As Bitcoin virtual currency soars, bubble fears do too

Apr 07, 2013 by Thomas Watkins
Some call it the most famous pizza purchase in history: In May 2010, a programmer called Laszlo asked an online forum if anyone would buy him a couple of pies in exchange for 10,000 Bitcoins, an experimental online currency launched in 2009. As of Friday, a single Bitcoin traded at around $135, amid fears that a new online bubble might soon burst.

Some call it the most famous pizza purchase in history: In May 2010, a programmer called Laszlo asked an online forum if anyone would buy him a couple of pies in exchange for 10,000 Bitcoins, an experimental online currency launched in 2009.

"No weird fish topping or anything like that," he wrote.

With each Bitcoin fetching less than a cent at the time, the order was worth about $41. Today, it would be valued at about $1.4 million (1.08 million euros).

As of Friday, a single Bitcoin traded at around $135, with the currency nearing $147 earlier in the week—up from about $20 at the start of February. It's a stratospheric jump some claim has been fuelled by Cypriots and Russians seeking to invest their euros elsewhere during Cyprus's , stoking fears that a new online bubble might soon burst.

"It's completely irrational," said Yannick Naud, a at the London-based Glendevon King Asset Management firm, who has seen an increase in client queries about Bitcoins. "As an investor you can't put any underlying value on the Bitcoin itself."

Bitcoins were launched in 2009 in the wake of the by an anonymous who wanted to create a currency independent of any central bank or . A form of "e-money", it is made of strings of dazzlingly complex code created by raw computing power—a process called "mining" that can in theory be carried out by anyone with a computer.

The software is written in such a way that it becomes increasingly difficult to generate new Bitcoins, with the number in circulation designed to eventually top out at 21 million.

Once mined, Bitcoins are stored on a user's hard drive in a virtual wallet, and can be sent directly to another person. Such peer-to-peer sharing bypasses the banks so is largely anonymous. But this brings its own risks—in June 2011, hackers targeted virtual wallets and wiped some people's accounts clean.

At first a coder's curio, Bitcoins quickly found a home in the "deep web", the shadier part of the Internet that is largely anonymous and requires some good technical understanding to access. It was used to fuel illicit drug buys and pay for other illegal services on specialist sites.

But computer aficionados and tech-savvy libertarians embraced the currency too, and in recent months a flurry of legit businesses have started accepting Bitcoins.

A cottage industry of stores buying and reselling goods online for Bitcoins has emerged, and some high-profile transactions have helped push the currency into mainstream consciousness. One Canadian man reportedly hoped to sell his house for Bitcoins, and a US man claimed to have traded his 2007 Porsche for 300 Bitcoins.

Robert Walker, a digital designer from London, said he bought about 200 Bitcoins over a six-month period starting at the end of 2011. He spends much of his time online and was excited by the idea of the Internet minting its own currency, and an investment not beholden to any central authority.

His purchase set him back about $900, but today would net some $27,000. But despite this week's new price highs, he's going to keep his virtual stash—for now at least.

"It's not a life changing amount of money, but it could be if I sat on it for five years," Walker said.

But for Naud, the asset manager, Bitcoin is reaching unsustainable levels. On paper at least, the value of Bitcoins in circulation now tops $1 billion, and a continued increase in price will require a lot of new investors.

"The bubble will burst when there will be less people willing to enter (the Bitcoin market) than people willing to leave it," he said. "It's hard to pinpoint, but it probably won't last another month at this price."

Experts said Bitcoins are especially vulnerable to rapid deflation. Governments trying to regulate them, for example, could spook investors and cause them to lose confidence. Already in the US, regulators have taken note of the currency and moved to make firms report transactions worth $10,000 or more, according to the Wall Street Journal.

"If it gets very popular, I can see the government clamping down," said Alistair Cotton, a senior analyst with Currencies Direct. "I think it would lead to a massive drop off in the number of users."

The Cyprus banking crisis - which saw the tiny nation agree a bailout deal with the International Monetary Fund, European Commission and European Central Bank that will shrink the banking sector and lead to losses on deposits of more than 100,000 euros - also coincided with a run-up in Bitcoin valuation.

Cotton sees similarities between Bitcoin and Napster, an early online file-sharing service that ran into legal difficulties and was eventually closed, though it was soon replaced by numerous other file-sharing services. Even if Bitcoin doesn't last, other virtual currencies will surely rise in its place, he said.

"If you look back in history in terms of financial bubbles, they always end," he said. "It's going to be a very rough ride for guys that invest in Bitcoin for speculative purposes."

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User comments : 19

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Lurker2358
1 / 5 (15) Apr 07, 2013
It's essentially a ponzi scheme. Sort of like legalized counterfeit money.

The guy who started the thing probably made a lot of wealth, and some people will make a lot of wealth along the way, but most people will lose wealth somewhere.

I never heard of bitcoin before this article. Must not be too big a deal since it's never been mentioned here, or on a science forum.

30 to 1 returns in 3 years sounds criminal, or probably should be illegal.

It's like gambling, except there's no posted odds, and no posted prizes, and no regulation to ensure buyers aren't being scammed.
mn3m0n1x
4.7 / 5 (12) Apr 07, 2013
@Lurker2358 - It's not a ponzi scheme.

"I never heard of bitcoin before this article".
then research it before posting "it's essentially a ponzi scheme" or "sort of like legalized counterfeit money" or "must not be too big a deal since it's never been mentioned here, or on a science forum":) Just because something didn't pop up on your screen in the course of your day doesn't really say anything about it.

On a side note any currency's only true value is decided by people's willingness to accept it in exchange for something. I personally like Bitcoin for many reasons (as do others) and hope it becomes more popular/accepted as time goes on.
Thrasymachus
1.5 / 5 (8) Apr 07, 2013
The users of Bitcoins understand what money is and how it works in roughly the same fashion as natello/Zephyr understands physics.
ValeriaT
1 / 5 (2) Apr 07, 2013
well, it' s not as good as it seems..
grondilu
3.6 / 5 (7) Apr 07, 2013
Before you guys diss bitcoin, try to remember that it is the only currency in the whole world, that you can use to buy drugs on a online black market. Whether you like it or not, this is a fact and a basic use for this currency.
It is also the only electronic form of Money that the Cypriot government could not have stolen from its citizens.
antigoracle
1.7 / 5 (6) Apr 07, 2013
With the US Treasury's plan to regulate Bitcoin, I recommend cashing out.
kochevnik
1.9 / 5 (9) Apr 07, 2013
It's essentially a ponzi scheme. Sort of like legalized counterfeit money.
Congratulations about confusing a pure maths algorithm with Jewish banking
grondilu
5 / 5 (4) Apr 07, 2013
It's like gambling, except there's no posted odds, and no posted prizes, and no regulation to ensure buyers aren't being scammed.

The regulation is in the source code.
kochevnik
2.6 / 5 (5) Apr 07, 2013
With the US Treasury's plan to regulate Bitcoin, I recommend cashing out.
How much bitcoin will you buy? With the dollar hyperinflation around 2016 and rise of the BRICSdollar you will be making a good choice
Steven_Anderson
1.8 / 5 (5) Apr 07, 2013
Breaking News: Bitcoin Miners Threaten Strike Over Fed Regulations

http://rawcell.co...lations/
trapezoid
5 / 5 (2) Apr 07, 2013
"If it gets very popular, I can see the government clamping down," said Alistair Cotton, a senior analyst with Currencies Direct. "I think it would lead to a massive drop off in the number of users."

Or it could be like certain other things... the fact that it's forbidden could make more people want to try it.
kochevnik
2.1 / 5 (7) Apr 08, 2013
People miss the scope of this. It is the beginning of the end of wealth based upon jurisdiction, and only the beginning of wealth and commerce based upon privacy and trust networks. The British and US empires are already walking dead anachronisms. They just don't know it yet, and due to ignorance think they can project relevancy. They are relics of a quaint bygone imperialist era before the advent of maths and computers. The sooner fiat currency is obsoleted, the sooner man can man can make true progress based upon merit, not monopoly tribalism and naked force. The future belongs to the warrior be he capitalist, scientist or artist. His only limits are the trust/distrust he entrains in his pursuits
kochevnik
3 / 5 (2) Apr 08, 2013
Or it could be like certain other things... the fact that it's forbidden could make more people want to try it.
Cash is much more anonymous than bitcoin which leaves an electronic footprint. Banning it would be particularly useless. Akin to the USA banning gold and silver ownership in the last century
Eikka
3 / 5 (4) Apr 08, 2013
"It's not a life changing amount of money, but it could be if I sat on it for five years," Walker said.


This is the only reason the bitcoin is gaining in value.

The more people "sit on it", the less bitcoins there are on the market, and as the supply dwindles the price goes up. From there on, it becomes a game of chicken - everybody sits on the money and waits, and the price goes up until someone gets nervous and starts selling. Suddenly there's more bitcoins on the market and the price starts to go down, and everybody starts selling in fear of losing their profits, which makes the early investors gain money and the latecomers lose money in the ensuing hyperinflation.

Because of this, the only real use for bitcoins is investment gambling. It's useless as a trade medium because the value is always going up except when it crashes down. You can't pay today's wages and debts with tomorrow's income because the prices have to fall continuously to match the value of the currency
Eikka
2 / 5 (5) Apr 08, 2013
And as a gambling medium, there's bound to be a Scrooge McDuck effect where someone literally hoards the money and buys the market for half a wooden penny every time the bubble bursts.

Eventually the bitcoins concentrate on one or few investors who gain the power to crash the market any time they please.
ivan_berdichevsky
1 / 5 (1) Apr 08, 2013
People not understanding what money is, is like people not understanding why the sky is blue. They're always in front of it, but the lack of curiosity and the excess of fake certainty certainly maims their brains.
Frostiken
1 / 5 (3) Apr 08, 2013
Because of this, the only real use for bitcoins is investment gambling. It's useless as a trade medium because the value is always going up except when it crashes down.

...

Eventually the bitcoins concentrate on one or few investors who gain the power to crash the market any time they please.


This. Exactly this. First of all, much of the wealth is ALREADY in the hands of a few people, because there are botnets controlling hundreds of zombie computers, and they're used to mine with idle processes, sending the wealth to just one person. Your average bitcoin user cannot even remotely approach this capability, and the botnet controller isn't even paying for the hardware / power use.

Secondly, since bitcoin is unregulated by its design, it means that no actual government measures can exist to insure the wealth, reduce the impact of volatile inflation / deflation, control the value (ie: quantitative easing), or halt or roll back a crash (eg: stock market controls).

kochevnik
1 / 5 (1) Apr 08, 2013
Secondly, since bitcoin is unregulated by its design, it means that no actual government measures can exist to insure the wealth, reduce the impact of volatile inflation / deflation, control the value (ie: quantitative easing), or halt or roll back a crash (eg: stock market controls).
Bitcoin can't inflate/deflate because it has intrinsic value due to scarcity. In contrast zionist paper you call money is worth less than the paper used to print it. It's used for wars and empire-building and keeping people dumb so the game never ends

A few GPUs are worth much more in raw capability than a botnet. You don't know what you're writing about

@Eikka You can't inflate a hard asset like bitcoin. Study some econ 101

@Eikka Eventually the bitcoins concentrate on one or few investors who gain the power to crash the market any time they please.
You mean as they do right now with dollars and small-cap stocks? That's been happening for centuries with your funny money
Eikka
1 / 5 (2) Apr 10, 2013
Bitcoin can't inflate/deflate because it has intrinsic value due to scarcity.


Scarcity has no intrinsic value. Just because something is rare doesn't make it valuable.

In other news: Bitcoin just crashed down 40% in six hours.

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