Wednesday, January 10, 2018

Is Bitcoin a Bubble?

Despite the incredible rise of Bitcoin in a short amount of time, I find this question surprisingly hard to answer.  (We can talk some other time about the wisdom of buying bitcoin; this is just about the wild run up in price over the last couple of years).

On one hand there are sure signs that this is an epic bubble.  Warning signs are all around.  According to The Atlantic,  "It Is Silly Season in the Land of Cryptocurrency" and they give reasons to back it up.
In October, the Colorado biotech company Bioptix changed its name to Riot Blockchain. The company’s valuation doubled within a few days.

This might strike you as an extraordinarily bizarre story. But even more bizarrely, it’s becoming ordinary. Weeks later, the British company Online PLC changed its name to Online Blockchain. The company’s shares jumped 400 percent. In December, the Long Island Iced Tea Corporation—which, as you might expect, sold iced tea—rebranded itself Long Blockchain. The company’s shares promptly rose nearly 300 percent. On Tuesday this week, the legacy photography company Kodak announced the launch of KODAKCoin, a “photo-centric cryptocurrency to empower photographers and agencies to take greater control in image rights management.” The stock rose 80 percent in a matter of hours.
People buying anything that seems to have even the most tenuous connection to bitcoin?  Are they crazy?  People are as excited as can be over investing in it and bubble warning signs like people borrowing money to put into Bitcoin and other cryptocurrencies are starting.

Certainly if you look at at this graph, put together by First in Freedom Daily (I added the color coded lines), Bitcoin appears to be the biggest price run-up in history dwarfing the famous Tulip Craze of 1634-37 and monstrously larger than the 1990s tech bubble.  The Tech Bubble is barely visible at the bottom of this plot (a light blue trace); even the Roaring 20s bubble that led to the Great Depression is hard to find on this scale. 
The first time I became aware of a stock market bubble was long ago.  Over the boom/bust cycles since then, I came to think that a sure sign that a crash was imminent was a news story of some kid who either quit college to be a trader or house flipper or whatever the new craze was.  

On the other hand, there could be something real here.  The technology behind the cryptocurrencies is called blockchain, and it could be a real game changer in a lot of ways.  Briefly, for those who haven't run into anything about this, a description from the Atlantic:
At the most basic level, it is a record of information stored on a network of computers. When people use a cryptocurrency like bitcoin to buy a pizza, a kilogram of illegal drugs, or a yacht, these digital transactions are approved by a network of computers around the world running bitcoin software. Each batch of these transactions—a “block”—gets a cryptographic code, a copy of which is posted to every computer in the network. These blocks are permanently linked to each other in a “chain” of publicly approved transactions that cannot be edited. Thus, blockchain.
In a way, the blockchain system is the opposite of Internet credit card security.  When you use a credit card online, you want all of your information hidden because if someone can get your card number and ID, they can steal with it.  With blockchain, the history of every coin is embedded in the chain of transactions.  Using bitcoin is like using cash in the sense that once it leaves your "wallet" it might be stolen (although that appears hard) but they can't go on a shopping spree with it.  By analogy, if buy a slice of pizza and give two bucks to the shop, those two bucks become their problem to keep from being stolen. 

More importantly, Bitcoin was designed to emulate not just cash but gold.  Nobody has central control over the currency so nobody can inflate or deflate it to achieve some political goals.  There is no Federal Reserve Bank of cryptocurrencies.  The algorithms were designed to be resistant to computers becoming faster over time, so while someone can "mine" bitcoins by running software, it would be better for them to have a room full of computers than one supercomputer.   It costs energy and time to mine bitcoins.  Newer, faster computers are slowed by the algorithms so that technology doesn't give them an advantage in mining the "harder to mine deposits".  Much as the amount of effort required to mine gold is the same as it was thousands of years ago.  We have much better technology but the deposits are much harder to mine. Furthermore, just like the reality that the amount of gold in the crust is limited, the number of bitcoins is limited by the algorithms to 21 million bitcoins.  When all 21 million have been mined, the miners go home. 

"Yeah, I got that, but is bitcoin a bubble??"  I think that yes, it's in a short term overpriced situation.  I think it's possible, even likely, that there needs to be some period of sitting in a trading range and consolidating (strangely, I run across this guy saying the same thing).  People need to settle down a little get some of the fever out of the market.  I think a drop in price of as much as 50% is not out of the question.  However, I also think it has a good future; that there's a real place for cryptocurrencies and they will make a comeback.  I think anyone buying now will never see the equivalent percentage increases in price the last few years have given us, but I wouldn't be surprised for someone buying on the next dip to make more common gains, like "a few" times what they paid.  Remember: it's widely recognized that the first commercial sale with bitcoins was a pizza order paid for with 10,000 BTC coins.  For two Papa John’s pizzas.  With coins around today's $14,000, that would be a $140Million dollar order.  I sure hope someone held onto those 10,000 coins because they'll never see that kind of gain again. 
A bitcoin mining center



18 comments:

  1. I'm way too conservative to risk anything on Bitcoin. I understand how block chain security systems work and I understand how the narcos feel that this will allow them to hide their money, but USGOV will pop the bubble once they start seizing bitcoin from that element of society. (I cast the runes and that's what they said)

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  2. Let's say hypothetically... you're selling high end sports cars. You'll accept bitcoin. You'll also accept payment over paypal. You sell a Lamborghini for $200K US. To get $200K US in your bank account to continue your business... you have to "sell" or convert your bitcoin. Problem is... the $200k could easily only sell in exchange for $150K by the end of next week. It might also sell for $250K? It seems awful "exchange rate" risk-laden to be a viable, ongoing way to carry on legitimate business. None for me thanks.

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    1. Let's say hypothetically, that you sell that high end sports car and accept USD. You have the same risk, because NOTHING supports that USD. Oh, yeah, the full faith and confidence of the US government. Righto. The corrupt swill running the USD money show are GUARANTEEING at least 3% inflation continuously. So you have the same risk as you postulated.

      No, the REAL concern over Bitcoin and any other similar currency is the corruption, fraud, and treason by world governments who will destroy the currency any time they choose. Especially if the Right People are not benefiting from that currency. NSA and CIA and MI5 and MI6 and the rest are poised to destroy all such entities when told.

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    2. Beat me to it, Mark ;-)

      Like I said at the very top, I didn't want to get into whether or not bitcoin was a good thing to buy, but with every central bank in the work seemingly in a race to devalue their currency compared to every other currency, the only thing the USD (or Euro, Yen or whatever) has going for it is inertia. They're widely accepted. People know what they are.

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    3. Well people "know" what they CURRENTLY are, and assume that same status will remain for the foreseeable future. Do note yesterday's Drudge, however:
      https://www.bloomberg.com/news/articles/2018-01-10/china-officials-are-said-to-view-treasuries-as-less-attractive
      and understand that if a few other countries cooperate with them, then things can get rather "sporty" very quickly.

      Also understand that the Deep State will do ANYTHING to destroy President Trump, and that they control the central banks.

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  3. Unlike rust-resistant metals with low electrical resistance, cows, or barrels of oil, Bitcoins don't have a use value other than their communication function as money. When (not if) somebody invents a better cryptocurrency, Bitcoin will rapidly become almost worthless as everyone shifts. The coin collectors will save some Bitcoin as a novelty and you can buy one for your fridge, like those 1 trillion unit notes from Zimbabwe.

    Bitcoin provides a global accounting ledger that lets you move token counts between accounts. However, there is no good way to promise an exchange value for those counts. I think a Bitcoin competitor needs a mint mark. Then, mint SiGB can promise to exchange one SiGB coin for one US silver dime he personally has, and then the SiGB coins become warehouse receipts. Bank runs on mints will keep the warehouses reasonably honest. Historically, gold coin warehouses fail and become "fractional reserve" (cheats and frauds) when "government" crooks prevent bank runs from serving their auditing function.

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  4. Oh please send me all those undependable dollars that you fear will be worthless as you bow to the bitcoin.

    I don't play computer games but I understand them and it is pretty obvious that the bitcoin is a computer game. Will this bubble burst? OMG can that be a serious question?

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    1. Is that you, Janet Yellen?

      And by the way, I'm not saying Bitcoin is dependable. If you bothered to read, you would have seen that I recognize it as fully exposed to the treasonous swill running the central banks, with the help of their enabling "intelligence" agencies. Or did you miss the part about NSA giving MI6 space and equipment in one of their facilities to let MI6 surveil US citizens, as they are allowed to do by the UK? And then MI6 turned the results over to NSA so they could spy on whoever they want without "violating" any "laws".

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  5. The British did a TV documentary series about the Deep State, called "Yes, Minister". Like Dilbert, it's billed as a comedy, but since they didn't have to exaggerate for humor it's actually a documentary. I'm sure the Deep State appeared when the first bureaucracy did, in ancient Egypt or earlier.

    The USD is supported by the IRS, and the Saudi Arabian agreement to only sell their oil in dollars. There's a graph floating around showing that every recent fiat currency has gone to effectively zero within 100 years. Imagine finding a treasure map to a pirate chest, and it being full of a fortune in paper currency. Giraldo opens the vault and finds a thousand Confederate dollars buried in 1865.

    I think Bitcoin was a very good try, but it seems all the privacy disappears after one single mistake that reveals a transaction is yours. Anything that depends on humans to be perfect is not practical. Features I'm looking for in a next cryptocurrency include: 1) mint mark, 2) privacy mistake only exposes one transaction, not all you ever did, 3) lower computing cost to defend the quorum.

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  6. There's a bunch of privacy oriented cryptocurrencies out now like Monero, ZCash, Dash. Bitcoin was never intended to be private, and there are a bunch of analytic companies proving it. One of the problems with the non-private cryptos is the idea of "bad" coins. Since every bitcoin can be tracked back to it's creation there are coins that can be proven to be stolen or have been used in darknet markets of some sort and thus tainted.

    A privacy oriented cryptocurrency like Monero has coins that are fungible. You can't track them back, but you can prove that they're valid so there's no chance that someone down the road will reject your payment because it's "bad" money.

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    1. Ah, but they can still reject your payment because the government has said it is not legal tender.

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    2. Government interference is outside the scope. If a vendor says they accept BTC or ETH or LTC, they can pick and choose which addresses are acceptable. If they accept XMR there's no history. If the government says you can't take cryptocurrency payments then no amount of privacy provided by the currency will help that.

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  7. The real question about bitcoin is, "can I buy tulip bulbs with it?"

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    1. And then make a bazillion dollars running etulipbulbs.com

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  8. Here's the video of a talk by the founder of ZCash recently at the CCC.

    https://media.ccc.de/v/34c3-9240-cryptocurrencies_smart_contracts_etc_revolutionary_tech

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  9. Bitcoin fails at what it was initially designed for... It isn't stealthy, and it also has problems with payments being rescinded.

    Monero and Etherium solve those 2 problems. (Not sure which is stealthy and which supports Turing-complete contracts.)

    But I think we are still waiting for the crypto-currency that will solve all the problems, and REALLY drive the .gov crazy.

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    1. Solve what problems? And why or how would you drive the government crazy?

      Why bother with crypto currencies, why not invest in euros or Canadian dollars or Swiss Francs? Or the most logical choice; silver and gold? Why even get involved in anything so risky as crypto-currencies?

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