Tags

, ,

The price has varied from virtually nil to $30 over the past two years. See BitCoin chart.

(http://bitcoincharts.com/charts/mtgoxUSD#tgSzm1g10zm2g25zv)

BitCoin is a product with strong parallels to Beanie Babies.

It is based on scarcity, a very old technique for generating price bubbles. Rare tulip bulbs sold for high prices as the perception of scarcity coupled with demand caused price to bid up. After the crash, the Dutch courts ruled that debts from speculation in Tulip bulbs could not be enforced.  The reason the court cited was that this speculation was gambling. (Chapter 3 of Mackay, 1841)  Gambling debts are enforceable in US courts, but not if the gambling establishment is unlicensed.

To date, BitCoins have been available to be spent because they continue to be made. It is hard to know how much actual buying of ‘real things’ is done with BitCoins. As the quantity of new BitCoins being mined drops, I expect the price to rise and BitCoin hoarding to increase.

After BitCoins stop being produced, I expect a large spike in price. That price spike could reach ridiculous levels for some transactions. (Perhaps as high as $1,000 per BitCoin). Some foolish people will assume that means “I’m rich!” based on the notional valuation of their holdings. (Any commodities trader knows better.)

The higher the price goes, and the faster it rises, the more hoarding of BitCoins will occur. Hoarding will make the supply problem of BitCoins even more difficult to deal with. That will cut the number of people willing to use BitCoins as payment and turn the system into more and more of a hoarder’s exchange. Then it will turn into a Beanie Babies chart.

http://alabastard.blogspot.com/2008/07/scmath-graph-plush-retirement-or-bean.html Based on the data gathered in my scientifically scrupulous research methods, I have come up with the following chart which accurately depicts the relative value of Beanie Babies in “Mint” condition for the period 1993-2008:

As you can see, Beanie Babies started off in 1992 with a relative value somewhere between Miller Lite and Lint (Pocket, not Dryer) then gradually inched up until hitting the Dog Turd plateau of ’94. This was followed by a skyrocketing in popularity, until the BBs (as I like to call them) hit their peak value in late 1995, being valued at slightly more fiscal worth than an El Camino (1984). Since that time, the value of a beanie baby has steadily decreased to the current, low level.

In 1997, a Princess Diana bear went for about $4,000 when it first hit the market. It’s now worth about 25 bucks, for a net loss of $3,975.

In fixed currency systems (think biblical times with gold talents) a prime way for new players to rise in wealth is by theft. We are already seeing that with the theft and lawsuit over it. The motivation will become extreme with a system that can’t reliably identify people. Theft will result in a crash in the value of BitCoins since the thieves will cash out their ill-gotten gains quickly.

I predict that after the price spike and theft festival, a core group who were the movers and shakers inside of BitCoin will cash out their BitCoins and go to work on a new, better system. There are already murmurings about this. I am not sure if BitCoin will ever give out its last coin before being replaced.

The new, better system will have similar characteristics to BitCoin, a primary element being scarcity. Perhaps the old BitCoins will be allowed, but I suspect the argument will be made that too many are stolen, or it will just be “incompatible.”

That new system will attempt to repeat the success of BitCoin. I think it will be successful at acquiring a new group of users who will, in turn bid up the price of the  replacement BitCoins. But this time, more care will be taken not to lose the new BitCoins.

I predict that since it would not be in the interest of those who stand to make the most money from creating new BitCoins that there will be no address to any of the fundamental issues I discuss on this blog. This is because their core community is composed of ignorant and deluded people who confidently imagine themselves superior to all the economic thought that came before. They don’t understand currency systems. They don’t bother to learn how banking works. (Or to the extent they do, they stupidly think that creating money is wrong. They don’t bother to think that everything they are looking at was made with debt.)

That core community buys asinine notions like the gold standard being a good thing for an economy. Frankly, the core community of BitCoin deserves to be conned and stripped of its hard-earned cash. But, I try because the ignorant are pathetic and I should at least attempt to lead them out of it. If they want to stay stupid, that’s their business.

A few people will make substantial small fortunes from BitCoin and from its successor. Most will be left holding the bag or else get the minimal benefit.

BitCoin will not have any significant impact on the economy of the world. For the reasons detailed in quite a few blog posts here it is impossible.

Will I get involved in mining BitCoins (or its successor)? I’m toying with the idea. The cynical part of me knows I could make money at it. The ethical part of me knows that for the most part that money I would make would be taken from people who conned themselves because they are ignorant (and sometimes stupid.)

What to do? I shall consult my muse.

Advertisements