This seems to make sense, but I think it not only misunderstands what market capitalization means, but also the nature of bitcoin. For one thing market capitalization doesn’t mean the money that has gone into whatever you are talking about. It represents both supply and demand. The market capitalization of a company doesn’t take into consideration how many people bought stock at different prices as it grew, it represents the value people currently place on the shares right now. In other words, the people involved with Microsoft for example early on paid less for their shares and made lots of money as the share price and thus market capitalization went up. That doesn’t mean the company is really worth less.
Also, bitcoin doesn’t represent the profitability of any central body that can be summed up by the market cap number. It is an economy. The US economy is measured not by the value of every dollar in circulation, but by every transaction. This is represented by the money supply multiplied by the average number of times each dollar is spent, which is called the velocity of money. The velocity of bitcoin would have to be taken into consideration if you want to calculate the amount of total money that has gone into bitcoin.
Finally, if market cap for bitcoin means anything I would say it represents the bitcoin network. Mining is not free and it can only ever be marginally profitable. But the resources that go into mining form the basis of the value of bitcoin, and as the most powerful computer network to ever exist, it is very valuable, even without considering the bitcoin economy.
I think the chances a panic crash could drive prices down too far for those that understand what bitcoin really is are very slim. If anything, I think most understand it to be undervalued in terms of what we could see in the next year or two, and that doesn’t even touch on its potential value as a money transfer system, which is a direction that is currently fueling a lot of speculation.
>For one thing market capitalization doesn’t mean the money that has gone into whatever you are talking about
No it doesn’t, but many of the people investing in Bitcoin seem to think it does. For instance, we hear of popular stories now about how investment in Bitcoin is larger than the total amount of money in the Cyprus M1 supply ($13 billion).
We also hear of people saying ‘If Bitcoin crashes, it won’t go under $500’, which would imply that they’d likely need to find a few billion dollars of extra capital in a matter of hours if it did instead have a flash-crash. Clearly, that’s not what they mean.
There was a guy on r/Bitcoin who queried me on my use of a trendline in a chart because he didn’t know how a trendline works for Christ’s sake.
And then we have posts such as these.. Are you really going to tell me these people understand the difference between market cap and the actual amount of capital invested?
>the resources that go into mining form the basis of the value of bitcoin
Almost 50% of the total Bitcoins ever mined were mined before May 2011, when the price was at $1 or less. Back then you could use your CPU or GPU(s) to mine Bitcoin.
The cost to mine, and therefore also the ‘backing’ value, would have thus been minimal. For instance at 21¢/kWh it would only have only cost $920 per year to run a 500W rig 24 hours a day, 365 days a year, which could be two powerful graphics cards in SLI/Crossfire.
The reality is that the cost to mine has been very cheap compared to the current price of Bitcoin. And what’s more, if less people mine, the same amount of Bitcoins are still produced, but the ‘difficulty’ decreases to compensate. Thus the ‘backing’ value of Bitcoins is theoretically zero, or very close to it.
>I think the chances a panic crash could drive prices down too far for those that understand what bitcoin really is are very slim.
Tell that to the people who invested in the 2011 crash at $30 or so - a price which was never seen again until about two years later, and which went down at the time to $0.01/BTC.
> that doesn’t even touch on its potential value as a money transfer system, which is a direction that is currently fueling a lot of speculation.
Err, this is the only value of Bitcoin. Bitcoin has no intrinsic value other than as a medium of exchange. That’s not what is fuelling the current speculation. What is fueling the current speculation is the prospect of becoming a Bitcoin squillionaire in 24 hours.
The feeling of envy and the motivation of greed are what is driving this latest bubble, and it’s destroying the Bitcoin economy. We’re seeing 50% intra-day volality, which means it’s risky for merchants to accept Bitcoins and not worthy to use to them (because the price will keep going up in the near future). This jeopardizes the system, which is increasingly relying on transaction volume for miner’s revenue, and people are hoarding it as though it’s an asset with intrinsic value rather than using it for it’s only actual use - as a medium of exchange.
These bubbles could keep continuing for some time to come, but eventually people are going to lose confidence in the system and abandon it. This could be because of a better alternative that comes along.
I think this bubble is going to be a big one, and will eventually see it return down to the $30 area. Can you point out to me where we’ve ever retested the $30-$60 area that was total speculation at the time?
It is true there are some unsophisticated investors in bitcoin. I suppose your title did mention that you were talking to the gullible, which I guess would include the uninformed. But because investing is opaque to some doesn’t mean that they are coming from a place of total ignorance when looking at what bitcoin means to the world. (Although some are obviously just gullible or arbitrary for sure.)
When that page says bitcoins have no intrinsic value, I think that is absolutely true of individual bitcoins. They are ones and zeroes and electricity. But so is the balance of your checking account, unless you look deeper into what those ones and zeroes represent.
So the bigger point is, where does the value of bitcoin come from. When I said resources put into mining, I didn’t mean the resources used to produce each individual bitcoin. I mean the resources used to keep bitcoin going as a whole. All the benefits of bitcoin over other systems of exchange have to do with 2 things, the security of the system and its decentralization. Both of these come from the processing power that right this moment is dedicated to mining. This processing power is the brute force of the internet. The security of bitcoin comes solely from the fact that miners are incentivized to put their processing towards overpowering any possible threat to the network. If the power of the bitcoin network were pointed towards anything else on the internet, it would go down and stay down. Groups like Anonymous get press for taking down websites for a day or two and cracking passwords to get at money and secrets. But the processing power they can control is a drop in the bucket when it comes to the bitcoin network. There are supercomputers and botnets for hire out there that unscrupulous people can and do use to crack websites, steal identities, and disrupt business. An example is the massive coordinated DDOS’s that all bitcoin exchanges suffered last spring and that played their part in the last big crash. But compared to the bitcoin network, it is negligable. The NSA was founded on cracking codes and learning secrets, and the best tools they have to do this could not stand up against bitcoin for 20 minutes. The cost to control this kind of processing power is hard to pin because it is pragmatically impossible. But it represents the power to blast through any code, any math problem, any internet security which means anything on the internet. And due to it’s decentralized nature, it can’t be shut down without destroying the internet entirely, which many would say is impossible at this point. There is no secret or bank account online that is more secure than bitcoin and this is because of the unprecedented power and decentralization of the network. That is the value that backs bitcoin.
And then you look at the fact that this kind of power is free for anyone to utilize because it pays for itself. Bitcoin as a store of value and medium of exchange makes the decentralized contribution of processing power to this historic network possible, but that doesn’t mean it is the only possible use. I used to see a lot more speculation on ways bitcoin could be used as identity verification, and even a new underlying security infrastructure for much of the internet. For any purpose that you require absolute faith that nobody will mess with your stuff online, bitcoin is your best bet. This is what I mean by resources that go into mining being the basis of bitcoin’s value.
But in reality, this potential is a raw material that needs to be developed. Currently, most money has been spent developing bitcoin for use as a medium of exchange. That is what I meant when I said this is what is driving speculation. People think that the use of bitcoin as a new kind of visa card basically, is going to make a lot of money and that the demand that is created by this industry will cause a lot of people to be bitcoin squillionaires as you say.Finally, what I mentioned in my post and you didn’t mention in yours is the value of the economy. In some sense this represents confidence. It also harnesses the reverse of this, which is peoples lack of faith in traditional national economies which may or may not be justified. I don’t think unlike some, that bitcoin will ever entirely replace the dollar. That isn’t practical. But the fact is that people do business with bitcoin that they would otherwise not do, which is exactly what Bernanke with his QE schemes was working on for the last few years and is pretty integral to the function of macro-economies. And this faith rationally follows the security and decentralization of bitcoin. You might say that betting on the bitcoin market in the short term is worse odds than betting against centralized banking institutions, but if you look at history, technology always wins and if you wait long enough, national governments and their currencies always lose. The confidence that is provided by a hedge against this principle is worth a lot because it spurs a lot of production which is what all money systems are based on. We can see this happening already in the venture capital going into bitcoin businesses, and preceding that, the illicit businesses that are forced to the margins because of regulation. But there is no reason to believe that will be the end of it. To be able to harness this trend could potentially be as valuable to the world economy as the dot com boom was. The theories of Carlota Perez explain how technologies spread through society and in turn impact the world economy and they also predict something like bitcoin. I think it is not a long shot to assume that something transformative is set to hit our financial institutions which have barely been structurally touched by the technological advances of the last few hundred years, and bitcoin certainly fits the bill. To not be on board and looking forward for these changes, whether or not you believe in bitcoin in particular for whatever reason seems to me a little nearsighted.
So I think that is why bitcoin has a bright future. Sorry I got so long winded. To sum it up, looking at bitcoin without taking into account its main advantages of security and decentralization means that you can’t make a smart bet. It is like looking at the management of a company without looking at the conditions of the industry it operates in. If you look only at the surface details of investment in bitcoin without looking at what it offers on a bigger scale, I think it makes sense to assume it is a bubble. But I don’t think that is true.