Currency is a way for people to exchange value. By itself, the currency does not have a real value. It only carries the symbolic value that people want to put in it. Try to pay with gold or euro in a Papuan tribe and you will understand what I mean.
In order to keep this value to a certain level, the currency should be scarce. The first solution was to use naturally scarce elements like gold. In a more modern way, a central authority “emit” the currency in a limited quantity. To avoid counterfeit money, a bunch of technical measures are taken, including a serial number. You can see those measure on any modern banknote.
But the money becomes increasingly virtual. For most of us, our salary is only a number on a computer screen. One might ask: how to avoid counterfeit money if it’s only a number in a computer?
It’s indeed a very hard problem. To tackle it, the central authority is constantly watching banks and institutions. There are central regulations. And do you know what? The system is producing counterfeit money anyway but in a legal way. Banks lend more money than what they own. It is easy: just adding some number on a computer. The quantity is regulated by the law but it is counterfeit money anyway.
As we see, virtual money cannot work without a central institution ensuring that there is no double-spending.
Here comes bitcoin. Bitcoin is a free software and a peer-to-peer network when every participant hold a certain number of mathematical objects. Thanks to some cryptographic algorithms, the network ensures that a given mathematical object belongs to one and only one participant. Participants are of course free to exchange those objects, called bitcoins, between themselves.
Without the need for a central authority, bitcoins are in limited quantity and cannot be counterfeit. If only they had some value, we could use them as money.
Wait!
As we said, money has value only because people are willing to accept it against goods. As soon as someone is willing to accept bitcoins for goods, work or anything else, bitcoins start to have a value.
And this is clearly what is happening right now: some people accept bitcoins for webhosting, sextoys or aikido lessons.
The more stuffs you might buy with bitcoin, the more value a bitcoin has.
Anticipating this trend, some people are buying bitcoins now thinking that bitcoin value will raise in the future. As there’s a lot of demand to buy bitcoin, the value of bitcoin raise ever more. You probably know that principle: it’s called speculation.
In less than 10 months, the bitcoin raised from 0,01€ to nearly 1,3€. But how much of this value is due to the market and how much is due to speculation? What will happen in the future?
There are three possible scenarios: infinite expansion, stable universe or big crunch.
The infinite expansion
That’s what die-hard bitcoin fans are expecting. More and more people accept bitcoins as payment, bitcoin value raises a lot in the coming years before stabilizing when it becomes the official money for the entire planet. Governments tries to ban bitcoins to keep their own local economic power but fail to do so.
It looks like a very improbable scenario but, who knows?
The big crunch
Like every speculative bubble, it inflates, it inflates until someone wakes up one morning and thinks: “What am I doing? I’ve spent all my savings into virtual mathematical objects! Let’s sell that quickly”. As people start to sell, prices decrease. Seeing the decrease, those with the biggest shares panic and think “I’ve to sell quickly before everyone else” and prices go down at an insane rate. It might look completely stupid but if people are doing that with startups, why not with bitcoins? Hence came the .com era and the trend to buy for billions companies that don’t even have a business model (who said Twitter?).
It could also happen in a more subtle way: people start to get bored. They have enough sextoys and aikido lessons, they don’t see what to do with all bitcoins they have. They sell.
The flat universe
Where goes the money in case of a crash? For the .com crash, money was spent paying the rent, the employees and the subcontractors. This money cannot be returned, of course. People worked for you, they were paid. The fact that you asked them to do useless stuffs is not their problem.
With bitcoin, the situation is slightly different in the sense that there’s little money actually spent. It means that, if bitcoin explodes as a bubble, there will still be the exact amount of money[1]. In an ideal world, everybody will sell at more or less the price he bought. In the real world, some will be richer, some will be poorer but there will be some kind of balance.
Having a minimal risk makes a panic less likely to happen. Most of people who buy bitcoins are doing it in a reasonable range. Losing all their bitcoins right now would not be more annoying than losing their wallet. When an Aikido teacher accept a student for bitcoins, it’s only one more student. Not a big risk.
Once the speculative bubble pops out, it is certain that prices will decrease, allowing bitcoin detractors to call it a failure or a ponzi scheme[2]. Some will even lose some money, some will earn a lot.
But, in the end, bitcoin market will stabilize itself. The bitcoin community is here to stay, exchanging goods between themselves. At which rate? At which size?
That’s a good question. If I only had the slightest idea, I would be buying/selling bitcoins right now.
But there’s one thing I’m sure: who would have guessed, in 1887, that Esperanto would be spoken by millions of people? Who would have guessed in 1991 that Linux would have more than 1% market share on desktop computers? That XMPP would be widely used despite MSN/ICQ domination only a few years ago?
If you liked the article, tips are welcome on the following bitcoin address: 18khU9QhmxoSsLpjj3jWYMmdvS9zrTS4WT
If you want to try to earn some bitcoin, please offer your services against bitcoin. You certainly have some talents that people need.
Pictures credits: silly_a1804, epsos.de, melisdramatic
Notes
[1] except some electricity fees
[2] despite the fact that speculation has nothing to do with a ponzi scheme, it is now usual for any economy illiterate to call anything that involves risks a ponzi scheme. If you can lose money, it’s ponzi. First, you have to explain them than Ponzi is not a pasta brand.
The The Bitcoin Bubble by Lionel Dricot, unless otherwise expressly stated, is licensed under a Creative Commons Attribution 2.0 Belgium License.
Statut de flink sur Wednesday, 27-Apr-11 21:57:43 UTC
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But interesting article overall.
The questions “At which rate? At which size?” can be answered by data present on every full client participating in the distributed shared history of bitcoin transactions.
This enables services like http://blockexplorer.com/ allowing to browse the historic traces of the currency as it moves from anonymous account to anonymous account. (you can create as many accounts as you want).
For me the jury is still out on Bitcoin. I dont have the time or money to “invest” in it. Many people are counting on the value going up, and now would be a smart time to get into bitcoins.
What many people are doing is called “mining” for bitcoins. They use the computers CPU to mine the coins. This is practically worthless waste of energy usage IMO if you do this by yourself. You can however increase your mining capacity if you buy a very nice computer with 4 of the best ATI radeon graphics cards in one computer and making use of the GPUs of the video cards, not the CPUs of the computer. Even then, it still doesnt pay for itself. You would then need to join a bitcoin mining club and mine along with those people as a group effort in order to mine coins.
Is it worth it? Maybe, maybe not.
For “mining” purposes, nothing beats a good old botnet. And, it seems someone already tried.
You might be interested in this article about the macroeconomics of alternative currencies: http://www.slate.com/id/1937/
So you write in english now?
lol
I already said it and I say it again : creating a way to *exchange* value without creating *actual* value is inflation.
The buying power that one earns by mining bitecoins is automatically weathervanes that someone else looses.
On the other hand, its not true that real money is actually conterfeit money.
Banks are lending more money that they own. This is true. But people use that “new” money in order to buy new cars, new houses, … So the quantity of money stays proportional to the quantity of actual goods that are created.
This proportionality between goods and quantity of money (as imperfect as it is in real world) is a very important feature of real money that is totally unexisting in the bitecoin’s system.
Finally, the bitecoins being exchangeable with goods, services and even with other moneys, they are automatically included in the standard monetary system as a simple good that some people are willing to posses.
For all these reasons, I do not believe in bitecoins. Let’s see us again in ten years to prove I’m wrong.
)
(I’m used to be wrong in my predictions
Grondilu you bastard
@nomen: ???
Donated 0.5 BTC
@Grondilu: yes, ploum also writes in english. He is that awesome.
@Laurent Claessens, why do you care so much about inflation? It’s all good.
@Ploum: I believe you were among the first to notice twitter and you may have told yourself that it’s pretty stupid. Quite astonishing to see it being worth several billions now, isn’t it?
Alex > In 1997, I said that Internet was just a trend and that it would fade after 2-3 years. In2002-2003, I told everybody that blogs were stupids and that I would never have a blog. I was really early on Twitter and said that it would stay a small site for geeks.
Now, I tell you: bitcoin is nice, but it will only stay a few years for geeks
Alex> I care about inflation because the value of the bitecoin *is* an inflation on the other money.
Put in other words, if *you* mine a bitecoin, you get more “power of buying”. That power of buying is exactly removed from the power of buying of your friends.
That situation is very different from money earned from a work. When you create something with your hands, you are creating wealtness that can be exchanged without removing the value of other moneys.
I think that a monetary system should include a mechanism that insures a parity between the quantity of work one is producing and his buying power.
In very short : mining a bitecoin is *stealing* money from people that are working for earning money.
@Laurent: how about auto-regulation? anybody can “steal” money. But few people actually “steal” money because “stealing” money is not that easy: you have to invest in mining hardware, and pay the bills for electricity.
Being a miner is just like being a farmer. You have to invest in it to get the tools and the land you need, and you also have to pay the bills for water.
But hopefully you don’t accuse farmers of being stealers because they make money from water and black soil.
Laurent > I agree with you that creating bitcoin is kind of “stealing”. Just like burning a banknote is making people richer.
But what financial people are doing is 100, 1000 times worst! They also “steal” but at an awful scale. They event manage to steal non-existing money and use it to generate even-less-existing money.
Alex> A farmer *produce* something useful for people. A bitecoin mining does not produce anything.
This is the difference : in the case of a farmer, you have a proportionality between the quantity of *goods* actually produced and the wealth.
Bitecoins have not that proportionality.
Bitecoins are literally parasitic to the value of the work of other peoples.
If you want to invest in mining hardware and pay an electricity bill, please do as me :
http://www.boinc-af.org/
Ploum>
1. “other are doing worst” is not a justification
2. Bitecoins being convertible in real money, all that can be done with euros can be done with bitecoins; there is just a converting step more. One can store bitecoins, lend them, …
The only think that you cannot so with bitecoins is to lend more than you posses.
The fact that you can lend more *real* money that you posses is the way the usual economy manages to “produce” money in a quantity that is proportional to the quantity of goods that are actually produced, because you have a loan in order to build a house, create a company, … (this is why credit for consumption is very bad).
Mining is not stealing whatsoever, as the 50BTC reward is a clear rule stated in the bitcoin software. Folowing rules is not stealing. Moreover, everything that is created is publicly announced in a fully transparent way. Just take it into account when you consider accept bitcoins as paiement.
@ grondilu:
It depends on where you get your energy from. If you plug in your computer at a public spot or at work, where others pay the energy bill, you are wasting their money on something unnecessary.
Even if you use only your energy, it is still unnecessary energy consumption.
grondilu> Ok, it is not stealing. Call it as you whish; my point is that the value of a bitecoin is a parasiting of the value of the real economy. Among many way of being a parasite, mining bitecoins and accept them as payement is a one that is not illegal. Well; it does not means that it is “good” for the society.
Please, show me that I’m wrong. Show me that bitecoin have a value that is not based on devaluation of the other moneys.
Spontaneous creation do not exist. There are no miracle. Bitecoins, as euros cannot be eaten.
Whatever the economic and monetary system is, the fundation is the work of people and the natural ressources
If you want a system that include some justice, then you want a system in which you have a proportionality between work and possibility of byuing.
Mining bitecoins do not respect that proportionality, while having a loan from a bank in order to create a compagny (which is the mechanism of “creating” money) respects that proportionality, even inperfectly.
Laurent > I agree that the value of bitcoin is based on the devaluation of the existing money. But it’s only for a short time that will happen during the “mining” of bitcoin.
I believe that it could be considered as negligible regarded to the “normal” devaluation that happen to our money.
Also, I don’t believe that the modern economic tools respect the proportionality.
The principle of bitcoin is, indeed, to create some value based on a very small deflation but, then, to have an economic tool that will not allow anymore the creation of money or all those artificial economic things we can see everywhere.
article sympa! 0.05 btc envoyés
Laurent,
I don’t believe in justice and in workload-proportional pay-off in the name of equality.
People are just not equally smart, athletic, creative, etc.
Alex> I’m not speaking about equality of salary by unit of work-time or something like that.
I’m speaking about a proportionality between the total amount of money that exists in the society and the total amount of goods that can be buy.
The mechanism of creation of money by loan to the banks implements that proportionality -even imperfectly- while bitecoins does not -by construction.
Investing in anything has, and always will be, an unpredictable con. I’m not touching it with a bargepole.
Besides the bitcoin forum, you can also post your services on http://www.bitcoinclassifieds.net !
Quoting : “Thanks to some cryptographic algorithms, the network ensures that a given mathematical object belongs to one and only one participant.”
I don’t think this is reliable enough to put the world’s economy at stake on it. Yes, bitcoins are a seducing idea, but any leak in the cryptographic system will have dramatic consequences. That still could be better than the current system in which we all blindly trust banks that happen to be even less reliable…