With cyptocurrencies all the rage these days, I figured I should weigh in. I've done a few dozen posts about the monetary theory behind cryptocoins, so rather than write another, in this post I'm going to describe my somewhat zany experience over the last fourteen or so months with litecoin, one of the bitcoin clones.
Curious about bitcoin, I figured I should gain some practical experience with the medium of exchange on which I planned to write over the next few months. So one cold autumn day in 2012 I bit the bullet and transferred some money to VirtEx, Canada's largest online bitcoin exchange, bought a few coins (a small enough amount that I wouldn't wince if their price fell to $0), and then transferred those coins from my Virtex account to my newly downloaded wallet residing on my laptop. Voilà! I was now officially a bitcoiner.
...which wasn't as exciting as I had anticipated. There was little for me to do with my fresh digital pile of coins. I'm not a huge shopper, and the places where I do buy stuff, like grocery stores, don't accept bitcoin. I don't do drugs, so I couldn't use Silk Road, the now-shuttered online drug marketplace. And I don't gamble, the gambling website SatoshiDice being one of the big drivers of bitcoin transactions. So my coins just sat there in my wallet gathering electronic dust.
Later that autumn I read somewhere that bitcoin had a smaller cryptocurrency cousin called litecoin, which traded for a fraction of the price of bitcoin. Curious, and with little other avenue for my bitcoins, I sent a small chunk of my already small stash of bitcoin to BTC-e, a Russian online exchange specializing in bitcoin-to-litecoin trades, and proceeded to buy some litecoins for around 5 cents each (I can't remember their price in bitcoin). I transferred these to my freshly downloaded litecoin wallet, and voilà, I was also now officially a litecoiner.
Much like my experience with bitcoin, I was tad bit disappointed. As a medium of exchange, litecoin was even less liquid than bitcoin. Whereas a few online sites accepted bitcoin, no one seemed to want litecoin, providing me with little opportunity to play around with my new toys. Along with my bitcoins, my tiny hoard of litecoins gathered dust.
A few weeks later, however, I stumbled on an interesting avenue for my litecoins: an online litecoin-denominated stock exchange called LTC-Global. At the time, it listed around 20-25 stocks and bonds. I gleefully opened an account (which took seconds) to which I transferred about 75% of my stash of litecoins, and started to invest. I use the term "invest" very loosely, even sheepishly. Because the dollar-value of the shares I was purchasing amounted to a few bucks, it was hardly a large enough sum to merit a true analysis of the companies in which I was investing in. I glanced through the summaries of the various listed companies, picked some that I found interesting, and bought their shares. My investments included a website that published litecoin charts, a bond issued by a litecoin miner, a few passthroughs*, and some other companies.
Over the next months I'd get periodic notifications that my companies had paid me dividends. I bought a few more shares here and there, and some of them even rose in value. But when the novelty of this was over, I forgot about my investments. Then in March 2013 litecoin prices really started to race, quickly moving from $0.05 to $0.50. This amounted to a 900% rise since my autumn 2012 entrance into the litecoin universe, a far larger percent return than I'd ever made on my "real life" investments. My stash of litecoin had graduated from the "tiny" to the "smallish" category.
I hastened to LTC-Global to check the price of my investments, and much to my horror discovered that many of them had fallen in value by the exact amount of litecoin's rise. My 900% return was not to be. And as litecoin's price crossed the symbolic $1 mark, the price of my stocks continued to fall! After a few frenzied inquiries posted to the litecoin forums, I was informed by some savvy cryptocoin investors why this was occurring. Many of the companies into which I'd invested my litecoins earned fiat returns. My litecoin chart website, for instance, received advertising income in euros. As litecoin prices exploded, the website continued to earn the same amount of euros, but this equated to a much smaller litecoin equivalent. Thus the price of my stocks in terms of litecoin had declined, though they were still worth the same amount of dollars or euros. Better had I kept my funds in litecoin than ever investing them!
This made me wonder: in a world in which cryptocoins are expected to rise by 900% in a few days (why else would someone hold them), is there any point in investing one's litecoins? The expected return on hoarding far exceeds the return from investing litecoin in companies that by-and-large earn fiat returns. Yes, companies that earn litecoin income will not suffer a fall in share price, but at the time I was making my investments the litecoin universe was so small that few companies earned a pure litecoin revenue stream.
By April, litecoin had advanced another 900% to $5, giving me a return of 9,900% in just a few months. My shares, however, continued to deteriorate in value. To compound the problem, one of the companies I'd blindly invested in turned out to be a scam. I suppose in hindsight I might have guessed that a company called "Moo Cow Mining" might be a poor candidate for investing. The owner of Moo Cow had stopped paying dividends and absconded with the investors' assets. In the bricks & mortar world such actions would have very real consequences, but in the nascent litecoin universe there seemed to be little that could be done except make loud threats on the forums. This caused me some consternation because though my initial investment had been tiny, as litecoin prices advanced from $0.05 to $5 what had been a small scam in real terms quickly became a not-so-small one.
Once again I forgot about my litecoins. Without warning, this September LTC-Global announced it would be shutting its doors. One of the hazards of running an online stock exchange is that it probably breaks hundreds of SEC regulations. No doubt the exchange owners had decided to call it quits before they got in trouble. Worried that my funds might be confiscated or blocked, I quickly logged into my account. My shares had fallen in value (see this post) upon the announcement, but I was still able to sell everything I owned. I limped out of LTC-Global having lost 65% or so of the litecoins I'd invested. I vowed never again to spend away my hoard of coins on silly investments.
This November litecoin prices experienced another buying rush as they rose from $5 to just shy of $50, pushing litecoin up by a ridiculous 99,900% since I'd initially bumbled into them. Although I'd lost a large chunk of my litecoins by investing in stocks, the remaining stash now summed up to an amount that was no longer smallish (but not gigantic, either). Even tiny amounts of capital will grow into something substantial at those sorts of rates of return. Let's not kid ourselves though, this wasn't a canny trade, it was just dumb luck.
Getting out of litecoin isn't an easy task. I'll have to send my coins back to BTC-e where I can exchange them into bitcoin, incurring a 0.05% transaction cost on the deal. Then I have to transfer these bitcoins back to Virtex to buy Canadian dollars, which will exact a fat 2% commission on the trade. Then I'll have to wait a few days for my dollars to be transferred to my bank account. It's a lengthy and expensive process. Alternatively I could try and find someone who makes a market in litecoin, go to their house or a café, and consummate the trade there. But that just sounds awkward.
I also now have the headache of figuring out the tax implications of all of this. Which makes me wonder: how can litecoin and bitcoin ever be useful media-of-exchange if, for tax purposes, one must calculate the capital gain or loss incurred on every exchange? Even if I was able to buy groceries with my litecoin, I'm not sure I'd bother. The laborious process of going through my records in order to determine my capital gain/loss would probably have me reaching for my fiat wallet. The advantage of fiat money is that there are no capital gains taxes or capital loss credits, obviating the need for bothersome calculation.
The tax issue, combined with the general difficulty I experienced buying anything with my litecoins, topped off by the complexity of getting back into fiat all conspire to drive home the point that the main reason to hold litecoins for any period of time isn't because they make great exchange media—it's because they're the best speculative vehicles to hit the market since 1999 Internet stocks. I'll admit straight up that the speculative motive is why I'm still holding my litecoins, the educational motive having receded into the background some time ago. After all, if these little rockets can rise from $0.05 to $50, why not to $500, or $5000? All that's needed is a greater fool. I'm fully aware that the odds are that litecoin's value will fall to zero before $500 is ever reached, but my litecoin gains are so unreal to me that I wouldn't lose any tears if that particular worst-case scenario were to occur.
And it's millions of folks like me who explain the incredible volatility of cryptocoins, since we are the marginal buyers and sellers of the stuff. Since first starting to write this post, litecoin has lost over 60% of its value, falling back to below $20. These speculative-driven spikes and crashes don't seem like a very durable state of affairs to me, at least if cryptocurrencies are to take a more serious role in the world of exchange media. To be useful, an inventory of exchange media should be capable of purchasing the same amount of goods on Wednesday that it bought on Monday, but with cryptocoins one has little clue what tomorrow's purchasing power will be, let alone next week's.
Although I'm skeptical of cryptocoin mania, let me end on a positive note. Cryptocoin 2.0, or stable-value cryptocoins, is probably not too far away. It may take a price crash before they emerge, but I do think that stable value crypto coins will prove to be far better exchange media than the current roster of roller coasters.
*a passthrough is a bit like an ETF. Anyone who invests in a passthrough receives a stream of dividends thrown off by an underlying stock, one that is usually listed on another crypto stock exchange.
Cryptocurrencies are still in their infancy. Once the markets and other low level infrastructure mature, the volatility will reduce and they will become attractive to a much wider audience. Ultimately they will be superior to fiat both for transacting (reduced cost) and for storing value (finite supply).
ReplyDeleteMoreover, cryptocurrencies, being open, will introduce whole new use cases as a result of the "programmable money" paradigm. Welcome to the beginning of the financial superhighway.
JP,
ReplyDeleteI think that most of what you're describing is simply... FX risk.
"I suppose in hindsight I might have guessed that a company called "Moo Cow Mining" might be a poor candidate for investing."
ReplyDeleteHaha!
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"This made me wonder: in a world in which cryptocoins are expected to rise by 900% in a few days (why else would someone hold them), is there any point in investing one's litecoins? The expected return on hoarding far exceeds the return from investing litecoin in companies that by-and-large earn fiat returns. "
I've wondered about a similar thing (though not specifically taking the 'input in litecoins, output in cryptocurrency problem) re investing in Bitcoin companies rather than in bitcoins directly and received some answers from people who have invested in Bitcoin companies http://www.koenswinkels.com/1/post/2013/12/why-start-or-invest-in-bitcoin-companies.html
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"it's because they're the best speculative vehicles to hit the market since 1999 Internet stocks."
In an important sense they're even better than that, or rather, Bitcoin is even better, because, as I wrote in the same article: "in the case of the early internet it was not possible to invest in TCP/IP, the general protocol underlying it, or even in the protocols built on top of that such as HTTP. If you were excited about the potential of the internet you couldn't invest in the protocols themselves, only in specific companies creating and/or using these protocols.
With Bitcoin on the other hand you can invest in the Bitcoin industry as a whole, in Bitcoin as a protocol for financial applications, namely by buying bitcoins. If Bitcoin as an industry and protocol succeeds, your bitcoins will go up in value and price.
Of course it may very well be the case that other protocols will emerge that outcompete Bitcoin, or that neither Bitcoin nor other protocols for financial applications will survive, but the risk of investing in the protocol as a whole will be considerably lower than the risk of investing in one specific company that is dependent on the success of the protocol.
For an investment in a Bitcoin company to succeed Bitcoin has to succeed AND the specific company you invest in has to succeed on top of that. Moreover, the money invested in the company cannot be invested in bitcoins, so there are significant opportunity costs.
For an investment in bitcoins to succeed, on the other hand, only Bitcoin has to succeed. Moreover, you can use all of your investment money to buy bitcoins and you don't have to use some to invest in the company."
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"And it's millions of folks like me who explain the incredible volatility of cryptocoins, since we are the marginal buyers and sellers of the stuff. Since first starting to write this post, litecoin has lost over 60% of its value, falling back to below $20. These speculative-driven spikes and crashes don't seem like a very durable state of affairs to me, at least if cryptocurrencies are to take a more serious role in the world of exchange media. To be useful, an inventory of exchange media should be capable of purchasing the same amount of goods on Wednesday that it bought on Monday, but with cryptocoins one has little clue what tomorrow's purchasing power will be, let alone next week's."
But the volatility seems to be a function of the tinyness of the market, as well as the relative lack of financial instruments such as shorting. You seem to suggest (especially in an earlier post) that it's the fact that bitcoins (and other cryptocurrencies) are not backed by anything in the real world that is what makes them volatile. I'm not sure why that would be true, as I write in this article in which I also discuss (what I think is) your argument http://www.koenswinkels.com/1/post/2013/12/why-bitcoin-needs-neither-intrinsic-value-nor-government-support.html
[/shameless self promotion]
Thanks for dropping by, Koen.
Delete"But the volatility seems to be a function of the tinyness of the market, as well as the relative lack of financial instruments such as shorting."
You make an analogy to penny stocks on your post (or at least Jeff Garzik did). Penny stock markets are tiny. And they are volatile as sin. But litecoin and other cryptocoins are in a totally different realm of volatility. No penny stock I've ever seen moves as much as these things do. Which means that something other than tininess must explain the extraordinary volatility of cryptocoins. (I don't agree that you can't short them. A sophisticated bitcoiner can borrow bitcoin and sell them.) In my opinion, the missing component that can explain this bobbing and weaving is their almost complete lack of a non-monetary use, or fundamental value. (I'll grant you curio value). Penny stocks have a fundamental value, and therefore are less volatile than cryptocoins.
(As a measure of penny stock volatility, I submit a chart of the S&P/TSX Venture index, the wild west of tiny gold, mining, and tech stocks. I don't think the Venture's prices are anywhere near as volatile as cryptocurrencies.)
I enjoyed your blog post. Keep up the good work.
Thanks for your response. I now think you're right that the comparison/analogy with penny stock is actually not a very good one (because bitcoin is actually both considerably bigger and considerably more volatile), and that the explanation for bitcoin's volatility has to be found primarily in something other than the smallness of its market per se.
DeleteBut I'm still doubtful that it is its alleged lack of a non-monetary role that provides explanation, or at least that it does so in a straightforward way, because qua volatility in their moneyness I don't quite see how the situations of bitcoin and e.g. gold would be that much different, because it is not clear to me why e.g. in the case of gold the non-monetary demand would prevent the monetary demand from collapsing.
Am gonna explore the issues a bit further, probably esp. wrt the difference between the current size of the market and the potential size, and the pervasive and often inherent (because of the interdependencies involved) uncertainty involved in the monetization of a good, of its becoming or not becoming a widely used medium of exchange.
Anyway, thanks for your thoughts.
"I don't quite see how the situations of bitcoin and e.g. gold would be that much different, because it is not clear to me why e.g. in the case of gold the non-monetary demand would prevent the monetary demand from collapsing."
DeleteThe difference is that bitcoin's price can collapse to 0 whereas gold's can't. At some lower price, the non-monetary demand supplied by jewelers and dentists will kick in. Knowing that there is a non-monetary anchor to the downside, anyone who holds gold for monetary reasons, ie for future sale (speculators, traders, merchants) will be more willing to grit and bear any expected price decline. And their willingness to hold rather than panic will in turn render gold's price less volatile. This makes speculators/traders more confident, which in turn dampens gold volatility, etc etc.
But with bitcoin, anyone who holds for monetary or speculative reasons realizes that there is no underlying non-monetary demand. Since prices could fall to 0, the market has a very itchy trigger finger which has the paradoxical effect of making prices even more volatile. Which makes the market even more trigger friendly, which makes prices even more volatile etc etc.
JP, you make a very good point about the capital gains taxes causing a headache. However, with Bitcoin (or cryptocurrencies in general) you can actually automate almost all of this, and have this working with almost any accounting app/service all over the world.
ReplyDeleteI used to do cross-country service provision in Europe before the Euro, so I am familiar with the problem. Now I'm having income in BTC, so I'm re-addressing the issue. It is difficult to smoothly integrate the current banking system with your accounting, it hasn't improved much over the years. Many banks do not provide any API, and even then there is often a bank-specific one or even a country-specific one (e.g. in Germany you have FinTS). I have accounts in multiple countries and even though all of them are denominated in Euros, you still can't automate your accounting. In addition to that, you have the API to your credit card provider if you accept credit card payments, and so on (I used to work in an online payments company as well as on the merchant side integrating the API into accounting systems). Andreas M. Antonopoulos explains in several of his talks that the traditional approach to achieving security of financial APIs is exclusion, i.e. you need to have special privileges and "worthiness" in order to access them. With cryptocurrencies this issue does not exist, and that increases competition and decreases costs. The blockchain is public.
These integration systems do not exist yet to a significant amount with Bitcoin, but because all the data and APIs are publicly accessible, they can be integrated without having to depend on a provider, and worldwide. Over longer time however, they can integrate much better than the traditional systems. PoS integration with accounting is the most commonly requested item (I did this research myself in one of my positions) by potential merchants.
BitPay started providing integration into Quickbooks, and that's a step into the right direction. Expensify took a similar approach, allowing more efficient expense handling. For investors, there are tools to track your portfolio, such as cryptotrack.com or cryptfolio.com (I haven't tried them so I don't know to what extent they are automated but they probably are because exchanges typically provide an API).
Over longer time, I'm pretty sure your typical bitcoin wallet will integrate with your accounting system smoothly and automatically. Due to public key cryptography, the accounting software doesn't have to have access to your private key or "talk" to the wallet directly, it gets data from the blockchain. Exchanges often allow you to have a read-only API keys for auditing purposes.
I know it's difficult to foresee this, but the problem of integrating financial data and accounting is not specific to cryptocurrencies, and cryptocurrencies actually have the foundation to solve this problem. I've been annoyed about a lack of an open worldwide API for financial systems long before Bitcoin existed.
Fascinating. So basically, the tax issue shouldn't pose a major problem since a bitcoin user will have software that does the capital gain/loss calculation for them, basically by analyzing the blockchain.
DeleteWhat about the crazy volatility? Why would I acquire a stock of cryptocoins today to buy a car tomorrow if I can't be sure the price of those coins won't collapse during the night?
Fun post. Fwiw, I think Litecoin is in no-man's land--too similar to Bitcoin, but with weaker branding. At least Peercoin's proof-of-stake, environmentally friendly pitch differentiates it from BTC. Any thoughts on XRP as an investment? Seems like the most promising, if/once Ripple takes off.
ReplyDeleteRe: cap gains tax and usefulness as MOE--doesn't this apply to pretty much all assets besides money? The main theme of this blog is that every asset has some degree of moneyness, but cap gains taxes seem to stifle this quality. Stocks certainly have more moneyess than used trucks, but if I'm saving for retirement, it still doesn't make sense to use part of my portfolio as a means of payment b/c I'd have a tax headache and I could be on the hook for taxes. From a moneyness POV, wouldn't a world w/o cap gains and sales taxes allow for a wider (and perhaps more efficient) range of payment options (say commodity futures or ETFs)?
Btw, Merry Christmas! You closed the year with a strong run of entertaining, accessible posts.
Merry Christmas, John.
DeleteOpencoin owns about 50 billion or so XRP and will probably sell them so as to dampen price rises. Since XRP are required for transactions fees, I doubt Opencoin wants prices to rise too high... this would slow down adoption of Ripple transactions.
"From a moneyness POV, wouldn't a world w/o cap gains and sales taxes allow for a wider (and perhaps more efficient) range of payment options (say commodity futures or ETFs)?"
Yep. Good point. A tax on wealth held rather than on transactions made would help encourage a broader universe of payment media.
Re: XRP--yes, there isn't likely the potential for crazy returns like other CCs. But isn't Ripple Labs banking on appreciation of the other 50 billion XRP for its profits? There may be some hope of long-term, stable gains. (I don't know much about Ripple, besides the primer, but it seems like there's some interesting potential for Opencoin to act as a central bank of sorts--stabilizing the value of XRP, providing liquidity. I'd be very interested to see your thoughts on Cryptocoin 2.0).
DeleteThe volatility of CCs is a problem, but that seems to be more of a function of big news swings (e.g. Baidu semi-acceptance & withdrawal, Chinese bank regs, various European rulings) rather than something inherent to CCs themselves. Imo, the "fair" environment in which to observe CC volatility would be one where knowledge of CCs is widespread and the govt defined "rules of the game" are somewhat stable.
Here's a wacky idea I had about cryptocoins--maybe a partial solution to the crazy array and volatility is the same as the medieval solution: a ghost coin. How about reviving the Shilling (a well-known unit, and also to honor Robert Shiller, champion of the indexed UOA)? At current prices, 270 grains of silver is about $11. Call it 10, and make the shilling an indexed-unit-of-account (either CPI or quasi-real indexed) equivalent to 10 USD in 2014. CC prices and contracts could be quoted in shillings and fulfilled in whatever CC both parties agreed on.
(CC applications aside, I wonder why the private sector hasn't adopted quasi-real indexing or some other indexed UOA for bonds or loans to protect borrowers or lenders from fluctuations in NGDP).
"But isn't Ripple Labs banking on appreciation of the other 50 billion XRP for its profits?"
DeleteIt's a chicken and egg problem. If XRP appreciates in value, the cost of using the Ripple system will rise since XRP must be spent away on transaction costs. If XRP is too high, transaction costs will be too high, and no one will use Ripple to transact, which is what the Ripple founders probably don't want. So no, I think they'll have to find another way to monetize the Ripple system.
"but it seems like there's some interesting potential for Opencoin to act as a central bank of sorts--stabilizing the value of XRP, providing liquidity. I'd be very interested to see your thoughts on Cryptocoin 2.0)"
Ripple pretty much represents the idea of Cryptocoin 2.0 to me. IOUs are encoded into a blockchain of sorts and rendered just as tradeable as a bitcoin. Unlike bitcoin, the IOUs are actually backed by something. Bitcoin IOUs will of course be just as volatile as underlying bitcoin. But if the IOUs are indexed to and backed by a more stable unit like $, then the IOUs themselves will themselves be stable.
Ripple Labs does act as a sort of central bank. They drove through a decrease in transaction costs earlier this month, for instance:
https://ripple.com/blog/proposed-change-to-ripple-reserve-requirement-2/
This would have reduced the usefulness and therefore price of XRP, evidence that Ripple Lab cares more about the sustainability of the Ripple system than earning a large return on XRP.
"The volatility of CCs is a problem, but that seems to be more of a function of big news swings"
Could be. As I discussed with Koen, I think the problem is that cryptocoins are boot-strap assets -- they have no non-monetary value, and therefore nothing to anchor them.
"Here's a wacky idea I had about cryptocoins--maybe a partial solution to the crazy array and volatility is the same as the medieval solution: a ghost coin."
Ripple would allow you to do that. You'd create some index and call it the Shilling, and then people could index their Ripple IOUs in terms of Shillings.
I don't think transaction costs (currently negligible, at 1 hundred thousandth of 1 XRP) are the main barrier to getting people to use the Ripple network. Rather, it's lack of awareness, underdeveloped infrastructure, and the inconvenience of obtaining XRP (the "easiest" way seems to be Kraken, which probably isn't that well known even among BTC users; Bitstamp has been sold out). Also, according to the Ripple wiki, base fees can be changed by consensus, and the reserve requirement is also mutable, as you pointed out.
DeleteRipple transaction fees have a long way to go before they become more expensive than credit cards or bank transfers. So that alone seems to give XRP room to appreciate quite a bit. And the fee and RR can always be decreased in terms of XRP.
One might say that XRP only derives value from its use to satisfy RR and pay transaction fees, and that if these are reduced XRP will correspondingly lose value. But can't XRP itself to catch on as a vehicle currency for FX? At least according to the self-promo hype (https://ripple.com/distributed-fx/), there's potential for Ripple to be used for all sorts of things. Won't gateways need increasing amounts of XRP on hand to provide these services, bidding up the price of XRP (but not necessarily increasing the costs of transactions, which can be lowered by consensus)? And there's always the potential for direct settlement of transactions in XRP. If this practice catches on, won't that lead to a snowballing of moneyness (and value, since the amt of XRP is capped)?
Ok, I read this (https://ripple.com/wiki/Payments), so I'm guessing that you believe that IOUs, not XRP, will be used to settle most transactions. But it seems to me that reliable, large-scale gateways will take a relatively long time to build up enough trust to issue IOUs as readily acceptable and liquid as XRP. Why wouldn't settlement in XRP take off first?
DeleteAnother thought: according to the wiki, XRP is the only currency in the system w/o counterparty risk. This makes it a kind of outside money, right? Historically, settlement in outside money was inconvenient b/c gold coins are heavy to lug around. But virtual outside money doesn't suffer from this physical limitation. So what advantage would settlement in IOUs have over XRP settlement? The IOU underlying asset (e.g. dollars) might be stable, but the reputation of the issuer wouldn't be (at least at first).
"so I'm guessing that you believe that IOUs, not XRP, will be used to settle most transactions."
DeleteYes, XRP are a sideshow. Ripple is interesting because it allows IOUs to be just as transferable as bitcoin.
JP,
ReplyDeletedon't forget that if monetary demand for gold vanishes, not only will its price decrease but also liquidity. That might be an even more severe consequence. Even though gold lost about a third of the price in the last 2 years for example, its liquidity is about the same.
Furthermore, Bitcoin must have non-monetary demand (it is the only logical conclusion), even though it's not readily apparent what it is and it causes confusion among economists.
"Furthermore, Bitcoin must have non-monetary demand (it is the only logical conclusion), even though it's not readily apparent what it is and it causes confusion among economists."
DeleteI'd be careful with that line of reasoning. That's how the 1999 tech stock mania was justified. Investors said: "we don't know why these things are worth $1000, but they must have some fundamental value, so we'll buy." It is possible for an asset to have a positive price but no non-monetary/fundamental value. Whether that is a stable situation or not is a tricky question. But I think it might explain cryptocoin volatility.
My argument is more praxeological, while yours is more empirical. As Bitcoin is not a financial instrument (concluded already by several lawyers and economists independently), it must be a good itself (commodity). I think that some economists confuse non-monetary utility with a utility that does not have money as a necessary condition. Which is silly, because then cash registers wouldn't have non-monetary utility either.
Delete"I'll admit straight up that the speculative motive is why I'm still holding my litecoins, the educational motive having receded into the background some time ago. After all, if these little rockets can rise from $0.05 to $50, why not to $500, or $5000? All that's needed is a greater fool."
ReplyDeleteMy goodness, are you in trouble.
Bail, man! Bail now!
:)
You wanna buy them?
Delete:)
There is another promising coin, called Zetacoin. There is a community of people behind it who are really trying to bring it into day-to-day use.
ReplyDelete-Xavier
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ReplyDelete