Bitcoin & the DotCom Bubble

[The Machine]

 

 

More about bitcoin. Yes, really...

 

The DOW closed over 16,000. Glory hallelujah! gasps Bill Bonner in his Daily Reckoning.

 

Onwards and upwards...from now and for all eternity.

 

Oh, dear reader, tears came to our eyes as the bell rang and we reflected on the majestic delusion that drives stocks higher and higher, day after day, to some breathtaking pinnacle.

 

Thirteen years ago, the value of America's capital stock – as measured by the Dow – was under 12,000. Now, it is fully a third higher.

 

Wait. 13 years ago was the height of the dotcom bubble. Since then, there has been a real estate bubble. And a debt bubble. And now, another stock market bubble?

 

What else has happened? GDP is up $6 trillion. But total debt is up $30 trillion. Debt is rising five times faster than output! How could the capital stock of this economy be worth 33% more now than it was then?

 

Sell? Buy? Old timer Richard Russell thinks we are just at the beginning of the exciting third stage of a market bubble...the fireworks stage...where prices skyrocket, before blowing up.

 

Who knows? So let's change the subject...to Bitcoin. Nobody knows anything about Bitcoin either, but everybody seems to have an opinion.

 

First, a dear reader writes from Switzerland:

"You are becoming a speculator...I am extremely surprised and disappointed.

 

"From gold to virtual currency...you are losing your mind.

 

"I am in Montreux for a conference for the wealthiest family offices in Europe. Nobody give a chance to this virtual currency.

 

"We just had a session how families lose wealth over the long run – I think Bitcoin may be added to the list."

Just to clarify. We are not crazy enough to recommend putting the family fortune in Bitcoin. As for speculating, we only speculate on ideas...not on investments. Bitcoin, the idea, may be worth speculating on.

 

Meanwhile, another dear reader sent us this opinion from Matthew O'Brien at The Atlantic:

"Bitcoin is a Ponzi scheme libertarians use to make money off each other – because gold wasn't enough of one for them."

Ponzi scheme? Huh? A ponzi scheme requires a Ponzi...a mastermind who fraudulently attracts investors and then uses their money to pay off earlier investors. That's not how Bitcoin works.

 

Mr O'Brien sees a parallel between Segway and Bitcoin. It's true that people have made big claims for both. True too that Segway hasn't revolutionised transportation. And it may be true that Bitcoin won't revolutionise the money system.

 

We don't know. Neither does Mr O'Brien. But he believes he knows:

"What's revolutionary is that it's a payments system with no third-party, like a credit card company, standing in between buyers and sellers. See, any time you buy something, it's a minor leap of faith. You choose to believe that the seller will deliver as promised – and if they don't, you want your money back. That's where financial intermediaries like credit card companies and Paypal come in. They make sure buyers and sellers are both trustworthy, and handle any disputes.

 

"Now, it's nice to be able to get your money back if things go wrong, but that's not free. The middlemen take their cut. Bitcoin, though, has no middlemen. It's just a decentralized peer-to-peer system. So you can't get your bitcoins back if things go wrong, but there won't be any transaction fees. The question is whether non-enthusiasts will think this trade-off is worth it.

 

"...The people who have bitcoins still have no reason to spend them, and the people who don't still have no reason to get them. They don't want a currency whose value you can't predict from one hour to the next. They don't want to buy things anonymously. And they don't want transactions to be irreversible (and certainly wouldn't want that if they got hacked).

 

"Every big idea starts out sounding crazy. But not every crazy-sounding idea ends up being big. History is littered with Segways. But for all its majestic dweebiness, at least the Segway was kind of useful. You really could zoom across sidewalks without anything resembling effort. I don't know why you'd want to, but you could. But what can you do with Bitcoin? 

 

"Well, it's good for real and fake gambling. Since it doesn't have any actual fundamentals, it can be worth anything: Bitcoin 36,000 and 36 are about equally plausible. That's good for making money at the expense of people who get in the game later, but little else."

Poor Mr O'Brien lacks imagination. Had he been around when the telephone was introduced, he surely would have remarked, 'Who will want one? It only works if you have someone you can call. And as of today, there are only 109 of these contraptions in all of North America.'

 

At first, the value of any new innovation is unclear. Its price should be volatile. Its immediate usefulness, too, will be limited.

 

Most innovations fail. But some don't. We're not saying that bitcoin will be one of the successes. It could crash and die tomorrow for all we know. But the promise of virtual money...crypto currencies...is, like the telephone, revolutionary.

 

Here's Joel Bowman – the first bitcoin miner we ever met – writing for the defence:

"I suspect you'll receive a lot of emails – both love and hate – on the subject. If nothing else comes of the experiment, it will have invited us all to challenge some unexamined 'truths' regarding what we thought we knew about money...

 

"One of the mental roadblocks I encounter from the 'hard money' crowd (to which many of your Dear Readers belong, I suspect) is that bitcoin is, by nature, intangible. This they see as necessarily negative, a priori.

 

"The glitch lies in conflating the concept 'fiat' with 'intangible'. It is assumed that the latter is synonymous with the former, which is simply not the case. It is, rather, classic deductive fallacy: All fiat monies are intangible, therefore all intangible monies are fiat.

 

"It's a bit like the old example, 'All thumbs are fingers...therefore, all fingers are thumbs.' Not true. Not all intangible monies are fiat, as bitcoin demonstrates. Fiat means a money that is declared to have value simply because the state says so. (From the latin, 'it shall be'.) Bitcoin is nothing of the sort.

 

"Bitcoin relies solely on subjective value, which is to say, value assigned to it by voluntary individuals who, after weighing up its characteristics, determine its utility as a medium of exchange in a given context (a digital context, for example). It is the very opposite of value by decree...by coercion...by violence. It is value by voluntary market determination.

 

"The hard money crowd is right to distrust the state, given its abysmal track record of destroying purchasing power through inflation. But they are wrong to throw the potential value of intangibles out with the putrid, fiat bathwater.

 

"There are many intangibles to which we attach immense value. Math...language...logic...ideas...love...You can already think of a dozen more, I'm sure...

 

"The fact that bitcoin is intangible is, perhaps counter intuitively, considered by many to be one of its most appealing characteristics. It virtually eliminates storage costs, for one. Same for transport costs. And transport time. And, despite what the Feds say, it is more or less impossible to outlaw (unlike, say, private ownership of gold...) They could write the rule, of course, but enforcing it would be like enforcing a ban on the English language...or algebra...or naughty thoughts about your neighbour's wife...

 

"In some ways, bitcoin is very much the 'Language of Money': it is egalitarian, in that it is available to anyone and everyone equally. (There is no central authority first issuing bitcoins to a preferred few...unlike, say, every fiat currency on earth.) It can evolve and adapt (the Open Source protocol allows for this). It is democratic, in that its price is set by millions of freely associating individuals – the market – who each 'vote' with their btc wallet. (This is a refreshing contrast to the phony price of money as determined by the over-degreed blowhards at the Fed.) It is entirely transparent, as anyone who downloads the btc client can view the entire transaction history...but it is also private, as users can fairly easily shield their identity from prying eyes.

 

"It performs much like a language, communicating information both from individual to individual, and from discrete transaction to the entire, distributed network. It is a digital currency for the digital age.

 

"Of course, nobody knows where we go from here...except into uncharted waters. As someone said recently, bitcoin will either go to zero...or many, many zeros."

 

[The Machine]

wow tough crowd tonight ..... negged for that article

[Elixirbaby]

I was about to buy last week it was $355 per bitcoin. Could have tripled .

[GARY2]

Well, Machine, I for one enjoyed the article.  Bitcoin fascinates me but not enough to dip into the bitcoin waters.  Soooo, here's a plus to you for bringing over another of your excellent articles.  Gary2

[yota691]

I was about to buy last week it was $355 per bitcoin. Could have tripled .

7661% increase for the year..Thanks Machine +1

[TBomb]

http://www.cnbc.com/id/101281272#!

 

Bitcoin price halves as China clampdown escalates
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Published: Wednesday, 18 Dec 2013 | 6:43 AM ET
By: Matt Clinch  | Assistant Producer

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No need to panic over China bitcoin clampdown: BTC China
Wednesday, 18 Dec 2013 | 3:20 AM ET
Bobby Lee, CEO of BTC China, says there is no need to panic after Chinese authorities blocked the country's Bitcoin exchanges from accepting new cash inflows.
The price of bitcoin has plummeted by 50 percent since record highs in late November, with selling accelerating on Wednesday after reports that the People's Bank of China (PBoC) has ordered third-party payment providers to stop using the virtual currency.

The price of a bitcoin fell to below $600 after stabilizing near $800 for the last couple of weeks after a price slump from $1,200 in late November. At 8 a.m. London time on Wednesday the currency was trading at $555 on major exchange Mt Gox and $550 on CoinDesk's index, which measures a basket of prices around the world.

(Read more: Bitcoin crashes 20% on China clampdown fears)

China's central bank has ordered third-party payment agencies - which provide clearing services for bitcoin exchanges - to stop any "custody, trading and other services" related to the virtual currency, according to a report Tuesday by Yicai.com. The Chinese website - which is affiliated with the China Business Network TV station - added that platforms were told to end working relationships with virtual currency exchanges before Chinese New Year which commences at the end of January.

Zhou Jinhuang, the deputy director of payment clearance at the People's Bank of China is reported to have chaired the closed-door meeting on Monday when more than 10 third-party payment platforms were given the news. Attendees included a representative from Alipay, which is China's leading third-party online payment solution, according to its website.

(Read more: Buyer beware: Bitcoin's fate could rest with China)

BTC China, the world's largest bitcoin exchange, according to Bitcoinity.org, stopped accepting deposits in Chinese yuan on Wednesday due to the clampdown. Bobby Lee, the CEO of BTC China told CNBC that he had received notice from his third-party payment processor on Wednesday.

"They essentially have cut us off from allowing customer deposits into BTC China's bitcoin exchange," he said. "Customers don't have to worry, the deposits are still here, the withdrawals will still be allowed. So there's no need to panic on that."

Lee added that he believes the recent clampdown is not due to government officials in the country fearing that bitcoin is helping customers to move yuan out of China. "Bitcoin exchanges are legal...so our business model is still valid but we're under some pressure in terms of being able to work with third-party payment companies. So we're looking for alternatives," he said.

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BTC China only deals with bitcoin yuan trades due to the strict currency controls in the country. Lee said that his company did not have any near-term plans to look at other currencies. Zennon Kapron, founder of Shanghai-based financial consultancy group Kapronasia, agrees with Lee that the clampdown wasn't necessarily due to fears of capital outflows.

(Read More: Bitcoin: CNBC Explains)

"The wealthy in China have always found ways, ether legally or illegally, to move their money out of the country," he told CNBC via telephone. He said that hints from the central bank that bitcoin exchanges were still legal meant there were "mixed messages" from the government. Chinese curbs may have hit the price of bitcoin hard but Kapron believes that the U.S. still plays a major role in the industry and it remains to be seen how U.S. authorities will regulate the digital currency.

As well as the news from China, the U.S. Treasury Department also offered a warning on bitcoin on Wednesday. The Treasury's Financial Crimes Enforcement Network (FinCEN) has sent "industry outreach" letters to about a dozen firms, according to Reuters, which highlights that businesses linked with bitcoin may have to comply with federal law and regulation as money transmitters.

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Bitcoin is a "virtual" currency that allows users to exchange online credits for goods and services. While there is no central bank that issues them, bitcoins can be created online by using a computer to complete difficult tasks, a process known as mining. Some 12 million bitcoins are believed to be in circulation, with a cap of 21 million — meaning no more bitcoins can be created after that point.

The initial fall in price in early December coincided with a statement released on the website of China's central bank which warned of the risks that the crypto currency posed. It warned that Chinese financial institutions should not trade the digital currency saying that while it does not yet pose a threat to China's financial system, it carries risks.

Its surge to over $1,000 in November was attributed partly to increased interest from Chinese users as well as favorable comments by regulatory officials at a U.S. Senate hearing in November. Former Federal Reserve Vice Chairman Alan Blinder has been quoted as saying that the crypto currency shows "promise".

(Read more: In the Murky World of Bitcoin, Fraud Is Quicker Than the Law)

BTC China exchange is now believed to have the highest number of registered users and received $5 million in November from institutional investors Lightspeed China Partners and Lightspeed Venture Partners.

Chinese search engine Baidu announced in October that it had started to accept bitcoin for its security service. This came after Chinese state television company CCTV broadcast a documentary detailing the digital currency in the summer. Many analysts see that as a key point at which interest in bitcoin increased.

Downloads of bitcoin wallets surged in China in the days following the documentary, according to statistics from SourceForge, rising to second place in the global ranking behind the United States. Bitcoincharts.com has data that shows the Chinese yuan is the second most traded currency pair with bitcoin after the U.S. dollar.

— CNBC.com's Matt Clinch. Follow him on Twitter