Is Bitcoin The World's Most Perfect Speculative Material?

3rd Apr '13 by Edward Croft

38 comments 21011 reads

I'm sure that it can't have escaped most people's attention that the price of Bitcoin has absolutely soared in recent weeks. The price of the innovative, cryptographically secured, digital currency has burst through some newsworthy levels - reaching $100 per bitcoin last week while the total value of all bitcoin in circulation reached a net value of $1 billion shortly after. Since Easter the price rise has accelerated to the point where I wouldn't be surprised if it burst through the £100 per bitcoin barrier within 48 hours.

These astonishing moves have caught the eye of the BBC, Economist, Moneyweek and the international press. This added media attention is adding fuel to what is already a very hot fire and the question that nobody seems to be able to answer is - how high can this thing go?

2013%2010:49.jpg

What the hell is a bitcoin anyway?

Before even attempting to answer how high it can go, it's worth recapping on what a bitcoin is to those who are completely befuddled - there's a good primer on Wikipedia, and a quick web search will throw up dozens of links that will give a fuller explanation than the next paragraph.

I am no expert, but have read up as much as most people will ever be willing to - so here's my take. In brief, it's a decentralised, open-source, digital form of money transacted peer-to-peer to and from virtual 'wallets' that can be downloaded from bitcoin.org and third party websites. It was born from the mind of an anonymous Japanese hacker (or group of hackers) who is/are generally known by the avatar "Satoshi Nakamoto".

The currency is secured not by the faith of e.g. the US government, but by trust in the cryptography that backs it. The money supply of bitcoin grows gradually, as new coin is paid to programmers who spend time verifying the so-called 'blockchain' - the history of all transactions in the network to ensure no duplicate transactions.

You can buy or sell bitcoin for regular currencies such as the pound or dollar and can 'spend' your bitcoin at an increasing number of venues as we'll see. 80% of the transactions between Bitcoin and 'real' money happen at the website MtGox which is Japanese owned.

Who is using…

Unlock with Email

Unlock with Google

Already have an account?
Login here

macroeconomix

10th Apr '13

Now that's what you call a healthy correction :)

marben100

How can this thing be considered a viable currency, as its advocates propose, when its value can vary so much relative to other currencies (including gold) in such a short space of time?

Quite unusable for trade purposes - or for that matter as a store of value.... as I write, it appears that live data from Mt Gox has died. Overloaded by panic sellers, perhaps?

I think the volatility aspect is a very fair point, and in of itself is likely to turn people off the technology - certainly if you view it as a store of value, and for trade purposes too. Though the same point could be made against any other currency movement e.g. forced devaluations, or during periods of hyperinflation where shopkeepers had to change their prices every day.

And in this case isn't the volatility due to there being no mature and efficient market? So far there is effectively only one main "exchange", which is not good, especially when one of the selling points of bitcoin is the peer to peer aspect, being to trade efficiently without middle men. And as you point out - the service is sometimes down. Such single points of failure are a weakness!

It is also (until IG markets came on the scene) difficult to short, so few "forced buyers" are in the market when prices drop.

From my perspective I think it is just functioning as a free market currency would in its infancy - and since when have we seen one of them? - have we ever? .. Too early to tell whether it will grow up (and stabilise) or die before it matures.

What is clear to me is that there is demand for a market in an alternative currency outside "the system".
In the past it was gold, in the future, could it be a crypto currency...? Why not?

Fair points. I guess the real test be if there is a point where a significant number of merchants are prepared to price goods or services in a stable Bitcoin value.

I noted that some quasi-official bodies were prepared to accept Bitcoin payments - but only by reference to dollar values. i.e. you could settle a bill in Bitcoin - but the numbers of Bitcoin required to settle would vary in real-time according to the Bitcoin/dollar exchange rate. That's not a real currency, just a US$ proxy.

...but then how could you ever have a vibrant, growing economy, if the number of currency units in circulation is fixed (as I understand Bitcoin is ultimately intended to be)? ;0)

Constant inflation being a prerequisite to a vibrant and growing economy is often taken as read, but where is the evidence to suggest this being the case - other than from the central banks and their friends?

Stable and relatively fixed (11 million now, up to 21 milllion in future) number of currency units is part of the appeal of bitcoin. They can't be conjured out of thin air by a centralised system or elite.

In effect, and if widely adopted, you'd have permanent deflation. You'd flip to a savings based, rather than debt/consumption based economy, and both prices and your pay would go down, rather than up - but your savings would not be eroded by this centrally controlled tax we call inflation.

It's all relative, and would require a change in mindset - that's for sure.. and anyway detracts from a *real* functioning economy based on reality in the thermodynamic system called earth and all the people doing business on it, based on mutually beneficial exchange with each other. Currency is just the medium.

The appeal of bitcoin, to some, is that if adopted, the lack of a central system will mean that money, and therefore control, would no longer be continuously syphoned through central, corruptable* systems, governments and the people that comprise them.

* cf. Fed's revelation today of leaks to banks and lobbyists (or more like the fact that someone found out this time?), Cyprus' forced sale of gold + dropping the investigation of movements/funds from politicians and bankers before the recent collapse and deposit confiscations.

The reason why permanent deflation isn't a very good idea is explained rather well here: http://pandodaily.com/2013/04/10/great-now-engineers-think-that-they-are-economists-too-2/

11th Apr '13

:) I don't share the author's perspective at all.

Look at the "deflation" we have in computers, memory chips, smart phones. Are prices constantly lowering in these cases such a bad thing?
Shops still have to buy stock,and shift at a profit. The consumer gets a better product for the same money, or the product gets cheaper. And his savings go much further - this is capitalism working, and deflation in the prices of products is a symptom of a healthy industry.

The man borrowing $1million to run a coffee shop is a rather extreme example - and given foresight and understanding of the currency system he's involved in, ought not to take on the debt in the first place if he can't manage it. e.g. I wouldn't dream of borrowing gold, or bitcoin. And is it actually so different to simply borrowing money in a high interest rate environment (where interest rates outrun inflation)?

The problem with the author's thinking, and it is commonplace, is that we are so used to debt being at the forefront, our form of money, our way of life. Conceiving of a different approach and a different way of doing things is just alien to us. It is all about borrowing now and paying later, running before we're walking - saving up first, is just not even a consideration, but in a deflationary environment it would be common place.

Like I said - we would instead have a savings led and capital based economy, not such a consumption/debt based economy. We'd have more venture capital, and less debt, e.g. more "kickstarters", we'd be more self sufficient, and saving/thrift and good investments would be rewarded, and yes it is fair to say that those in debt, who make bad decisions given the environment, would not have such an "easy time" like they have today under ZIRP.

Would all this be such a bad thing?

I think the trickiest thing about "deflation", would be removing the expectation that employees pay goes up every year.

Note that although we've discussed deflation here, the number of bitcoins will move from 11 million today to 21 million over the coming decades. This is almost a doubling of the supply - so some mild "inflation" built in. The "mining" of coins was designed to be analogous to gold.

Note also that we've assumed people are only allowed to operate with one currency system. There is no reason why we can't operate across a number of currency systems.. Though this is where Thiers' Law comes into play ;)

PS. Perhaps Pension companies should be buying less sub-prime coffee shop owner debt, and allocate more funds toward something else e.g. gold/silver (bitcoin?) and common stock. Perhaps we should be encouraged to take responsibility in making our own investment decisions instead of relying on some pension company blindly buying rated corporate/government debt on our behalf?

Look at the "deflation" we have in computers, memory chips, smart phones. Are prices constantly lowering in these cases such a bad thing?

Certainly, innovation is a good thing but, except when truly innovative products e.g. like the iPad 1 come out, consumers are likely to delay purchases, waiting for the next incremental improvement. That is not a particularly good thing. On more basic goods, such as clothing, deflationary pressures have a horribly depressing effect on pay.

One of the most fundamental problems with the global economy at present is that precisely this sort of downward pressure on costs and pay has led to increasing improverishment, particularly in the West. And then, when ordinary consumers can't afford to buy (because their wages are held down due to "structural labour market reforms" - a nice euphemism), business struggles to sell. As the articles author states: a death spiral.

e.g. I wouldn't dream of borrowing gold, or bitcoin.

So if either of those were advocated as universal currencies, they'd have a hugely depressing economic effect as entrepreneurs wouldn't be inclined to borrow to finance growth. That's precisely the author's point.

So, in my view, as well as that of the author of that article, deflation is an unmitigated economic disaster. Can you point me to any successful economies with persistent deflation?

Of course, high inflation is also generally bad. The tricky thing is walking the fine line between the two conditions.

I think this conversation has gone beyond the reality of bitcoin. For one thing there is no fractional reserve system based on bitcoin (e.g. borrowing at from bitcoin banks who leverage) it is not even possible to fractionalise, so a "deflationary death spiral" in the typical sense is not really on the cards:
http://mises.org/daily/6362/

What is evident is the "strengthening of the currency". Which, as with *any* currency exchange, is great for the holders, and really bad for the debtors. You don't have to look far for recent examples of that e.g. Icelanders who took out euro mortgages.

The currency is at the moment just a good - and the supply/demand characteristics are trying to find a price level. This volatility may last a while until the market matures - it may never. But talk about serious deflationary moves in the long term of the currency are a little premature.

As for examples... The greatest period of economic growth in American history took place during the "Gilded Age" (~1877 to 1900), when average prices were falling 3.8% per year, even as economic growth marched onward at 4.5%.

http://en.wikipedia.org/wiki/Gilded_Age#Economic_growth

Average prices falling, is "deflation" according to today's definition is it not?

You can check the purchasing power of the dollar between 1877 and 2000 here:
http://www.westegg.com/inflation/

David Paine20

4th Feb '20

Bitcoin at $100, still looks funny, but once it was at that point. Currently, I Googled it's above $9000 BTC To USD. But still, bitcoin is considered a risky investment, What happened with exchanges in the past, makes it a risky investment, still, no one knows or predicts what will be the future of BTC

alison ruggles

6th Jan '21

This is my first day looking into this. So far I can't see how as a small independent investor I could add a little to my portfolio. Maybe it is still just for the rich and professional traders, but you mention the poor transfering money preferentially this way. As time allows I will continue investigating, but I found your article the most easy to understand so far, so thanks. AR

Edward Croft

I had totally forgotten that I'd written this in 2013. I actually tried to buy BTC back then on the MtGox website but completely failed.

I currently have a long position in Bitcoin - I own some on IG (DFB) and on Coinbase. Unfortunately you won't be able to buy on IG now as they have literally today cancelled all trading by retail investors in Crypto. (and I'm not recommending anyone buy at these levels!)

You can find the Coinbase app on the app stores or website. I think the Coinbase IPO is going to be fascinating.

I can't believe I was calling it a bubble in 2013... definitely bubbly now.

[With the benefit of hindsight - I was right... BTC is the world's most perfect speculative material - what I hadn't grasped back then was the network effect around it. That makes it even more prone to vertiginous, reflexive blow off tops. How high 2021's goes is anyone's call - $40k, $50k, $100k , $500k - it doesn't matter when it's the ultimate speculative material... ]

For stock market investors - there are a few interesting plays. Argo Blockchain (LON:ARB) has gone absolutely vertical in the last few weeks. But there's also the £GBTC - that's how the Robinhooders trade BTC.

Spl183

A great summary post there, Ed. Sounds like you went long on IG much earlier than I did !

Just hit $36K, an interesting Q1 lay ahead ...

Best,
Spl183

Carey Blunt

there are a few really good threads on Bitcoin in the discussion forum including this one....

https://www.stockopedia.com/co...

And the part 1 of that same post by shauniekent .

A couple of things stand out for me, 7 years ago people were saying it was all hype and a bubble and saying it would be gone tomorrow..... and yet here it still is and people are still saying the same things. I think this is because you can’t uninvent technology. Once the genie is out of the bottle you can’t put it back in. This blockchain technology will be with us forever in one form or another. That doesn’t mean Bitcoin will necessarily survive but it has the best chance of any of the coins.

The only thing that can stop Bitcoin now would be a failure of the technology I think caused by bad actors and as a political move. It would have to be deliberate and essentially be an act of war. I don’t think it’s coming this hype cycle though.

Momoko Miyamoto

I think the most bullish thing about Bitcoin is that people keep forgetting or losing their passcodes so that the effective amount in circulation falls to offset that being mined. Tricky “asset” to keep secure so don’t think it will ever replace something that can be locked up and insured or backed by government guarantee and/or legal system
Additionally, unless one is a criminal or big time tax dodger, it’s an imperfect answer to a non-existent problem.

mojomogoz

7th Jan '21

Hey! Bitcoin is a perfect speculation. Almost as if someone started with the idea first and then designed bitcoin. I guess that when it corrects it will be the first 'asset class' (bitcoin is crypto) to fall over 50% in one trading day. Bitcoin proves the extent of our speculative sickness in a distended market with weird policy positions

I wrote this yesterday:

https://mojomogoz.medium.com/b...

Here's a comment I put in another thread:

Some views:

It's a gigantic assumption to say the West will be dependent on bitcoin. This is akin to saying a global hegemonic force that is non-state controlled will dominate. This is possible but the probability must be fractional...
...in what sort of environment could this happen? It would be a bit Mad Max. After a terrible catastrophe had befallen major powers (ie US and EU). It is possible in such an environment that crypto is the secure means of exchange and storage of value...but that's probably once again a minor probability and more likely that simpler and tangible things are used that require low trust in individuals or a system (ie gold or something else suitable to barter or simple verifiable asset backed credit in low trust environment)
Bitcoin's has two durable future paths if we ignore the Mad Max option: 1) speculative financial interest that remains small and inconsequential, 2) a regulated entity.
Option 1 means its a volatile 'gamer' asset. It's like playing roulette...you might win if you are lucky and in which case leave the table as ultimately the house will fleece you (the house in bitcoin is large holders who can push the market around to fleece as many small holders as they can making use of bewildering volatility)
Option 2 means the USD, euro etc reign supreme as they are the currency of the regulators who are the power brokers...so what is bitcoin? Avoiding taxes or making illicit payments (inc evading capital controls) will not be possible. Remember that just about the most powerful institution in the world is the US tax man....you don't want to be a wealthy person holding bitcoin, US citizen and not disclosing holdings and gains as they will catch you and you will spend a very long time in prison
Some of the earliest bitcoin addresses are Chinese. If I had to design a financial derivative "wonder weapon" to transfer wealth from West to East and/or disrupt West that would be supercharged by capricious greed, hypermedia and speculative mania I'd be pretty hard pressed to come up with anything more ingenious...is it beyond Chinese (or Russian) strategising to have created bitcoin as a tool to aid the undermining of Western fiat currencies, particularly USD. Undoubtedly, China wishes to create this as that gives it pricing power in the commodities it is so reliant upon
Please note the speed with which Chinese are rolling out their digital yuan (Digital Currency Electronic Payment (DCEP)). They will only permit the presence of bitcoin in China to the extent it does not disrupt their strategic global goals. This means bitcoin must be fully transparent to CCP within China and all transactions notifiable. It also signals to the West/USA that China's interest in bitcoin is to disrupt the West/USD. This is not a good look for bitcoin

I am amazed that bitcoiners continue to present it as a panacea to overcome Western malaise. This is a fantastical and impossible illogicality. But the narrative and speculation is strong and it may carry on sucking more credulous people into believing it (or more likely FOMO)...some bitcoiners will sell, make lots of money and claim they played the system like geniuses (and that they sort of knew it was a nonsense). In number, most wont do this as during speculative manias the temptation is to hold longer and believe the narrative. What sort of player will you be?

Innovation and speculation often makes some lucky fools rich alongside the schemers and corrupt who game the system. Bitcoin will do the same. Argo Blockchain (LON:ARB) is a beautiful example of this game. Look at the backgrounds of the people involved....100% opportunists with little in their background that says they are suitable stewards of capital.

But ignore me and keep drinking the Kool-Aid...it amazes me that people cannot realise that they are within a speculative mania.

I have performed my skeptical services admirably here (even if I do say so myself).

Your mojo

Alphaflight

Bitcoin is the epitome of fiat. It is more faith-based than is the dollar. It can be inflated by fractionalization. In fact it can be fractionated to infinity if necessary so a "21 million cap" means little.

I have increasingly come to the viewpoint that BTC is simply a combination of a payment service with a token contained within it. People focus on the asset (because it is a "coin") but it is worthless mostly without the service, which requires (1) the service node, (2) the tremendous energy usage and (3) the network to all be in place. Yes, you can do some off-line trading, Trezor to Trezor, but it has to be acknowledged by the network to stick.

People seem to think a SHA 256 bit hash and distributed ledger are the end of Fintech evolution... I have a box of 5.5" floppies and some 3.5" WordPerfect disks to sell.

Pure fiat!....just subdivide rather than 'print' more...same game

Absolutely.

jwebster

8th Jan '21

I have been trading Ethereum on small, short-term trades. Purely riding momentum. So far, happy with the results, but given the volatility, my positions sizes are small.

As a long term store of value, BTC is a tough call IMO because it requires the miners to add new blocks to the blockchain by computing the hash value of the block header. This takes time and real-world costs in the form of computer equipment, electricity and housing. Miners get paid in BTC for their efforts, so it only works if the price of BTC is > cost of mining. This for me is the vulnerability, as if the miners don't get paid enough to recoup real-world costs, they're out and the blockchain freezes. If the blockchain freezes, your coins are suddenly worth nil, you can't transfer them.

Currently miners get 6.25 BTC for solving a block, which today means 6.25 * $38,900 = $243,125 which is why they spend vasts sums on kit to out-race each other in solving the hash value to enter a new block.

When the BTC cap is reached, at that point the miners can't be paid with new coins. Suspect what will happen is they will then be paid via transaction fees attached to a new block. So, to sell your block you will have to pay this fee to get the miners to add it to the blockchain. I.e. give away a fraction of your BTC as a transaction cost.

My BTC pals call BTC digital gold, such that it's the same as gold as a store of value, but better as its digital form allows simple storage and transfer. As a physical object, gold incurs holding costs. This is true. But, due to the reliance on miners, I see it as vulnerable to a change in tech or crowd psychology. I appreciate though people who bought BTC at the lows have done very well, although the question is always when to jump off the train. Best while others are clambering aboard.

But, no question, there is a huge thirst for some sort of store of value. Cash is in question given the massive QE which must ultimately devalue it. Treasury bonds, once the ultimate safe haven, look vulnerable to inflation, should it occur. In addition, the behaviour of Western governments in general towards their currencies and levels of government debt, looks at best indifferent at worst reckless.

So we should not be surprised if BTC continues to attract money flows, even institutional.

I can appreciate why the Chinese CCP is launching its own digital coin. For their coin there are no miners, the only verification source is the Central Bank, who confirms all additions to their blockchain. So full central control over both transaction verification and supply. That's the future, like it or not.

Is Bitcoin the world's most perfect speculative material?

What the hell is a bitcoin anyway?

Who is using…

Unlock the rest of this article with a 14 day trial

About the Author

Edward Croft

38 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...