is better because it is in more limited supply, playing on the fear that reasonably lies in all of us with even a modest positive wealth as either savings or a reliable income, that our savings or income will depreciate in value over time due to continued inflation of the monetary supply.

Both forms of credit money are used by the Banksters to siphon off wealth from humanity. The battle between inflation (loss of spending power to savings and income) and deflation (loss of productive economic activity) is secondary in seriousness, to the more serious problem of siphoning off the economic productivity of humanity for other purposes, by other beings (the "bastards in power" and those who fund them, whoever they are), purposes often inimical to the well being of humanity.

===

Bitcoin is the geek version of rare tulip bulbs and Picasso paintings. All three are in rare supply and (given that Picasso is quite dead) all three are at no risk of becoming abundant. During the death throes of a major economic boom, such rare items are often marked up in price dramatically, by those desperate to hang onto their wealth. Wealth is future spending power, and as the misdirection of human economic activity is fully realized, future spending power will be devastated. A clay tablet stating you are due six months rations from the city's grain bins is worthless if those grain bins are empty.

===

Gary North has an analysis of bitcoins that I find persuasive: Bitcoins: The Second Biggest Ponzi Scheme in History (http://www.garynorth.com/public/11828.cfm).

[indigopete]

Gary North has an analysis of bitcoins that I find persuasive: Bitcoins: The Second Biggest Ponzi Scheme in History (http://www.garynorth.com/public/11828.cfm).

I don't find that analysis the least bit persuasive.

For a start, Gary North conveniently doesn't take into account the billions of people around the world who currently have no access to banking facilities or dollar' money (that's because his clients are all invested in dollar based assets).

Secondly, his article is a treatise on Bitcoins in the context of "money" in general. He appears to think that the only reason they are given value at the moment is because people think they will be "money" and therefore he thinks that he can apply classical theories of money in making an appraisal of cryptocurrencies' true value.

This is a big mistake. They are not in demand because of any classical theory of "money". They are in demand because cryptology based tokenization is the only technology known to man that can make assets directly tradable on an electronic platform such as the internet.

It doesn't matter what you call them - "crypto-tokens", "money", commodities - whatever. They work and they don't require a third party to underwrite them as bank money does. Gary's treatise takes none of this into account. He is highly selective in choosing only to consider the dollar price fluctuation (that's because he's an investment advisor, not a technologist).

The price fluctuates rapidly because the current market capitalisation is so tiny. Large trades can move the price a lot. As it gets bigger it will become more stable.

Some others who don't find his arguments convincing are about 50 million Chinese people. Maybe Gary should re-read his own essay and think again, in particular this paragraph:


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. It would have to develop through exchange, not bought as an investment. In other words, the free market will have to adopt Bitcoins as a means of increasing the division of labor.

Well guess what - that's exactly what's happening. At a rate faster than has ever happened before for any type of trading commodity. The fact that people are "hoarding" is not as relevant as GN thinks. As their value goes up, traders will offer goods and services in exchange for those digital assets, just as they will other currencies, so it's a virtuous circle, not a vicious one.

[ThePythonicCow]

[Bitcoins] are in demand because cryptology based tokenization is the only technology known to man that can make assets directly tradable on an electronic platform such as the internet.
That is a property of Bitcoins, yes.

Similarly, encrypted Internet messages and connections provide a way for me to communicate secretly with anyone else on the planet with an Internet connection.

I have sufficient cryptographic expertise to actually have a decent chance of directly communicating, secretly, with anyone else similarly capable. How many people can say that? How many people actually are communicating in secret, beyond the reach of the NSA? I'm not, both for lack of anything I really need to say in secret, and for lack of similar technical skills in those I do communicate less secretive information with.

Just as with encrypted messages, encrypted currency is a "magic" technology beyond the skills of almost everyone to personally develop and use, with some confidence of being free of Big Brother access.

For that matter, gold has the same problem ... the Bastards in power control the bulk of it, and control the trading and futures markets that make gold a liquid asset.

Bitcoins are really not much different than Paypal when it comes to facilitating long distance monetary transfers over the Web. In both cases, the actuality is, for most people, that they need to rely on services provided by others for the essential integrity and secrecy of their transactions.


Some others who don't find his arguments convincing are about 50 million Chinese people.
"Fifty Million Frenchmen Can't Be Wrong" (http://en.wikipedia.org/wiki/Fifty_Million_Frenchmen)

[indigopete]

Bitcoins are really not much different than Paypal when it comes to facilitating long distance monetary transfers over the Web

Absolutely they are ! :)

How on earth do you think that cryptocurrencies have been able to render an entire banking infrastructure redundant ? The reason is that Paypal (and any other bank transfer for that matter) is not transmitting anything other than a bunch of numbers. These are readily reproducible (i.e. all you're doing is reducing a number at one end and increasing it at another). Because of this immense weakness as a form of money, a gargantuan infrastructure is required to have those numbers mean anything.

You basically need a trusted authority at one end (a bank), another trusted authority at the other end (another bank), god knows how many layers of laborious approval in the middle, not to mention about a 3 day waiting time for funds to appear.

...and after all that, you haven't actually received anything. All the bank did at the end was change a number in your account.

The Bitcoin blockchain is lightyears ahead of all this. By "owning" bitcoins, you control a blockchain address which no-one else can occupy while you "own" it. You can transmit those coins to any other address directly and have the transaction validated by the entire world's blockchain computing power. I'm sorry, but there's not a bank that can come near this level of monetary intergity, ubiquity or performance.

These are the kind of subtle but profound characteristics that are just lost on many who just look at the whole thing from a purely economics perspective. I would not trust an investment advisor to tell me about Bitcoin any more than I'd trust a travel agent to fly my plane.

[AutumnW]

One thing people have to bear in mind is the crooks that control the world want to be able to move their stores of value, unimpeded. That's why bitcoin hasn't been marginalized yet. However, it is a hackable commodity. And it will only take a couple of successful attempts to bring it down completely. Failing that it could continue it's upward climb with many competitors waiting in the wings.

[EYES WIDE OPEN]

Folks & fellow Avalon Travellers:

I started this new thread because so many contributors to other bitcoin threads have been bringing up the issue of "tulip mania" and the problem of Bitcoin's volatility making it unsuitable as a currency. Instead of grappling away all over the place on different threads (like here (http://projectavalon.net/forum4/showthread.php?65935-Bitcoin-passes-1000-mark-Keiser-Report-Bitcoin-is-Beautiful--E526-&p=764712&viewfull=1#post764712)), I thought I'd address these two central points of misunderstanding here.

First of all, as I said on another post, Bitcoin and all of it's cryptocurrency brothers and sisters is *base* money. There are (broadly speaking) 2 types of money categories in the officially-defined money supply:

[1] - base money (M0)
[2] - credit money (M3)

(See: http://en.wikipedia.org/wiki/Money_supply)

The difference to me and you is that "base money" is central bank money and "credit money" is an "IOU" for central bank money. As we all know by now, there are about 10 "IOU"s produced by the commercial banking sector for every 1 unit of central bank money (See the section called "Fractional Reserve Banking" in the Wikipedia article above).

Cryptocurrencies (of which Bitcoin is only one) are *base money*. What that means is that they are not a proxy for something else (in the sense that the IOU was proxy money for the bike in my post about the plumber above).

Another way of looking at base money is that people seek it as an ultimate store of wealth - like gold. There is nothing special about gold, it's basically a useless metal, very heavy (usually a bad thing) and doesn't have many industrial uses that are not substitutable by other metals. It is also a soft metal (another negative from an industrial point of view). The only thing gold had going for it was that it was impossible to counterfeit, had a limited supply and was a good conductor of electricity. Plus 1 other *very important* attribute of base money - the ability to attract a sense of "Tulip Mania" from its holders. This leads me on to addressing the main criticism of Bitcoin:

****************** TULIP MANIA ******************

The so called "Tulip Mania" phenomenon is an absolute essential attribute of any commodity that is a candidate for "base money". i.e. that people want it for no other reason than the fact that everyone else does and that it's a scarce resource.

It happened with Gold which has been the subject of "Tulip Mania" for thousands of years. The only difference between gold and the 1637 Dutch Tulip phenomenon is that:

a) - Tulips are not very durable, whereas gold is
b) - Tulips are not very limited in quantity, whereas gold is

Well, guess what, those same 2 distinctions apply to crypto currencies in the context of electronic trading (which now forms 90% of all the worlds trade).

So now on to the second point - the inability of Bitcoin (or any of it's fellow currencies) to function as a currency due to its volatility:

****************** DAY TO DAY TRADING ******************

The ability of cryptocurrencies to facilitate day to day transactions (like supermarket tills) is immaterial. When we carry out a payment at a point of sale terminal, we are not actually transferring money, just numbers which are a 'proxy' for real money.

What those numbers represent is the problem. Nobody really knows, and they don't care either as long as those numbers hold an exchange value for a box of Conrflakes down at Tescos. The problem comes when they don;t have any ecxhange value any more.


****************** VOLATILITY ******************

The most important measures of anything as its ability to function as a currency are:

a) - it's ability to respond to variations in supply and demand and correctly reflect this balance using a property called "price"
b) - it's resistance to counterfeiting

It is very easy to show that the cause of Bitcoin's price volatility is due to the first of two items above. What this means is that Bitcoin is actually functioning perfectly as a currency by correctly reflecting the variations in its supply and demand.

Secondly, its resistance to counterfeiting is about a million times more perfected than banks have ever been able to do with printed money (again, because we are dealing with 'base money', it's always harder to copy the genuine article than it is a proxy for the genuine article).

****************** BANK MONEY ******************

In all of the current furore about the explosion of cryptocurrencies, it's easy to miss the real phenomenon occurring in the world financial system - the implosion of value of credit money (M3). i.e. what we have in our bank accounts. If you don't believe me, at least believe the ECB (European Central Bank):

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/11/Europe%20loan%20growth.jpg

Look at the correlation between M3 (the numbers we have in out bank accounts) and the amount of private sector debt - they are one and the same. i.e. the only way that M3 money can be created is through people signing up for mortgages.

On the other hand M0 money (such as cryptocurrency money) is not dependent on central banks. This fact is starting to dawn on the Chinese. Once it dawns on the rest of us, its curtains for the commercial banking sector (and along with it the 'numbers' in out bank accounts.

It's a no-brainer that cryptocurrencies are going to create a whirlwind which will devastate credit money like fish in a barrel. Here's some links for you people so you can watch the world changing in realtime:

Chinese Bitcoin price in Yuan: https://vip.btcchina.com/

Fiatleak: This shows geographically where Bitcoin is going in realtime: http://fiatleak.com/

Realtime Bitcoin Price in Dollars (Click the cogwheel for different exchanges): http://preev.com/btc/usd/source:mtgox

Watch realtime trading of Fiat into Crypto (This one's amaxing): http://btccharts.com/

Market Capitalisation (This shows how much capital has flowed into Cryptocurrencies independently of price on a minute to minute basis): http://coinmarketcap.com/

great post!

[ThePythonicCow]

Bitcoins are really not much different than Paypal when it comes to facilitating long distance monetary transfers over the Web

Absolutely they are ! :)

How on earth do you think that cryptocurrencies have been able to render an entire banking infrastructure redundant ? The reason is that Paypal (and any other bank transfer for that matter) is not transmitting anything other than a bunch of numbers. These are readily reproducible (i.e. all you're doing is reducing a number at one end and increasing it at another). Because of this immense weakness as a form of money, a gargantuan infrastructure is required to have those numbers mean anything.

You basically need a trusted authority at one end (a bank), another trusted authority at the other end (another bank), god knows how many layers of laborious approval in the middle, not to mention about a 3 day waiting time for funds to appear.
Absolutely, you're right ... that Paypal requires some trusted authority, whereas those with sufficient technical savvy can exchange bitcoins securely with just a data connection of any sort.

Absolutely irrelevant however for most people, who lack that technical savvy and must end up relying on the tools and services provided by others, either way.

The Bitcoin exchanges which have already become a major part of the infrastructure of bitcoins are one of their weak points.

The mathematics of bitcoins are different. I have degrees in Mathematics and Computer Science, with years spent in such areas as these. I absolutely agree, Bitcoins are a different beast, technically and mathematically.

However ... the political-socio-cultural-economics are not different.

===

And, regardless of your expectations that people will be using Bitcoins, en masse, for conducting ordinary monetary transactions ... that is not why people are hoarding Bitcoins at present. People are telling us of the mathematical wonders of Bitcoins ... but they are hoarding them hoping to get rich off the greater fools.

All Ponzi schemes that I am aware of have this same aspect ... a good "story", often true in some way, as this one is ... but used as part of the sales pitch, not as a full and balanced description of the present reality.

[indigopete]

And, regardless of your expectations that people will be using Bitcoins, en masse, for conducting ordinary monetary transactions ... that is not why people are hoarding Bitcoins at present. People are telling us of the mathematical wonders of Bitcoins ... but they are hoarding them hoping to get rich off the greater fools.


Paul -

Although that's true to a very large extent, I think you underestimate the degree to which this is an idea who's "time has come".

Since Nixon unhooked the dollar from the Gold standard in 1970/1, widespread fiat currency collapse has been an accident waiting to happen. For several years now, insufficient high grade private sector debt has been created to deliver enough liquidity for economies to grow (in a real way that is, not just statistically). To compensate, central banks are now printing at full pedal-to-the-metal capacity.

Clearly, this has now reached a point of diminishing returns because neither are economies growing in a real sense nor are liquidity problems abating. (For example the Fed is arresting all the new money before it gets into the commercial banking sector where it would be subject to the "multiplier effect", by offering competitive rates on excess reserves).

Meanwhile, they've run out of ammunition on interest rates which are now at a 30-year rock bottom level, chasing cash out of bank accounts for any fertile haven it can find.

So all this has created a perfect storm. The fiat currency bubble has survived for 40 years because there simply hasn't been any alternative.

However, we now have a mature, worldwide electronic trading platform in place which has tentacles at household level. Against this background, cryptocurrencies are like a very small pin to this gigantic baloon. The fact that people are speculating with them is nothing compared to the genuine macroeconomic effect they are about to have on fiat. Why else would people want to offload it for something so vague ?

This phenomenon goes a whole lot further than just plain speculative gain. Commentators like Gary North either have vested interests to protect or simply cannot see the wood for the trees.

Good luck to anyone who can make money in the meantime, but lets not get confused - the speculation is effect, not cause.

[apokalypse]

Bitcoins=Same old crap...why people jump over it anyway.

[Jeffrey]

Enjoying the exchange. It is helpful. Some points brought up here that haven't been discussed or fully reasoned out in terms of the tendency for the bastards in power to manipulate it one way or another. That or underestimating the ability for greed and lust for power to infect any kind of system involving representation of value through any kind of proxy. Ha! I didn't mean to make that pun, but it fits perfectly!



Absolutely irrelevant however for most people, who lack that technical savvy and must end up relying on the tools and services provided by others, either way.

[...]

Just as with encrypted messages, encrypted currency is a "magic" technology beyond the skills of almost everyone to personally develop and use, with some confidence of being free of Big Brother access.



There is another degree of vulnerability that I think Paul is may be alluding to regarding the technically saavy imbued with a lust for power, control, and greed (all things that the bastards in power have intimate relations with).

Excerpts from the PDF:




The Bitcoin economy exhibits remarkable and predictable stability on the supply side based on the power costs of mining. However, that stability is challenged if cost-curve assumption is not solely expressed by the fair cost of power. As there is at least one major player, the botnets, that can operate at a power-cost-curve of zero, the result is a breach of Gresham's Law: stolen electricity will drive out honest mining. This has unfortunate effects for the stability of the Bitcoin economy, and the result is inevitable collapse.

[...]

Building on the scenario of misallocated power costs by hobbyists or other users, what possibility is there for a simple power cost of zero? If a hobbyist is successful once, she might be encouraged to branch out to use the computers that are perhaps under control but are not directly owned. Farms of computers exist in families, in universities, corporates, governments, intelligence agencies .. and in botnets [Symantec].

Of those, most of them have approximate but non-zero power costs, and at the limit, the cost reduces to the opportunity cost - what is the best use that can be made of the power? By far the most interesting are the botnets, which earn their direct power cost of zero to the owner by dint of the fact that the power is stolen.

[...]

As each new botnet enters the market, supply increases, and the operators drop their prices. Each new botnet faces some shrinking amount of easy money, but it's still worth it -- to them. But to honest miners, they are quickly pushed below their minimal cost of honestly purchased power.

In the end, honest miners are squeezed out by the cheaper prices, one by one, and the market settles at a new stability. At the limits, the new price will settle at above the cost of botnet mining, and below the cost of honest mining.

In effect, the market becomes addicted to the price of bitcoins mined using stolen resources. With little difficulty it is easy to see that the market for mining is owned, or will be owned, by the botnets.

[...]

Bitcoin breaches the law of economy in that its use of proof-of-work causes costs in power, which is otherwise better used or better desired. Then, botnet-mined bitcoins circulate alongside honestly-mined bitcoins at the same price, as mandated by the software design, and thus we find bad money circulating alongside good. BitCoin's breach of Gresham's law can be seen as "stolen electricity beats out honest mining." The above proceeds of crime argument adds some coincidental colour to the term 'bad money.'

[...]

The security of Bitcoin relies on a single party or cartel of parties not being able to dominate the capacity for mining. Therefore Bitcoin relies on a large and diversified network of miners. Yet, the proof-of-work mechanism, the existence of free entry and no limits to honesty ensure that botnets will cause a breach of Gresham's Law: stolen electricity will drive out honest miners. Once botnets take over, criminality increases, honest users decamp and collapse follows.

Hence, the requirement of diversification is broken by Bitcoin's very mechanism to make diversification work fairly: proof-of-work. Attempts to repair the design generally result in the replacement of Bitcoin with some other architectural base.

The Bitcoin economy is highly vulnerable to attack. If an agent were to decide to attack Bitcoin, he has several strategies available. One could operate a mining botnet and slowly lower the Bitcoin market price by regularly selling small amounts of bitcoins with a declining price. As the honest miners are squeezed out, further manipulations of the Bitcoin system are possible. A second strategy is to pump & dump to generate volatility.

Both strategies result in the honest mass market decamping for other fields. Once the market takes on the taint of criminality, the Feds are encouraged to shut it down by targeting the exchange makers; fear of criminality and the appearance of the Feds work together to cause the collapse.

Source: Bitcoins and Gresham's Law

http://iang.org/papers/BitcoinBreachesGreshamsLaw.pdf

EDIT/ADD: I think the concept of bad money driving out good relates to the potentially corrupted manipulation of Bitcoin in the future driving out it's good benefits in the short term. Stolen electricity beating out honest mining is one example.

[mosquito]

Interesting discussion and much needed. It's nice to see that someone clearly understands the matter, so please, let's keep it civilized ! (as indeed it has been) ;)

"The law of economics" and "Gresham's law". Both laws no doubt created by economists, for economists, predicated on the correctness of the current economic model, which is clearly not working. So maybe we shouldn't pay too much attention to them.

Here's an interesting RT article on the crypto-currency meeting in London. The focus of the article is on anonymity.....

http://rt.com/news/bitcoin-not-anonymous-stallman-522/

[ThePythonicCow]

The fiat currency bubble has survived for 40 years because there simply hasn't been any alternative.
The looming end of the US Dollar's supremacy does not mean that your favorite alternative of the day (Bitcoins, gold, yuan, SDR's or whatever) is necessarily the grand successor.

[leavesoftrees]

Cliff High is talking about bitcoin (and other things) in this Red Ice radio interview

http://www.redicecreations.com/radio/2013/11/RIR-131125.php


Clif High - Hour 1 - Bandwidth Caps, Bitcoin, ISON & Nummo Origins
November 25, 2013
Clif High, along with his associate George Ure, developed the Web Bot, or the Web Bot Project in the late 1990s. It's an Internet bot software program or a web spider that originally was designed to predict stock market trends. Eventually it developed into something different. Now it's claimed to be able to predict future events by tracking keywords on the web. In the first hour of the program Clif and Henrik discuss the looming internet bandwidth caps that are slated to limit, restrict and control internet data consumption. The control of the internet comes in many different forms and the cap is the latest trick by the ISP monopolies, enabled by government, to make more money and to shut down streaming services. Clif talks about hackers and other alternatives to circumvent these restrictions. Later, we discuss the "wings" that have sprouted on comet ISON in the last few days, as it's getting closer to the sun. We move on to discuss the positive aspects of Bitcoin, why you should get involved and how they continue to increase in value, as more and more people get aboard. In the second hour, we continue to discuss the technicalities of Bitcoin and Litecoin

[Calz]

Ooooops ...

__________________


Hard drive containing £4 million in bitcoins trashed

James Howells is kicking himself after throwing away a computer hard drive worth millions of pounds.

The IT technician made the costly blunder of accidentally getting rid of the drive which contained 7,500 bitcoins.

It had been gathering dust in a drawer for years after generating the digital currency in 2009. Since then, bitcoins have skyrocketed in value, and the hard drive was worth £4m.

The drive is now somewhere in a landfill site in Newport, Wales getting buried ever deeper under other rubbish.

James said he was devastated when he realised what he had done: "I was in front of my computer, the drawer where the drive was kept was only a few yards away and the first thing I did was move to that drawer, and look, even though I knew it wasn't there, it was still the first thing I did."

"From the very first time I came across bitcoin I knew it was going to be a good investment and I knew it was going to be the next big thing. I mean, devastating really. What else can I say?" he added.

Bitcoin trades 24 hours a day, every day. The supply of the currency, which is "mined" by solving math problems, is limited, and recently stood at 12 million bitcoins, worth about £8 billion at recent prices.


http://www.sott.net/article/269335-Hard-drive-containing-4-million-in-bitcoins-trashed

[indigopete]

The looming end of the US Dollar's supremacy does not mean that your favorite alternative of the day (Bitcoins, gold, yuan, SDR's or whatever) is necessarily the grand successor.

Well, I think it does mean that, but you're right in the sense that I cannot tell the future and we should always expect the unexpected.

Also, I'm not saying all of today's monetary wealth will pile into cryptocurrencies, I'm just saying that I think that *some* of it will. If even 1-5% percent went into 'crypto's it would cause a major financial earthquake. Remember, cryptos are not levered. Debt-based fiat money is highly levered - at least by a factor of 10 and in many cases up to a factor of 40. This creates a huge pressure gradient for wealth to flow along in the event of a crisis.

(Put another way, in our current fiat system, there is only 1 seat for every 10 standing. In the cryptocurrency system, there are 10 seats for every 10 standing. So where are the other 9 from the fiat system going to go when the music stops ? Do the math).

2 other main reasons I think this is likely:

[1] - where else is it going to go ? It can go to commodities (oil, metals etc) and much of it surely will, but they are not mobile assets. They can't be used as money in electronic trading other than in a very indirect way

[2] - there are precedents. "Mini collapses" that have already occurred which allow us to observe what people do in such a currency crises. In particular the sovereign debt crisis in Cyprus, Argentina and (to a lesses extent) Spain. In each case, thousands dumped much of their savings straight into cryptos (Bitcoin in particular). See, for example:

http://forexmagnates.com/bitcoins-soar-in-value-in-argentina-due-to-capital-control-laws-bitcoin-meetup-held-in-nations-capital/

Capital controls will be one of the last resorts that central banks and governments will use and there are not many ways to bypass them other than smuggling or cryptocurrencies.

There's not much any government can do about 2 parties swapping £1000 for a bunch of letters and numbers :)

[GNC Harteveld]

You forget that cryptocurrent is generated using fiat money, so you just created the 11th seat.

[indigopete]

You forget that cryptocurrent is generated using fiat money, so you just created the 11th seat.

???

I don't understand this statement. How are they "generated using fiat money". This is not true - at least not in the literal sense.