Thursday, November 8, 2012

Bitcoin: thank God it failed!

Good morning economists. I would like to finish this week's posts with a discussion on the failure of the bitcoin. Chances are, that you, like me, have not heard of the bitcoin before. Indeed it was not until yesterday that this concept came to my attention.

Apparently someone by the name of Satoshi Nakamoto came up with the idea of a universal electronic type of money, called bitcoin. This virtual money could be earned by solving online puzzles by people who were called "miners". The economic theory behind botcoin seemed sound. Bitcoins were to be released slowly so that the value was kept relatively constant and the problem of inflation could be handled. Bitcoin was introduced just when the global recession hit, when investors were losing confidence in all major currencies. At the same time bitcoin exchange with real currencies could be facilitated through bitcoin brokers. Here is a short video released in 2008:
Bitcoins were to be used for online payments and several retailers were accepting them as a means of payment. However, it never really became a popular currency for exchange. At one time the exchange rate of the bitcoin to the dollar was 1 bitcoin for $27. This meant that demand for bitcoins increased dramatically and a few thousands of bitcoins were worth millions of dollars.

Then all of a sudden the online system crashed. Satoshi Nakamoto disappeared. Sometime later, the online wallets where consumers kept their bitcoins were attacked by hackers who were emptying them in the blink of an eye. Sadly, the bitcoin was not allowed to die there. It still exists today but no one in their right mind would (according to my own opinion) try to buy bitcoins.

The bitcoin was a failure, but its short lived success (in 2009) raises the topic of the need for an international currency. It seems that people are desperate for a unified currency, maybe as a reaction to the economic recession. Pity that this need was taken advantage of by a common thief.

Have a real currency date. 

7 comments:

  1. How is something with a $120million market cap today a failure?
    Bitcoins are currently at $10.80 and volume is growing exponentially.
    The system has never crashed.

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    Replies
    1. This is directly from wired.com: "After he broke into Mt. Gox’s system, the hacker simulated a massive sell-off, driving the exchange rate to zero and letting him withdraw potentially tens of thousands of other people’s bitcoins."
      Yes the system is vulnerable and has crashed. As for the $10.80 you forgot to mention that it is down from $29 in June 2011. Something that has lost 66% of its value in approx 1 year. Successful indeed!!

      Delete
  2. Bitcoin is not intended as money, but as online cash. Money is an store of value and must be durable, divisible, convenient and portable. By that definition, bitcoin is not money, but neither are dollars, euros or yens. However, Bitcoin cannot be inflated by debt-junkie governments and make online payments fast, secure and annonymous. Overall, I like it, and it has not failed: you are just confused about what its purpose is.

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    1. You know every day I am surprised at some of the responses I get from people. This being one of them! As you correctly pointed out, money must have several characteristics. 1)It is a store of value. Indeed bitcoins have value in terms of real currency, that is why they are exchanged through bitcoin brokers. 2)Money must be durable, divisible and portable. Bitcoins are all of the above. They are divisible, they are durable because they exist in electronic form and they are of course convenient. By the way you failed to mention the most important characteristic of money which is that it has to be generally acceptable as a means of payment. After the hacker fiasco, you understand than fewer retailers now accept bitcoins.

      Dollars, euros, or yens are not examples of money....hmmmm I am sorry I do not agree with your statement and neither do trillions of people on this planet.

      As far as bitcoins not being inflated by debt junkie governments, you are right. They can be inflated by teenage hackers who have exposed the system time and time again.

      To end this debate once and for all. The reason why bitcoins exist today, is because there are people who believe that they can profit from them. People that have not learned from past experience and people who believe that they can make money by exchanging bitcoins in the short run. Tomorrow's post will be dedicated to this, I promise.

      As for who is confused and who is not, I will leave it to the thousands of students I have taught economics throughout the years.

      Thank you for your comment!

      Delete
  3. You were confused about Mt Gox and the bitcoin system, like everyone else you put Mt Gox's failure on the credibility of bitcoin, which wasnt the case, you can hack Mtgox, you cannot hack bitcoin!
    This misinterpretation lead everyone to sell and lose confidence in somehting absolutely safe ... Now its back to the top, accept your mistake.

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  4. Once again, another user who chooses to remain "anonymous" while commenting on this post. Anonymity does not reflect well on making an argument..just my view.

    Now for your comment. "You can hack mtgox, you cannot hack bitcoin"? I am not sure you really understand your own argument. You basically say that hackers who hacked mtgox and changed the value of bitcoin overnight, did not basically hack bitcoin itself. Your argument is self defeating as if someone can illegally change the value of a "currency" then that someone essentially intervenes in affecting that value. If this is not the definition of hacking, I do not know what is!

    If bitcoin is back to the top as you say, you will see it falling back to the bottom. Just give it some time. You need to understand that bitcoin is nothing else than a speculative bubble which is bound to burst. When it does, people like you will be shouting and yelling for loosing their valuable money.

    And a final word. Do not remain anonymous next time. Stand by your argument by properly signing in. It is more dignifying that way!

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    ReplyDelete