The Bitcoin Bubble – Why it Doesn’t Matter

Shortly after posting my previous article, there was what was gleefully reported by many as the big Bitcoin crash (most notably this blogger here who debated me briefly in the comments of my blog). The amount of fear, uncertainty, and doubt being thrown around is nothing short of insane.

The problem with markets is that you can’t tell if it’s just a bubble popping, a crash, or a correction even while it is happening. People jump on one of the bandwagons, or they remain on the sidelines silently watching the debacle.

With Bitcoin we must try to take all factors into account. Why did the price crash? What was behind the whole thing? Was it a panic sell-off? All these questions, and more, I believe can be answered by objectively examining the facts.

The blogger who posted here, is quoted as saying:

“So what now for bitcoin? It will crash and disappear like Pets.com, Leheman Brothers and Anglo Irish Bank, existing only in the memories of economists. I’m sure libertarians will still argue about it on reddit, but for all practical purposes it will be dead. The price of bitcoin will drop just as it did after the last bitcoin bubble, its only a question of how long it takes.”

However, what I find most interesting is that in his entire article, he posts many graphs and charts showing similar bubbles to the one Bitcoin experienced. In all these graphs, however, we notice that the price never dropped to nothing. Also, after the last Bitcoin bubble, the value rose and rose, contrary to what he is saying here.

Here is one of his graphs for Nasdaq that apparently shows a bubble:

Screen Shot 2013-04-12 at 12.03.31 PM

Notice how, after the “crash,” the value steadied out at the midway point in the exponential rise. Haven’t we seen such a “crash” before in Bitcoinia? Why yes, we have. Here’s a graph showing the last Bitcoin bubble, and the resulting value after the drop:

Screen Shot 2013-04-12 at 1.01.10 PM

How then can he make the claim that Bitcoin will crash and disappear? If it is indeed like the bubbles he shows on his blog, then wouldn’t Bitcoin look like the graphic taken from his own website?

It truly makes me wonder how someone can predict that Bitcoin will fall to $0.00 and become worthless when, in the very same article, he shows that bubbles rarely result in a crash to worthlessness. It seems to come off as disingenuous to me.

What is the motivation behind posting such an attack on Bitcoin? Why does a bubble popping have to result in Bitcoin disappearing entirely? Well, you see, that’s the connection that no one who posts such articles will ever be able to make.

Granted, he did try to make the case that since Bitcoin is only a speculative commodity then the bubble popping will cause it to crash and burn. While I see that an argument was attempted, all points used to try and prop up this assertion end up falling flat.

For instance, here is a quote where he attempts to point out a flaw in the “Bitcoin commodity:”

“Without a government to stabilise it, it will continue to fluctuate wildly into a death spiral. A unregulated market is open to manipulation and many claim this is behind “Black Wednesday”. Bitcoin was meant to show how the market can succeed with no government involvement, but instead it showed how crucial the government is.”

This is just silly. The government doesn’t need to “stabilize” anything. The reason the price dropped was because all the weak-hand speculators jumped ship. If Bitcoin isn’t just a commodity, but also an entire payment system in itself, then pure speculation doesn’t run the show. So, what does the author then attempt to do? Well, he tries to paint Bitcoin as a commodity and not a currency so that his point isn’t easily refuted:

“The fundamental problem with bitcoin is that it is not a currency. Currencies exist to be used, traded as a medium of exchange and a store of value. Bitcoin on the other hand has been used for speculation, gambling and hoarded. It has stopped being a currency and become a commodity.”

Here he makes a bald assertion that Bitcoin is only being hoarded, gambled away, and speculated on. That, in his mind, means that Bitcoin is not a currency… but it is rather a commodity. What?

What about the rising number of businesses accepting Bitcoin as payment? What about bitspend.net, a website you can use to purchase anything from any website with Bitcoin? I’m not really following his logic here. Also, here he is again trying to make the argument that deflation is bad:

“This problem goes to the core of bitcoin and the fact that it has a fixed supply. When the value of bitcoin is rising, the price of everything else is dropping. Therefore it makes little sense to buy anything, because it will be cheaper later. So instead people hoard bitcoins, which drives the price higher.”

Are you kidding me? So, in the thousands of years that gold was used as currency, people hoarded it instead of spending it because gold was deflationary? He makes absolutely no coherent argument in support of his idea that a deflationary currency will cause everyone to not spend a dime and die hungry because they don’t have food in their stomachs. This sort of hyperbole is not only dishonest, but it is dangerous to the readers who aren’t well informed.

So there we have it… it will only crash if it isn’t a currency, because if it were then it would still have usefulness at any price. Since it is a complete payment system in its own right of the kind the world hasn’t seen before, then it will continue to have lasting usefulness. Therefore, the whole argument that the bubble getting popped means that Bitcoin will die remains an unfounded assertion, and nothing more.

What could someone have to gain by posting a bald assertion and trying to make it look like an informed argument? Let’s look at several quotes from his blog:

“You see it is best to view bitcoin as a giant experiment of how an economy would operate without a central bank.

The crash revealed a lot of flaws in bitcoin, particularly its deliberative choice to be unregulated.

Collapses like this happen in real stock markets. However, they are usually saved by the central bank intervening to guarantee the price or by a government bail out. However, the whole point of bitcoin is that there is no government so there can never be a bail out. It was designed by people who worship the supremacy of the market and argue that the government is the cause of all crashes. In this ideology the government is a parasite on the rest of the economy, and if left alone the market will naturally soar.

Bitcoin was meant to show how the market can succeed with no government involvement, but instead it showed how crucial the government is.

The belief that we are better off without central banks is regularly asserted, but until now, untested. Well, we have created a market with no central bank or government intervention and the result is a speculative bubble and followed by a spectacular and volatile crash.

As there is no stabilising force to save the currency it will crash and burn.

Decades in the future, there probably will be an online currency acting like a financial Esperanto. crucially it will have to be backed by some sort of Central Bank who will intervene in the market.”

Well, there you have it. His whole unfounded argument that Bitcoin is going to crash and burn because it encountered a bubble is not only easily refuted by pointing out that Bitcoin is not just a commodity, but it also appears that he has a goal in mind: to make it seem as though governments need to be involved in a money supply or it will fail.

That is the entire reason for his post, and, as we’ve examined, his point doesn’t hold up very well. Expect the conspiracy against Bitcoin by the banks and governments to ramp up as Bitcoin gains in popularity. The only way they can kill Bitcoin now is if everyone believes the misinformation and hype.

Don’t buy into the claims that Bitcoin is just a commodity, that lack of government regulation is what caused the fall in price, or that a deflationary currency would never work for society. That’s what “they” want you to think. It’s too obvious.

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12 thoughts on “The Bitcoin Bubble – Why it Doesn’t Matter

  1. Robert Nielsen

    Thank you for gracing me with an entire post as a reply (even if you strangely leave me anonymous). Lets get going.

    The difference between the other crashes I mention and bitcoins is so obvious I didn’t think it was worth mentioning. Bitcoin has nothing backing it, other crashes have a whole economy behind them. The reason the Nasdaq didn’t go to 0 was that would have meant the economy had ceased to function and America was reduced to the level of Somalia. This did not happen, because not all shares were in the IT industry and were therefore not affected. This is very obvious and I’m not sure why you missed it.

    Actually the last crash saw bitcoin fall from $33 to $2. You’re playing hard and loose with the facts by pretending the minor change was the crash referred to. http://www.guardian.co.uk/technology/2011/oct/18/bitcoin-value-crash-cryptocurrency

    The reason why other bubbles don’t end with a value of zero is that they have something backing them. Bitcoin has nothing behind it. Plus in a bubble the affected companies do go bankrupt usually.

    “Why does a bubble popping have to result in Bitcoin disappearing entirely?”
    It is theroetically possibly that bitcoin will not disappear just as Communist parties have not disappered. However it will lose 99% of its value and become insignificant and might as well have disappeared.

    Bitcoin is in freefall and has lost three quarters of its value. You will have to do better than just dismiss this obvious fact as “silly”.

    “What about the rising number of businesses accepting Bitcoin as payment?”
    If you can provide data and numbers as to have many bitcoins are being spent, how many firms are using them and/or their size, then you will be right. However, all you have is a Wikipedia page that does not say how many bitcoins are accepted by shops, only names some without giving any indication as to the size of these shops. You need facts to back up this claim and I am not seeing them.

    “So, in the thousands of years that gold was used as currency, people hoarded it instead of spending it because gold was deflationary?”
    It’s strange that you accuse me of being dishonest and then misrepresent my argument in the one paragraph. Gold does not have a fixed supply, there have been new discoveries for thousands of years. It can also be imported to increase the money supply. Bitcoin is an extreme form of the gold standard so the deflation experienced will be far more extreme (by the way, all economists agree that the gold standard caused deflation).

    I specifically said in my comments to your last post that deflation does not cause spending to drop to 0. It is ridiculous to pretend that I said people will starve rather than spend. Of course people will spend on necessities like food, rent etc. They have no choice. But for purchases that they have a choice over, they will hold off. Thus there will be less spending, not zero spending. An example of this is the Irish housing market where deflation has caused the housing market to freeze for several years. As people do not use bitcoins to buy necessities, the bitcoin market will be far more affected by deflation.

    “it will continue to have lasting usefulness.”
    Actually it won’t. Bitcoins depend on their exchange rate, so a price collapse means people will not be able to buy much. If I earn 1 bitcoin a day when the exchange rate is $200, then I can live well. If the rate collapses to $1, then my bitcoin is next to useless.

    Are you saying I’m part of some sort of government conspiracy? Really? I think you have cause and effect mixed up. I did not set out to prove the case for government. I studied the facts and the events as they unfolded and came to this result.

    Reply
    1. bitcoin0conspiracy Post author

      The problem here is your insistence that Bitcoin is backed by nothing. Yes, it is a small economy, but there *is* an economy backing it, as evidenced by all the businesses beginning to accept Bitcoin.

      Yes, the other bubble was larger, but the shape was still the same: exponential growth followed by a drop to lower than the mean of the rise, followed by a climb to the mean over time.

      So, since the bubble is literally the same shape as the previous ones, and there is an economy growing around it, then you can’t make the argument that a bubble popping means the death of Bitcoin. Yes, it lost three-quarters of its value during the drop, but so did it when the price dropped before. It’s actually beginning to look a lot like a predictable pattern.

      Your main argument against the fact that an economy is growing around Bitcoin seems to be merely dismissive. I produce a growing list of businesses accepting Bitcoin, and your response is that we don’t know how many Bitcoins are being spent versus day traded or hoarded.

      However, the success of bitspend.net seems to be pretty large: https://bitcointalk.org/index.php?topic=153481.0

      Also, since the blockchain is public, we can actually do some analysis on the transactions and find that yes, while some coins are being hoarded and day traded, there is a sizable chuck of coins being tossed around from person to person.

      So, all in all, it seems like the economy around it is indeed on the rise. Therefore, again, you can’t really compare it to a bubble that forms around an unbacked commodity.

      Also, gold does have a fixed supply… Until we start exploring interstellar space and find a huge planet made of gold. Yes, it’s being mined… And so are Bitcoin. I fail to see how my rebuttal doesn’t still stand.

      Not all economists agree that the gold standard was what caused deflation. A few minutes of research netted me that information.

      Of course, you still haven’t given a cogent argument that demonstrates that a deflationary currency is bad… All you can do is speculate that it will result in doom and depression. If I want to buy a computer, I’ll buy it. Who cares if the value of my currency goes up in value afterwards? I still have money.

      Also, if the price falls down, people will still be able to buy the same amount of goods. You’ll just need to purchase more Bitcoin to buy the same amount. This problem is easily remedied by buying Bitcoin at the current price when it falls so that you can make your purchase with “cheap” Bitcoin, and then use your actual stache of Bitcoin when it goes up… You’ll even have that “change” left over that is now worth more. Deflationary currency at its finest. :D

      Also, I’m not saying you are a part of the conspiracy… You’re just contributing to it… The FUD and all.

      Reply
      1. Robert Nielsen

        Actually, no bitcoin does not have an economy. It is accepted in some places, but they can drop it at the drop of the hat. It is perfectly possible for every person and business to leave bitcoin. Hence its bottom is 0. However, it is not possible for every person and business to leave America so the bottom of that economy is not 0.

        Actually, in the last bubble the price dropped by 90%. For some reason you seem to consider this an advantage instead of a chronic weakness. You see, during the first crash, bitcoin was relatively unknown. This is not the case the second time. This time people will remember and be far too cynical to fall for another bubble. Fool me once etc.

        Did you honestly think that a chat room forum would convince me? A forum where not evidence is produced, just a couple of people saying its good? Come on. You claim blockchain gives you evidence to support yourself. Fine then show it to me and I’ll concede the point.

        I’m not sure whether you are being deliberatively slow or not. You claim gold was fixed in supply for thousands of years. Of course it wasn’t, there were constant new discoveries. The difference between this and bitcoin mining is that it was unpredictable and can’t be imported (a point you keep ignoring) Bitcoin mining is deliberatively being reduced to zero, unlike gold. Also bitcoin is following a far tighter monetary regime than gold ever did, hence the far greater deflation.

        Again no sources to back up your claim that the gold standard didn’t lead to deflation. Why do you have an aversion to evidence?
        http://robertnielsen21.wordpress.com/2012/10/20/the-fools-gold-standard/

        “If I want to buy a computer, I’ll buy it.”
        Its common sense that if it will be cheaper next week you will wait a week. Are you telling me that you so desperately need a computer right now that you would ignore a sale that was coming the next week?

        Finally, why would anyone want to buy tickets onto a sinking ship? As the price collapses almost everyone will try to sell their share and get out, leaving a ghost town behind.

        Reply
        1. bitcoin0conspiracy Post author

          Wait, so the almighty dollar can’t crash? I thought that was something being actively discussed everywhere.

          And yes, people won’t be fooled as easily a second time… you just inadvertently supported my view.

          The guy posting in that chat room was the owner of bitspend.net, and unless you’re trying to say we shouldn’t just accept his word for it, then I say it’s a pretty fair thing to point to to show Bitcoin’s economy’s success.

          Everyone knew there was a fixed amount of gold in the ground, just like we know there’s a fixed supply of Bitcoin. However, the *advantage* of Bitcoin over gold is we know precisely what the inflationary rate is. That helps tame volatility after the economy fully takes hold.

          Also, you’re the one making the assertion that the gold standard led to the depression. I don’t need to provide counter argument unless you provide some of your own.

          Also, why buy a computer now when it’ll be cheaper in a week? Why not buy it in two weeks? Or three? Or a year? You see… Eventually I’ll buy the computer, so your argument still doesn’t hold.

          You are assuming it’s a sinking ship… it is all conjecture on your part with absolutely no solid argumentation backing it up.

          Reply
          1. Robert Nielsen

            Can the value of the dollar or the Nasdeq be reduced to zero? Baring nuclear war, the answer is no. There are some people who think otherwise, however, they’re been predicting the end of the world for a long time and have yet to be proven right.

            Actually, having been burnt and chastened, people will choose to opt out of bitcoin altogether, rather than sensibly investing. Due to the rigidity of bitcoin, it is impossible to avoid the boom and bust cycle.

            Are you telling me that we should uncritically accept the word of someone who has a vested interest in talking up his website? Surely you’re not that gullible. Notice how vague his descriptions are. “Site traffic is very high” He mentions orders have come from Australia, Germany and Japan but gives no indication as to how many orders there are. My blog has gotten views from countries all over the world, but that does not make it a global phenomenon, for the obvious reason that I’ve only gotten a handful of views from most countries.

            You simply to completely misunderstand both my argument and economic theory due to a mixture of ignorance and wishful thinking. You see, you have a belief that bitcoin is brilliant and there are few things in the world harder to move than someone with a firm belief. Hence, my arguments seem to be having no effect as you willfully ignore and misrepresent them. You (deliberatively or accidentily) play dumb with the computer analogy. Yes, purchases will eventually be made, but they will be less than otherwise. That is the problem. You seem determined to close your mind to this idea, which makes me wonder if there’s any hope for you.

            Reply
            1. bitcoin0conspiracy Post author

              Can the value of the dollar go to zero without nuclear war? Yes, man, definitely. I fail to see how you’ve adequately rebutted my point, in that case. There’s plenty of dollar crash scenarios that don’t involve nuclear war… don’t go into hyperbole now.

              Also, despite the volatility of Bitcoin, people are still choosing to get into it more and more. Bitcoin was volatile in 2011, and it is volatile today. What makes you think, in the face of more and more businesses getting on board, that the general population will decide that *today* is the day that they won’t put up with the volatility anymore, when they’ve been increasingly putting up with it for two years already? It seems like wishful thinking on your part.

              According to your logic, any time you go to a website and they claim that they have X number of orders, or a 99% customer satisfaction rate, then we should completely disregard it as garbage. However, it isn’t even on their site that he is talking about the success, but rather on a forum with a bunch of other dudes like him that are starting up businesses and so forth.

              I’m sorry, but it seems like just you’re plugging your ears and shouting, “Nah nah nah nah… I can’t hear you.” Bitspend.net is a successful website according to the owners of the site. Get over it already.

              Like I argued, purchases wouldn’t be less with a deflationary currency because I’m not going to end up waiting an indefinite amount of time to buy a computer, or anything else I desire. It will keep costing less and less, but that wouldn’t make my number of purchases less overall because eventually I’ll end up buying everything that I want to buy. Therefore, I fail to see how a deflationary currency necessarily means less people buying things. It doesn’t make sense, and you aren’t helping by providing literally no argument to back your assertion up.

              In your last paragraph, you simply move to using ad hominem after ad hominem. Bravo, good sir. Bravo. At least I have tried to remain civil in this discussion. It’s not that I’m willfully ignorant, it’s just that I’m waiting for you to actually provide a good argument instead of wasting my time.

              Reply
              1. Robert Nielsen

                You fail to realise the obvious fact that few people had heard of bitcoin before a month ago. So they did not experience the 2011 crash, so it cannot be said they stuck through it. The volatility is both far worse than then and also completely new and unexpected.

                “According to your logic, any time you go to a website and they claim that they have X number of orders, or a 99% customer satisfaction rate, then we should completely disregard it as garbage.”
                Did you actually read what I said? Had he given specific numbers I would accept them. However, if I told I have orders from America and Australia but don’t indicate if they sales are minuscule or large, you could not automatically presume I had a successful business. The fact you completely ignore the obvious bias of the source and instead treat it as though it was an independent verification, shows that you are the one with the wishful thinking.

                “Bitspend.net is a successful website according to the owners of the site.”
                You realise that can be said by pretty much every site on the internet?

                I see you don’t understand deflation nor want to. So I’ll drop the fact that bitcoins were hoarded massively during the price rise. At least I tried.

                “it’s just that I’m waiting for you to actually provide a good argument instead of wasting my time.”
                I could say the same to you. If you think an exponential price rise not backed by solid fundamentals (with data supporting it) followed by a catastrophic collapse wiping out three-quarters of the value is not a bubble, well then I don’t know what to say. If you are waiting for a better argument than an obvious bubble and bust, then you’ll be waiting forever.

                Reply
                1. bitcoin0conspiracy Post author

                  Umm, the newcomers heard about the previous bubble. During the last exponential rise, that’s all the news stations could talk about… how Bitcoin had a similar bubble in the past and dropped in price. I still fail to see what you are going after here.

                  The fact that Bitspend.net had a surge of interest, and continues to enjoy of surge of interest, is evidence of its success independent from the sales numbers. The number of new customers alone shows success. Therefore, your gripe about the lack of sales numbers confuses me. Not only is it not that important, but you seem to be engaging in wishful thinking if you don’t realize that great growth in customers doesn’t equal great growth in revenue. It astounds me that, as someone into economics, you wouldn’t realize that.

                  I don’t understand deflation? How much lower could you stoop to in this debate? You make certain accusations against Bitcoin because it is deflationary, yet you back none of them up. To respond to them, all I’m required to do is point out the glaring holes in your arguments… and then you have the gall to tell me that *I* don’t understand deflation? You need to learn what an ad hominem is, my friend.

                  Did I claim that it wasn’t a bubble? Nope, not at all. As a matter of fact, the title of my blog post here is “The Bitcoin Bubble – Why it Doesn’t Matter.” Your claim that Bitcoin is not backed up by any fundamentals completely floors me. You don’t realize that Bitcoin is a completely new payment system yet? Where’s the value from that?

                  Your tactic in the debate now seems to be to throw ad hominems my way instead of bringing any substance. I wonder how long this can continue until you either bring something in support of yourself to the table, or you realize that with every ad hominem and bald assertion you’re just digging yourself into a deeper and deeper pit.

                  Reply
                  1. Robert Nielsen

                    Actually when the bubble was at its height, the previous crash was downplayed as a glitch that wouldn’t re-occur, just as before the 2008 financial crash, the 2000 stock bubble was treated as an exception to the rule. However, it is clear that there is far more attention being paid to bitcoin now than there was in 2011. This means that the effect of the crash will be multiplied. I don’t know about you, but most people don’t like investing in currencies or commodities that will inevitably crash. You may not see a problem with that, but it will scare most people off.

                    The point about bitspend is that I want evidence. You claim it is popular, but I want proof. Back up your claim. Give me numbers, data, independent evidence, not just a vague press release from head office. I could post on an internet forum saying that my blog is extremely popular, but that wouldn’t mean I was right. I would have to provide supporting evidence (such as the number of views) or some independent ranking. You claim there is a lot of new customers, so back up your claim. How many? Is it a slight increase or a deluge?

                    Ok, the fact that bitcoin is deflationary is common sense. As the supply is fixed, increase in demand will increase the price. Hence for it to be a successful currency, its price will have to massively increase. This means speculative bubbles are inevitable if it is to be anyway successful. Just as hyperinflation caused chaos to the economy so does hyper deflation (which is what occurs under the constantly increasing exchange rate). Under hyperinflation people rushed to buy everything as soon as possible as the price would be higher if they waited. Hence the process is reversed under hyperdeflation. Of course, this does not mean people will starve, but economic activity will freeze as is occurring in the housing market under deflation.

                    Will you stop using the phrase “Ad Hominem”? Congratulations you know the meaning of a big word, it would be far better if you used it in its proper context. You are just as disrespectful of my argument and I don’t start whinging about it.

                    Bitcoin is meant to be a currency and all currencies have something backing them, usually the reserves of the central bank. Simply being a new payment system is not enough. After all that’s what PayPal is and it is not a currency nor experiencing a bubble in its share price. A novel payment system alone is not enough to stop the price from dropping to zero.

                    So far I have pointed out the many flaws of bitcoin and why its price will boom and then crash. So far the facts and events are on my side. You can cry Ad Hominem all you like as the price of bitcoin continues to slide and you retreat further into the cave of wishful thinking.

                    Reply
  2. Pingback: The Bitcoin Bubble Has Burst | Robert Nielsen

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