Bitcoin - Part 2

[Eddie Dane]

From "CIty AM"

You hear the dreaded words: “this time it’s different”.

During every asset bubble, you will find scores of professionals telling you that it isn’t a bubble; this time, it’s a real and important forward step in technology.

This is very confused. The fact that there’s a genuine step forward doesn’t mean it can’t be a bubble.
There was a railroad bubble back in the 1870s in which thousands of small investors were wiped out. That didn’t mean that the railroad wasn’t the future of transport. And the dotcom bubble of the 1990s didn’t mean that the internet had no future.​

I forget her name, but there was a South American economist who -after the railroad bubble burst- proposed that these bubbles pay for the infrastructure and technological development that comes to fruition later.

This rings true. It happened with railroads, cars, the internet, and possibly now with blockchain.

The promises of the dotcom hype are now coming true, twenty years later Amazon is actually the juggernaut that was predicted to materialise.

 

[Thabiguy]

From "CIty AM"

You hear the dreaded words: “this time it’s different”.

During every asset bubble, you will find scores of professionals telling you that it isn’t a bubble; this time, it’s a real and important forward step in technology.

This is very confused. The fact that there’s a genuine step forward doesn’t mean it can’t be a bubble.
There was a railroad bubble back in the 1870s in which thousands of small investors were wiped out. That didn’t mean that the railroad wasn’t the future of transport. And the dotcom bubble of the 1990s didn’t mean that the internet had no future.​

Since you wrote this as a response to me, I kinda feel like I may be expected to react to it in some way... but I can't really seem to link the highlighted quote to something particular I've written. If you were making a point and expect me to say something about it, my apologies for not understanding. If you just wanted to post this quote and don't need anything from me, no problem; it is an interesting quote.

 

[psionl0]

The definition of a bubble is whether current investors in the affected asset stand to suffer irretrievable loss of a significant part of their investment, not whether the brand will survive. I think people who have bought Bitcoin at say $15,000 are at risk of suffering such loss. I would be surprised if they come out unscathed.

What proof do you have that "this time it is different" and those who buy at the current price peak will be the first people ever who don't recover if they hold on to their bitcoins?

 

[Craig B]

Since you wrote this as a response to me, I kinda feel like I may be expected to react to it in some way... but I can't really seem to link the highlighted quote to something particular I've written. If you were making a point and expect me to say something about it, my apologies for not understanding. If you just wanted to post this quote and don't need anything from me, no problem; it is an interesting quote.

I simply thought your post was interesting, and hoped that my quote from City AM would be enlightening. I don't need you to respond unless you feel moved to do so.

 

[Thabiguy]

I simply thought your post was interesting, and hoped that my quote from City AM would be enlightening. I don't need you to respond unless you feel moved to do so.

It's all fine. I just genuinely couldn't tell whether you were expecting a response from me or not. I can't currently think of anything I might add to your quote from City AM, so I'll just see what others will say.

 

[Craig B]

What proof do you have that "this time it is different" and those who buy at the current price peak will be the first people ever who don't recover if they hold on to their bitcoins?

Not sure what you mean. Although the Dutch tulip industry is still with us, the people who paid hundreds of guilders for a bulb back in 1637 effectively lost the lot. By 1639 tulip bulbs could be bought from garden supply shops for a few stuivers apiece.

Another example. There was a huge real estate price boom in Florida in 1925-26. People who bought at the peak and held on, saw the nominal dollar value of their investment (not the real value) back to their purchase level around forty years later. But that isn't a good way of stashing money away for forty years, and although Florida is still there, and real estate is still bought there, these investors suffered a large irretrievable loss. The bubble burst.

 

[Thabiguy]

What proof do you have that "this time it is different" and those who buy at the current price peak will be the first people ever who don't recover if they hold on to their bitcoins?

I certainly don't think they will be the first people ever to lose even while intending to hold on to their assets. After the last crash, it took three years for the price to bounce back. After the next crash, it may be what, five years? Seven years? We don't know, do we?

Humans do not live forever. Some people will simply die while holding on to their bitcoin, never seeing any return in their life whatsoever. Some will see their bitcoins stolen or lost to exchange crashes, digital theft, hardware disasters. Some people will get into financial troubles for unrelated reasons (healthcare expenses, housing problems, family issues, whatever) and will be forced to liquidate their stock and lose money - or, if they refuse to sell, be even worse off, as they will effectively be short all that money at the time they need it the most.

The simple fact is that the longer someone has to hold on to an asset to even break even, the more they expose themselves to all those risks - and of course, the worse they are simply as a consequence of having to live without their tied up money. If the next decline lasts long enough, then even though the price may technically bounce back up, hardly anyone will recover their losses. Because no matter how much they wish to, people cannot hold on to their assets indefinitely, and due to the finite nature of human lifespan, the utility of postponed monetary gains inevitably declines over time.

 

[psionl0]

bitcoins

Dutch tulip industry

You still can't address the bitcoin price history directly.

 

[psionl0]

I certainly don't think they will be the first people ever to lose even while intending to hold on to their assets. After the last crash, it took three years for the price to bounce back. After the next crash, it may be what, five years? Seven years? We don't know, do we?

Of course we don't know. What we do know is that 3 years is the longest that anybody ever had to wait to see the price recover from a crash and that they all went on to make spectacular gains since. 3 years is hardly a life time.

Of course if you are going to gamble on bitcoin with money you can't afford to lose or are unable to wait a few years to see if the price will rebound then .....

Incidentally it took 5 years for the Dow Jones index to get back to the peak of 2007 after the 2008 crash. http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

 

[Craig B]

You still can't address the bitcoin price history directly.

I haven't addressed the price history of any bubble or probable bubble directly, because I have observed in opposition to your general thesis about Bitcoin that

That is a feature if all bubbles. Every prediction that they will pop is wrong until the one that is right.

I am now very surprised at your protectiveness of this asset inflation against even neutral historical comments. Is this a question of some ideological standpoint that you are defending as a matter of principle against scoffers and heretics? As The Washington Post has noted.

That ... has become a Ponzi scheme for redistributing wealth from one libertarian to another. Actually, I would like to amend that a little bit: Bitcoin has now graduated to being a Ponzi scheme for redistributing wealth from one person to another.

When it started out, bitcoin had two major constituencies: techies who were blown away by its sheer technical accomplishment, and End-The-Fed types who were convinced it would replace the dollar. Now, it entices these libertarians who, for the most part, have been trading it among themselves, with early investors cashing out some of their winnings as new investors come in.​

Are you defending it because of some ideology of this, or some other, type?

 

[Thabiguy]

Of course we don't know. What we do know is that 3 years is the longest that anybody ever had to wait to see the price recover from a crash and that they all went on to make spectacular gains since. 3 years is hardly a life time.

Almost every year of my life, I have been stronger than the year before. If there was a temporary setback, every time I later recovered and became stronger than ever before.

By applying the logic of your argument, this proves that I will keep getting stronger forever. With even greater confidence, because I have been around quite a bit longer than bitcoin, and this pattern has been reliable all this time.

 

[psionl0]

Almost every year of my life, I have been stronger than the year before. If there was a temporary setback, every time I later recovered and became stronger than ever before.

By applying the logic of your argument, this proves that I will keep getting stronger forever. With even greater confidence, because I have been around quite a bit longer than bitcoin, and this pattern has been reliable all this time.

That is not a valid analogy. You know that your physiological makeup is the same as that of all human beings in which at some point in you life, you will reach a peak physically and mentally then go into a decline that will continue until you are dead (barring unforeseen tragedies).

Bitcoin is like nothing that has been before. There is no way to tell if or when a saturation level might be reached where anybody who might be interested in bitcoin has had all they want to do with it. New players could enter and leave this system indefinitely. Some stocks last forever and some have a very short life. We have no way to tell where in that spectrum bitcoin lies.

Another important factor is that the underlying blockchain technology is increasingly being seen as a legitimate way to eliminate unreliable central registries. Applications range from contracts to voting and there are many applications that haven't been imagined yet.

As long as the blockchain technology becomes increasingly legitimate, cryptocurrencies are likely to gain mainstream acceptance. It may not be bitcoin that becomes a universal currency but as a store of value, this commodity/currency/whatever could have a place for the foreseeable future.

 

[Thabiguy]

There is no way to tell if or when a saturation level might be reached where anybody who might be interested in bitcoin has had all they want to do with it. New players could enter and leave this system indefinitely. Some stocks last forever and some have a very short life. We have no way to tell where in that spectrum bitcoin lies.

Yes, I agree with this.

What I'm saying is that the argument that the speculators cannot lose their money if they buy now, because every time there had been a dip in the past, the asset has recovered later, is fallacious. - That premise holds true for any asset whatsoever that is at its historical high when the statement is made, but obviously, many examples show that the conclusion doesn't necessarily follow.

Basically, any argument that claims to be able to make predictions about future price developments based on price history alone (of bitcoin or any other asset) is flawed. That includes even claims as mild as that the current buyers will always be able to recover their losses. No, they may not, even if the asset itself eventually recovers at some later time.

One could make an argument for predicting future price development based on the details of the asset itself. That I have no problem with. The argument could still be flawed or sound, convincing or not, but at least it wouldn't automatically be a fallacy.

 

[psionl0]

What I'm saying is that the argument that the speculators cannot lose their money if they buy now, because every time there had been a dip in the past, the asset has recovered later, is fallacious.

I am not making that argument but many people have been consistently making the opposite argument ever since the first pizza was paid for with bitcoin.

 

[Thabiguy]

I am not making that argument but many people have been consistently making the opposite argument ever since the first pizza was paid for with bitcoin.

I'm not even sure what is the opposite argument - that the buyer must lose money? Obviously that would be just as fallacious.

There are some interesting things that can be proven, however. For example, that the average amount of money that the people trading bitcoin on exchanges have made is negative.

 

[portlandatheist]

I forget her name, but there was a South American economist who -after the railroad bubble burst- proposed that these bubbles pay for the infrastructure and technological development that comes to fruition later.

This rings true. It happened with railroads, cars, the internet, and possibly now with blockchain.

The promises of the dotcom hype are now coming true, twenty years later Amazon is actually the juggernaut that was predicted to materialise.

This reminds me a bit of the hype cycle theory:
https://en.wikipedia.org/wiki/Hype_cycle
There's a new technology and much hype and exuberance and then hype eventually peaks
People become impatient and disillusioned as the reality doesn't meet expectations, then:
Eventually the technology matures and starts to actually deliver after the hype crash

 

[Craig B]

This reminds me a bit of the hype cycle theory:
https://en.wikipedia.org/wiki/Hype_cycle
There's a new technology and much hype and exuberance and then hype eventually peaks
People become impatient and disillusioned as the reality doesn't meet expectations, then:
Eventually the technology matures and starts to actually deliver after the hype crash

That is very apt. As I have said, in many cases the objects of speculation survive the bubble and crash, but many investments are lost anyway. The South Sea Bubble represented the introduction of joint stock companies, which are still with us. For that matter the South Sea Company itself survived (modestly) until 1853. Railways are also an excellent example, following the Railway Mania^WP of the 1840s.

 

[psionl0]

That is very apt. As I have said, in many cases the objects of speculation survive the bubble and crash, but many investments are lost anyway. The South Sea Bubble represented the introduction of joint stock companies, which are still with us. For that matter the South Sea Company itself survived (modestly) until 1853. Railways are also an excellent example, following the Railway Mania^WP of the 1840s.

None of that proves that this peak represents the highest price that bitcoin will ever get up to. Nor the next peak. Nor the one after that nor the one after the one after that .......

 

[p0lka]

I don't think anyone is talking about proving anything, to be fair, so proving stuff in this context isn't really relevant?

 

[psionl0]

I don't think anyone is talking about proving anything, to be fair, so proving stuff in this context isn't really relevant?

So why mention these irrelevant examples if they don't prove anything?

The examples given are all flash in the pan investments that peaked once and never again. Bitcoin has had more peaks than a mountain range - each one higher than the preceding one.