The Economics of Bitcoin, the bubble and a Ponzi scheme

Are Bitcoins the new craze? It seems so, or at least to venture capitalists it is. Silicon Valley has been inundated with visionary venture entrepreneurs who have invested millions of dollars in Bitcoin companies, financing new exchanges and payment systems for the virtual currency. Future investors met to discuss the idea of launching a program to provide Bitcoin-related ventures with cash and office space. This new business venture is calling themselves, BitAngels, a group of investors that help form start-ups in Austin, San Francisco and New York.

When BitAngels was formed, the group already included 65 investors who pledged $6.7 million into Bitcoin businesses. By the end of one week, the number of investors had grown to 90 and funding had doubled.
The Bitcoin bubble, (everything on the planet has to have one-bubble that is), peaking in late March at a value of $266 per Bitcoin, the currency plunged in value, bottoming out at below $50 in early April. But since then, Bitcoins which are created by computers using sophisticated mathematical equations have recovered dramatically, recently fetching about $130 each. Bitcoin Watch
In fact, Bitcoin’s bubbles may be a bigger problem for Silk Road than its busts. In the site’s forums, some users have noted that they’re reluctant to spend their Bitcoins when they’re appreciating so quickly. In some cases, users can also make more by simply holding onto the Bitcoins they earn, rather than trading them for dollars.
Carnegie Mellon Professor Nicholas Christin studied online black market Silk Road and concluded that law enforcement authorities could stop it by disrupting its use of Bitcoin for anonymous transactions. As of September 2012, Christin estimated that on Silk Road, where all transactions are required to use Bitcoin, volume amounted to approximately $1.9 million per month. Online arms merchant Executive Outcomes, which deals in illicit goods, accepts only Bitcoin in payment to ensure anonymity. Christin stated that Bitcoin increases the level of anonymity in such transactions, possibly making it more difficult to identify the buyer of a weapon used to commit a crime.
Economist John Quiggin has claimed that “Bitcoin is perhaps the finest example of a pure bubble”, and that it provides a conclusive refutation of the Efficient Markets Hypothesis (EMH). While other assets used as currency such as gold, tobacco and U.S. dollars have value independent of people’s willingness to accept them as payment, Quiggin argues that “in the case of Bitcoin there is no source of value whatsoever”.

Since Bitcoins do not generate any actual earnings, they must appreciate in value to ensure that people are willing to hold them. But an endless appreciation, with no flow of earnings or liquidation value, is precisely the kind of bubble the EMH says can’t happen.

Others claim that Quiggin is typical of those who can’t let go of the government centered view or commodity view of money.

Money is the thing which people place the most value on. It is what they seek to allow them to trade for goods and services, maybe that is why the government and the central planner type economists are so concerned. Gold holds no real underlying value as money either. Its use as a “money” standard is based on the acceptance of it as the most valuable thing they use.

Debt spending stimulates the economy. If I take out a $5000 credit card and buy a large ticket item with it, I am stimulating the economy. But I am also hurting my ability to spend in the future because now I have a monthly payment. This is why the economy has not improved. Bitcoin is decentralized money. The value is going up because it is a currency that proves everything that has been said about money is actually true. You only create money when production increases. You don’t just print the money out of thin air. That is why it is requiring more American dollars every month just to trade for a Bitcoin.
The rise in value is what these venture capitalist see as a money maker for all of the investors involved, they are treating Bitcoins like the venture capitalists treat the new start-ups in Silicon Valley. It’s just another investment to produce the maximum in dividends, but now that Bitcoins has major backing, what effect will Bitcoins have on the monetary system in this country? Will it effect our currency at all? Will the Federal Reserve except it as another money standard, and if so what changes will that make for U.S. currency, or will they attempt to maneuver the death of Bitcoins? Bullionvault Gold News
Peter Thiel, founder of PayPal invested $2 million dollars in Bitpay, another Bitcoin transfer service, but this company helps mainstream companies accept Bitcoins for purchases instead of U.S. currency. Fred Wilson, Union Square Ventures, who backed Tumbler and Foursquare, forked over $5 million to Coinbase, a company interested in transfering Bitcoins into the mainstream. 
Facebook twins own one percent of all Bitcoin, Harvard graduates Tyler and Cameron Winklevoss said this, “We have elected to put our money and faith in a mathematical framework that is free of politics and human error.” The twins investment adds up to about $11 million dollars.
And this, in a nutshell is what’s driving these venture capitalists, “People say it’s a Ponzi scheme, it’s a bubble,” said Cameron Winklevoss. “People really don’t want to take it seriously. At some point that narrative will shift to ‘virtual currencies are here to stay.’ We’re in the early days.”
The visionary early days; pioneers in any industry see a need for a commodity, exploit it, sell it, brand it, cash in on it and become super wealthy. Robber barons of the early twentieth century saw the potential for their vision, and went for the brass ring. It paid off, but will Bitcoins?
A Maltese company, Exante, and founder of the fund Anatoli Knyazev, started a hedge fund that the company says has bought up about 82,000 Bitcoins, or about $10 million worth from wealthy investors. Bitcoins now has a hedge fund….oh brother!
This next story is why I believe these really ARE the early days. These smart young men created their own Bitcoin exchange like the early days of Wall Street, they gather using their cell phones, trade and sell on a regular basis. It’s amazing to watch not only new technologies emerging everyday, but to watch as these new young minds adapt to the ever changing environment and create something new, make money at it, use it to their advantage, push against the old establishments and come out on top. Visionaries.

6 thoughts on “The Economics of Bitcoin, the bubble and a Ponzi scheme

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