Bitcoin/other crypto currencies

[Raza]

Eventually, yes. Like every currency, it went through a bubble, and is now normalizing.

It's not a currency. It's smoke and mirrors.

[Raza]

I know the gold standard is ancient history but all these virtual currencies am I correct in my understanding that they have nothing behind them so have no intrinsic value at all?
I have no idea what the phrase mining for bitcoin means.

Real currency movements are complicated enough, MrsO the business brain in this family is talking about taking a fixed rate $ to GBP contract for a sum of money that needs to be completed over a specified time frame (probably a year) so we get the rate agreed no matter what is changes to up or down. This is why I just do teeth and she does money.

Not only do Bitcoins have no intrinsic value, they're not backed by any governing body at all, and they have no physical existence. No one has to take Bitcoin. Bitcoin was in the past highly volatile and will probably be highly volatile again should it become popular again.

Crypto currencies are made up things developed by people who want to remove the middleman in pyramid schemes. Now they get money for nothing. Literally nothing. They're a great way for normal people (and even some financial professionals I know) to lose a lot of money quickly and for drug dealers to launder money.

Stay away. It's not the future of money; no more than pet rocks were the future of pets.

[Rdenney]

I know the gold standard is ancient history but all these virtual currencies am I correct in my understanding that they have nothing behind them so have no intrinsic value at all?
I have no idea what the phrase mining for bitcoin means.

Real currency movements are complicated enough, MrsO the business brain in this family is talking about taking a fixed rate $ to GBP contract for a sum of money that needs to be completed over a specified time frame (probably a year) so we get the rate agreed no matter what is changes to up or down. This is why I just do teeth and she does money.

I feel the same way. National currencies are backed by the faith and credit of the nation issuing them. Bitcoin is backed by the faith in the technology to keep it safe, but as we have seen, that faith can be misplaced.

I also see it as a play by an ad hoc and disorganized body of technologists who collectively believe that technology should rule political and social structures, rather than the reverse, and that scares me far more than a dysfunctional political and social structures.

Rick "dysfunction is part of the human condition" Denney

[M. Montaigne]

I know the gold standard is ancient history but all these virtual currencies am I correct in my understanding that they have nothing behind them so have no intrinsic value at all?
I have no idea what the phrase mining for bitcoin means.

Real currency movements are complicated enough, MrsO the business brain in this family is talking about taking a fixed rate $ to GBP contract for a sum of money that needs to be completed over a specified time frame (probably a year) so we get the rate agreed no matter what is changes to up or down. This is why I just do teeth and she does money.

That is no different than any conventional fiat currency. The value of any fiat currency is whatever the market is willing to bear. There used to be a time when bank notes where common, "backed" by banks, until the banks went under.

Centralized currency mechanisms have merit because for large transactions, you expect a central monetary authority to back the currency, as well as regulate it if necessary (e.g., the Fed).

With digital currencies, the idea is the same, except that the currency is digital, not physical. With cryptocurrency, there are three things that come into play:

1. The currency becomes decentralized (i.e., anyone can print, but it's not "easy" to print -- you need computational power, and this process is called "mining")
2. There is a public ledger which records all transactions, to verify ownership and transactions
3. You take away the backing, because as a fiat currency, its value is what the market is willing to bear

Interestingly enough, with the ability to trade cryptocurrencies with physical currencies, you now have a basis of comparison with conventional currencies. This does two things:

1. You can now exchange cryptocurrencies for, say, USD or EUR. Consequently, this lets you purchase "physical" real world items, which lends legitimacy to the currency.
2. Unlike other currencies, cryptocurrencies are truly free market based -- their value is entirely based on what the market is willing to bear, which means that there is no stabilization mechanism. This lends greater volatility because of its decentralized nature.

In any event, cryptocurrencies take away the ability of the state to set fiscal and monetary policies, and gives it to the market. The value of the currency is what the market is willing to bear. As simple as that.

Understandably, there have been concerns, mostly on the volatility and whether or not there is a floor on the value of cryptocurrencies given how they operate (i.e., a negative cost, which isn't something traditionally associated with currencies -- your dollar bill doesn't become a debt instrument; your cryptocurrency potentially could).

There is some semblance of anonymity to cryptocurrencies, but better infrastructure and increased regulation means that that will not last long. Also, while anyone may be able to mine currency, the infrastructure needed to generate new cryptocurrencies means that mining pools will become focused in the hands of a few, leading to either centralization or a hub-and-spoke model of economy.

[M. Montaigne]

It's not a currency. It's smoke and mirrors.

It is the natural evolution of currency. As with any fiat currency, its value is what the market is willing to bear.

Is it any less reliable than the bank notes of Zimbabwe?

[Broker]

It will never be widely used. Not bitcoin anyway. Just the time that people might start to widely accept it, it will be widely regulated, hence driving down the alleged benefits of the "currency". I've preached against it for years. Some idiot on another forum claimed it would end 2014 valued at $5000 USD. He was wrong.

[geoffbot]

It will never be widely used. Not bitcoin anyway. Just the time that people might start to widely accept it, it will be widely regulated, hence driving down the alleged benefits of the "currency". I've preached against it for years. Some idiot on another forum claimed it would end 2014 valued at $5000 USD. He was wrong.

Lots of big companies accept it http://www.bitcoinvalues.net/who-acc...-bitcoins.html

[Broker]

Lots of big companies accept it http://www.bitcoinvalues.net/who-acc...-bitcoins.html

Again, smoke and mirrors. They say they accept it, but they don't. They provide you with a link to pay, where the bitcoin are converted to USD and they take the payment in USD. They don't care about bitcoin. They care about the USD (for the US companies). Not one of those companies actually holds bitcoin because as a "currency" it's far too volatile for them to hold. They can't budget with it, they can't pay their vendors with it. It's a useless currency for them. But they see it more as a marketing tool than a functional part of their business.

I've been an economics prof for 15 years and i discuss this in every class.

[M. Montaigne]

I think true decentralization is not possible, but I do see them becoming more widely available over time.

Will they ever replace conventional currencies? Not as long as there are nation states. Are they a viable alternative currency? I would argue that they are.

Another way to think about it is this way: If everyone were to cash in on the debt that we owe them, three things would happen:

1. We would start paying them, but that would devalue our currency, driving down the effective value of the debt
2. We may be able to pay most of it back, but it would pretty much kill our economy for decades to come
3. The position of the US Dollar would become untenable, and we will need to seriously contain inflation by printing way, way less

So, while technically we would repay our debts, if everyone came calling all at once, we'd be screwed. This is no different than what happened during the banking crisis.

My point? Fiat currencies aren't particularly "more" reliable than cryptocurrencies. The whole thing is smoke and mirrors; we just buy into the magic kingdom because we put our faith in Uncle Sam.

[M. Montaigne]

Again, smoke and mirrors. They say they accept it, but they don't. They provide you with a link to pay, where the bitcoin are converted to USD and they take the payment in USD. They don't care about bitcoin. They care about the USD (for the US companies). Not one of those companies actually holds bitcoin because as a "currency" it's far too volatile for them to hold. They can't budget with it, they can't pay their vendors with it. It's a useless currency for them. But they see it more as a marketing tool than a functional part of their business.

I've been an economics prof for 15 years and i discuss this in every class.

I think this is a chicken-and-egg problem. Decentralization is one of the reasons why there is greater volatility.

However, as mining pools become more centralized, there are incentives to include some regulatory mechanisms to curb volatility and provide some semblance of value predictability.

My worries with cryptocurrencies are somewhat different. Here are the recommendations I have heard:

1. There have been recommendations to loosely couple some of the valuation with a "real" currency.
2. Potential to mine more (i.e., inflation) to address corresponding inflation with the USD

Let's take a page from the Asian "Tiger" crisis:

1. They tried addressing current account imbalances by pegging to an appreciating currency -- the USD
2. The domestic inflation was greater than or equal to the US inflation, resulting in exchange rate appreciation
3. There were inadequate foreign reserves to meet foreign debt, made worse by falling GDP and a sharp uprising of Current Balance as a percentage of GDP

So, my worry is that any regulation along the lines of coupling with "conventional" currency mechanisms will spell the death of cryptocurrency.