The Rise And Fall Of Bitcoin... But Is It Really Over Yet?

from the not-quite dept

Back in April, just as Bitcoin was starting to get some mainstream attention, I questioned its ability to succeed long term. Too much about it felt like a fad, and there seemed to be significant questions about it. However, over the next few months, as the price of Bitcoins rose quickly, and there was more and more interest in it, I wondered if perhaps my natural skepticism got the best of me. Of course, since then, the Bitcoin market has come way back down, and the concept has definitely lost a lot of its "shiny new thing" appeal.

Wired is running a detailed article on "The Rise and Fall of Bitcoin," which is a worthwhile read. Of course, it seems to be premised on the idea that Bitcoin is more or less dead -- a fad that came and went. Indeed, my initial post on Bitcoin questioned whether it would just be a fad. I still think it's likely... but I'm wondering if the big flare up over the past few months might be good for Bitcoin in the long run. Lots of speculators came and went, and Bitcoin gets to be ignored once more. Might that create a space to allow for a more sustainable ecosystem to be built, while the speculators and swindlers have moved on? Maybe. I'm still thinking that Bitcoin is most likely a fad that will die out. But sometimes a big flame out early on is a good way to obscure work that comes out of the ashes.

If I had to guess (and it's purely a guess), I'd say that the real legacy of Bitcoin may be in how it paved a path. The more interesting area to watch might not be what happens to Bitcoin specifically, but what the next attempt at such a currency brings around. There are lots of smart people looking at what happened to Bitcoin, and someone's going to come up with a better mousetrap.


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    Chris Rhodes (profile), Nov 28th, 2011 @ 10:13pm

    A Necessary Market Correction

    Bitcoins were massively over-valued for what you could use them for.

    The most important thing for Bitcoins is that the price stabilizes. It doesn't matter so much whether it stabilizes at 50 dollars or 5 cents, so long as it does, in fact, stabilize. Too much volatility due to speculation was discouraging vendors from adopting it, because they had no method of accurately gauging the price they should ask for their goods.

     

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      Hephaestus (profile), Nov 29th, 2011 @ 6:25am

      Re: A Necessary Market Correction

      "Too much volatility due to speculation was discouraging vendors from adopting it"

      That is the catch 22 of bitcoin. It will not catch on until the volatitlity stops, and the volatility will not stop until it has become much larger. Right now, bitcoin is like a penny stock and is easily manipulated by any sudden influx or removal of cash.

       

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    Jack A (profile), Nov 28th, 2011 @ 10:17pm

    Hype Cycle

    I think that we're coming out of the Trough of Disillusionment, as shown in this graph of the Gartner Hype Cycle, and moving on to slope of enlightenment. Compare to Wired's graph here.

     

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    Anonymous Coward, Nov 28th, 2011 @ 11:13pm

    Value of currency is backed by real things

    Bitcoins has nothing to back it's value, so it's value is subject to people who is using them. This means when enough people who wants to mine fortune out of it, it's value will rise and drop rapidly.

    For virtual currencies, maintaining stable value is important. If you keep it's value stable for long enough, people might even willing to accept it as a form of real currency. The rise and fall earlier this year have squashed most of the trust people built to it.

    Satoshi is right, inviting public entering the market prematurely has effectively killed the thing.

     

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      Anonymous Coward, Nov 28th, 2011 @ 11:28pm

      Re: Value of currency is backed by real things

      Bitcoins has nothing to back it's value, so it's value is subject to people who is using them. This means when enough people who wants to mine fortune out of it, it's value will rise and drop rapidly.


      So do "real" currencies...

       

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        Doug, Nov 29th, 2011 @ 12:07am

        Re: Re: Value of currency is backed by real things

        Real currencies are backed by an organization that controls the total amount of the currency in circulation at any time. The backing organization knows that allowing the currency's value to fluctuate unpredictably will cause it to be abandoned by everybody and will cause harm to the currency's economy. Those who invest in the currency are making a bet that the currency will be managed reasonably by the organization.

        The correct amount of currency to have in circulation depends on how many people want to use it and how much each unit is valued. Bringing a new currency into circulation involves slowly releasing units at a rate that keeps each unit's value even. This requires adjusting the rate over time.

        One problem with BitCoin was that the rate of release was mostly determined ahead of time and there was no way to significantly adjust the rate of release. When BitCoin was popular, there wasn't enough to go around and its value went up (too quickly). When BitCoin was unpopular, nobody wanted it and its value went down. This happens with real currencies, but with BitCoin the changes were far too wild to be absorbed by the BitCoin economy.

         

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          Bengie, Nov 29th, 2011 @ 8:27am

          Re: Re: Re: Value of currency is backed by real things

          "Real currencies are backed by an organization that controls the total amount of the currency in circulation at any time."

          No currency is backed by an organization, they are backed by the services other people(general public) are willing to trade for that currency.

          The total currency in circulation is kind of managed by a central organization, but that has no direct relation to the currency's actual value, but is highly correlated.

           

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          Adam S, Nov 29th, 2011 @ 10:47pm

          Re: Re: Re: Value of currency is backed by real things

          1. "unpredictably" is the key word in your first argument. my counterargument is this...how has the us dollar been doing over its entire existence. has it lost 97% of its value? i think it has. it has predictably lost value. even though it is very predictable, why would i want to invest in that?
          2. the "correct amount"? according to whom? is there some objective amount of currency that is the correct amount? are you the one that gets to decide that? or is there some metric that you arbitrarily decided would be best to maximize?
          3. the more volatile something is, the more opportunity there is to make money off of it. stock brokers love volatile stocks, they make money off of them. if everything were steady, then stock brokers wouldnt exist.
          4. there wasnt "enough to go around"? how much would be enough? do you decide that? do i? who decides that? is that decision objective? is that decision in the best interest of everyone? or just some people?
          5. "too wild"? again, who decides this? is there some objective criteria that im not aware of? please let me know. i would love to attend these secret meetings.

           

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      The eejit (profile), Nov 29th, 2011 @ 1:58am

      Re: Value of currency is backed by real things

      The same can be said for the dollar, Euro, pound, lire, yuan, yen, rupee, and pretty much any currency currently existing. They fluctuate constantly, and yet they're not dead.

      Perhaps there's another reason, such as excessive speculation (see also: Roulette Banking methods).

       

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    A Guy (profile), Nov 28th, 2011 @ 11:18pm

    I think bitcoin is too susceptible to manipulation, has no experienced central bank to help maintain its stability, and may step on the toes of state actors. If it isn't mostly abandoned outright, I predict more boom and bust cycles.

     

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      Hayak, Nov 29th, 2011 @ 4:02am

      Re: boom and bust cycles

      I don't think anyone has cracked the end of cycles let alone a fledgling internet currency. Proof of the pudding for bitcoin will be to see if it can become diffuse/expensive enough to make manipulation not worth it......

       

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      Chris Rhodes (profile), Nov 29th, 2011 @ 8:32am

      Re:

      has no experienced central bank to help maintain its stability
      *SNORT*

      Yes, central banking has definitely maintained the stability of our currency.

       

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      A Guy (profile), Dec 4th, 2011 @ 9:23pm

      Re:

      All you have to do to kill bitcoin is put a lot of processing power behind mining bitcoin. Once you have a disproportionate amount of coin, you are able to manipulate the market. After a few exaggerated boom and bust cycles, there is a good chance the consumer will abandon bitcoin for a currency that actually acts like a currency.

      State actors whom have the most to lose by the takeoff of bitcoin also have the most processing power. I cannot say whether they are actually going to use that power, but the system seems ripe for abuse.

       

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        Somebody, Dec 6th, 2011 @ 11:44am

        Re:

        I could be wrong, but my understanding is that a predetermined amount of bitcoin is released every 10 min, so it doesn't matter how much processing power you put behind mining. Having the most processing power will mean that you get to actually mine the bitcoin, thus securing it first and being able to trade it for goods/services/traditional currency. In return, you spend a certain amount of resources to mine the currency, in theory more than your competition. The competition of mining naturally sorts out the cost. In other words, if mining were very cheap and the value of bitcoin substantial, many more miners would get into the game and eventually drive the cost of mining up because you wouldn't harvest as much coin. Alternatively, when the value of the bitcoin drops and mining is no longer lucrative due to an over saturation of miners, some (or possibly most) miners will drop out and those remaining in the game will harvest enough coin to make the effort & resources worth it. So no, processing power does not kill bitcoin.

         

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          A Guy (profile), Dec 6th, 2011 @ 11:37pm

          Re: Re:

          You make one potentially erroneous assumption.

          Assumption:All the people mining bitcoin are trying to get a good value for their investment.

          If your only goal is to undermine the currency and cost is not an object, you can put a disproportionate amount of processor power behind it all the time. The goal is not to get a good value for your mining activities, the goal is to hoard bitcoin until you reach a critical amount.

          After you hoard enough, you can manufacture boom and bust cycles. If bitcoin doesn't act like a currency, it will not gain widespread adoption.

          I'm not saying that this is actually happening. I don't know. It just seems like the system could easily be abused.

           

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    Anonymous Coward, Nov 29th, 2011 @ 12:53am

    "flair" up -> flare up, as in fire.

     

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    Anonymous Coward, Nov 29th, 2011 @ 1:38am

    The more interesting area to watch might not be what happens to Bitcoin specifically, but what the next attempt at such a currency brings around.

    You mean Namecoin?

     

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    Amin, Nov 29th, 2011 @ 2:32am

    Bitcoin has no technical shortcomings. Its problem is that the associated economy and supporting software are meager, though they have both developed significantly over the past few months.

    This would be the case with ANY attempt at a new digital currency. The infrastructure for a new technology isn't built over-night, but in the case of bitcoin it's being worked on, and getting more useful every day.

     

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    Anonymous Coward, Nov 29th, 2011 @ 2:42am

     

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    chedderslam (profile), Nov 29th, 2011 @ 5:56am

    held off, now i might just jump in

    i have folded for a long time, and a few months back , took a quick look at bitcoin just for something to do. i was TOTALLY not reading up a little about darknet/i2p and all that. for science.

    it looked good, and, from a consumer standpoint, i honestly was intrigued. the idea that i could pay, ANONYMOUSLY, was super-duper-awesome. via riaa/mpaa/fbi/nsa/timewarner and all that "watching" me.

    now that things have settled? yeah, i think this morning i'll go to the site, get the client running on my two 5770's, and see "wahtz up".

    #lolbbq

     

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    Anonymous Coward, Nov 29th, 2011 @ 6:57am

    I stopped reading at "Perhaps bitcoin’s creator wasn’t one man but a mysterious group—a team at Google, maybe, or the NSA."

     

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    Jim Harper (profile), Nov 29th, 2011 @ 8:38am

    Let's Think About Currency

    I've been interested to see how much of the Bitcoin discussion is driven by its value as an investment vehicle. It's as if there's a forthcoming IPO or something.

    Currency is a product that allows people and societies to avoid the transaction costs involved in barter. Some dimensions of currencies' utility include: liquidity/mass adoption, stable value/inflation resistance, surveillance resistance, seizure and theft resistance, convenience/speed/light weight, and a few other things I haven't thought of or remembered just now.

    Bitcoin is better along some dimensions (e.g. highly inflation resistant, prospectively very convenient, and fairly surveillance and seizure resistant) and worse along other dimensions (highly illiquid as yet, and not very theft resistant - see 'cybersecurity,' including BitCoin7; MtGox was a close call, I guess). A lot of these things are technologically and socially determined, hence the "as yet"s and "propsectively," so I find the #Bitcoinfail meme at least premature. Status quo bias probably produced a #bottledwaterfail meme back in the day...

    A notable theme here in the comments is that money requires central management. Study your history and you'll see that money came into existence spontaneously and without central management, and that fiat currency (i.e. centrally managed, with value established first by decree or law) always fails to maintain its value. The chart looks pretty much the same from the first fiat money issued in China thousands of years ago right up to Zimbabwe: a long slow decline, a hastening of the decline, sometimes a little recovery, then the value falls through the floor.

    The value of money, just like everything else, rests on consensus. I think the question of where Bitcoin should be valued vis a vis other currencies and things will be socially and technologically determined by its "viscosity." If it's *only* used for transactions, it will have a low value compared to other things because it might be held for the hour or two it takes for a transaction to register and for the Bitcoin to be sold again. If it ends up sitting in people's wallet files (let's hope they know how to secure them), it will have a higher value compared to other things because there will be "less" of it around. Where it comes to rest doesn't matter. At scale, its value will be stable.

    The alternative currency game is a long game that could take off incredibly quickly when the dollar and Euro make their way down the fiat money value curve. It's good to think ahead about what might happen in that event. Having a true online currency might be (and cause) a pretty cool shift in world history at that point.

    So Bitcoin (and the underlying concept) are really interesting, important, and barely thought through yet. Here's hoping I get around to writing the definitive paper on it before the big monetary collapse!

     

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      Anonymous Coward, Nov 30th, 2011 @ 12:00am

      Re: Let's Think About Currency

      On the other hand, if there is a credited service that allows it's credit deposit to flow, it may create a candidate for alternative currency. (See reports on QQ's credit deposit for example. It's been said to almost have the chance to become a publicly accepted e-currency in China last year.)

       

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    dere;, Nov 29th, 2011 @ 11:53am

    hi

     

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    keith, Nov 29th, 2011 @ 1:40pm

    Can you still use them to buy high quality illegal drugs anonymously?

    That answers your question.

     

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    Zell Faze, Nov 30th, 2011 @ 12:32am

    More Users Every Day

    I have to say that despite the value dropping since June, the number of people using BTC has continued to rise. The number of businesses accepting Bitcoin (according to the Wiki) is over twice as long as it was in June, and the amount of volume on the exchanges is much higher than it was back in June from what I have been told.

    To me it doesn't seem like Bitcoin is failing. To me it just seems like the investors and speculators decided that they were done trying to make a quick buck off of a new currency.

     

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    VY, Nov 30th, 2011 @ 8:49am

    No need for a "next" Bitcoin, it can be extended.

    Bitcoin is good enough to serve as a backing of a digital financial system. There exist schemes to push its scalability by another factor 100 or so. If needed, contracts and additional protocols can be used to improve security and add decentralized accounting for micro-transactions.

    If Bitcoin lives long enough for people to implement the most important additions, what could possibly stop it? The project is now already close to catching on in multiple markets; once critical mass is reached, there is absolutely no way back.

    Note that bloggers declaring Bitcoin dead usually display extreme economic incompetence within the same post. Nobody can afford infinite volatility, and I don't remember a commodity that was killed by "hyperdeflation". Just nonsense by people who should think before they talk.

     

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    Anonymous Coward, Dec 1st, 2011 @ 2:38am

    1 and 2: If the supply of money grows approximately at the same rate as the growth of the economy as a whole, that is the correct rate of inflation for a healthy economy. Deflation would discourage lending and investment, and hyper-inflation would discourage both long-term investment and saving.

    3: It's true that it might be a good commodity to speculate on, but that depends on why it's volatile. If you have better information and analysis than other short-term investors, you can outsmart them. High volatility is not a good thing for a currency though. Currency should have a mostly predictable value.

    4: I think he means bitcoins were too scarce for people who wanted to enter the market. I don't really agree with that. Since Bitcoins are divisible to many decimal places, and are also inherently worthless, the whole demand could probably be satisfied with just a few coins in existence, split up among those who wanted to buy them.

    5: Too wild for a currency.

    What many gold hoarders and "end the fed" people don't realize is that the old gold and silver coins were actually worth more than metal they were printed on, because they were backed by fiat. The main value of money - beside being somewhat predictable in valuation and more convenient than barter - is that they are legal tender for all debts public and private. It's really the power of the government to tax and spend, and to enforce its policy through the executive branch and the courts, as well as its monetary policy, that gives money its value. The job of a good regulator, is to make sure that the value of money is kept in sync with the value of the economy of the country.
    Once this is realized, you see how it's better to divorce the value of money from the value of a single commodity. Hence, fiat money.

    Gold has industrial and artistic uses; by keeping it tied up in money you make it more expensive, thus artificially increasing the cost of electronics and avionics, impeding economic growth. Also, if large amounts of gold is found, or a cheap way to extract gold from sea water is invented, you would have massive inflation. Gold is better than bitcoin though, because gold is a very corrosion-resistant element, while bitcoin can be destroyed just by forgetting a password.

     

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    Rubert P Suckerman, Dec 16th, 2011 @ 11:49am

    Where did everyone go?

    They must have all moved onto a garbage barge (sorry, seastead)

     

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    Nurul@bitcoin, Feb 14th, 2012 @ 4:22am

    Comments

    I would like to thank you for the efforts you have put in writing this blog. I’m hoping
    the same high-grade web site post from you in the future also. Actually your
    creative writing abilities has encouraged me to get my own web site going now.
    Really blogging is spreading its wings and growing fast. Your write up is a great example.

     

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    bitcoin game, Feb 19th, 2012 @ 6:47pm

    Entertainment Value

    Some say there is nothing of value backing bitcoins. What about their entertainment value?!

     

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    Anonymous Coward, Nov 26th, 2012 @ 7:38am

    I guess the Macbook Air I bought from Amazon with my excess coins from November before the 28th split is worthless because it's not backed by anything right :)

    Hater's gonna hate.

     

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