Why bit coin is doomed Tyler destroys the idea

How and why Bitcoin will plummet in price
by Tyler Cowen on December 30, 2013 at 7:49 am in Economics | Permalink
My post from yesterday was perhaps not specific enough, so let me outline one possible scenario in which the value of Bitcoin (and other cryptocurrencies) would fall apart. For purposes of argument, let’s say that a year from now Bitcoin is priced at $500. Then you want some Bitcoin, let’s say to buy some drugs. And you find someone willing to sell you Bitcoin for about $500.
But then the QuitCoin company comes along, with its algorithm, offering to sell you QuitCoin for $400. Will you ever accept such an offer? Well, QuitCoin is “cheaper,” but of course it may buy you less on the other side of the transaction as well. The QuitCoin merchants realize this, and so they have built deflationary pressures into the algorithm, so you expect QuitCoin to rise in value over time, enough to make you want to hold it. So you buy some newly minted QuitCoin for $400, and its price springs up pretty quickly, at which point you buy the drugs with it. (Note that the cryptocurrency creators will, for reasons of profit maximization, exempt themselves from upfront mining costs and thus reap initial seigniorage, which will be some fraction of the total new value they create, and make a market by sharing some of that seigniorage with early adopters.)
Let’s say it costs the QuitCoin company $50 in per unit marketing costs for each arbitrage of this nature. (Alternatively you can think of that sum as representing the natural monopoly reserve currency advantage of Bitcoin.) In that case both the company and the buyers of QuitCoin are better off at the initial transfer price of $400 and people will prefer that new medium. Over time the price of Bitcoin will have to fall to about $450 in response to competition.

But of course the story doesn’t end there. Along comes SpitCoin, offering to sell you some payment media for $300. Rat-FacedGitCoin offers you a deal for $200. ZitCoin is cheaper yet. And so on.
Once the market becomes contestable, it seems the price of the dominant cryptocurrency is set at about $50, or the marketing costs faced by its potential competitors. And so are the available rents on the supply-side exhausted.

There is thus a new theorem: the value of WitCoin should, in equilibrium, be equal to the marketing costs of its potential competitors.
This theorem will hold even if you are very optimistic about market demand and think that grannies will get in on it. In fact the larger the network of demanders, the lower the marginal marketing cost may be — a bit like cellphones — and that means even lower valuations for the dominant cryptocurrency.

(It is an interesting question what fixed, marginal, and average cost look like here. Arguably market participants will not accept any cryptocurrency which is not ultimately and credibly fixed in supply, so for a given cryptocurrency the marginal cost of marketing more at some point becomes infinite. Marginal cost of supply for the market as a whole is perhaps the (mostly) fixed cost of setting up a new cryptocurrency-generating firm, which issues blocks of cryptocurrency, and that we can think of as roughly constant as the total supply of cryptocurrency expands through further entry. In any case this issue deserves further consideration.)

Note that the more “optimistic” you are about Bitcoin, presumably you should also be more optimistic about its future competitors too. Which means the theorem will kick in and you should be a bear on Bitcoin price. Arguably it’s the bears on the general workability of cryptocurrencies who should be bullish on Bitcoin price because a) we know Bitcoin already exists, and b) we would have to consider that existence an unexpected and unreplicable outlier of some sort. Yet the usual demon of mood affiliation denies us such a consistency of reasoning, and the cryptocurrency bulls are often also bulls on Bitcoin price, as too many of us prefer a consistency of mood!
In theory
Now, theoretically, you might believe that the current price of Bitcoin already reflects exactly those marketing costs of potential competitors and thus the current equilibrium is stable or semi-stable. Maybe so, but I doubt that. The current value of outstanding Bitcoin is about $20 billion or so, and it doesn’t seem it cost nearly that much to launch the idea. And now that we know cryptocurrencies can in some way “work,” it seems marketing a competitor might be easier yet. (You will note that by its nature, there are some Bitcoin imperfections permanently built into the system, imperfections which a competitor could improve upon. Furthermore the longer Bitcoin stays in the public eye, the more likely that an established institution will label its new and improved product LegitCoin and give it a big boost.)
You can think of that $20 billion — or perhaps just some chunk of that? — as a very rough measure of the prize to be won if you can come up with a successful Bitcoin competitor. Even a fraction of that sum will spur some real effort.

In short, we are still in a situation where supply-side arbitrage has not worked its way through the value of Bitcoin. And that is one reason — among others — why I expect the value of Bitcoin to fall — a lot.
I thank Brad DeLong for an email query and analysis which sparked this blog post.

Addendum: Maybe I’ll write another post on the possible expected deflationary bias in any cryptocurrency, given that expected price changes usually get compressed into the present and that an overall expected rate of return equality must hold. And the question of how much an initial issuer can exempt itself from mining costs as a form of reaping upfront seigniorage. and the profit-maximizing way of sharing these gains with early adopters. Those are two hanging issues with respect to the analysis here, in addition to the matter of cost structure discussed in the parentheses above. And now go reread Kareken and Wallace (1981). “=/∞” I think one has to say here.
- See more at: http://marginalrevolution.com/margi...ow-and-why-bitcoin-will-plummet-in-price.html

 

How to short bitcoin


soaring could be that figuring out how to profit from its fall is tough.

FORTUNE -- Can you bet on the likely eventual bitcoin crash?

You bet. But it's an expensive trade. And even if you're right, you won't walk away with much, if anything.

The traditional way you bet against something is to "short it." But in order to do a short sale you have to borrow a share of stock or bond or whatever you are looking to bet against. And borrowing bitcoins is nearly impossible. There is a company based in Hong Kong in testing phase that seems to offer bitcoin shorting, but I couldn't find out much about it.

What you can buy is a derivative contract that will rise in value when bitcoins fall in price. There are a number of places that sell options and futures on bitcoins.

One place -- ICBIT, a bitcoin exchange -- is run by a guy in Moscow.
MPEx, a stock exchange for companies with shares traded in bitcoins -- there are four of them -- also lists bitcoin options.

BitInstant, a Brooklyn-based payment processor, is planning on launching a bitcoin futures exchange early next year.

All of these places require that you open an account to start trading, and none of them take dollars. So you have to buy some bitcoins elsewhere, which in itself is no easy task, and transfer them to your ICBIT or MPEx account before you can get started.

MPEx charges 30 bitcoins to open an account, which at Wednesday's closing price was $33,000.

I heard good things about ICBIT, which offered accounts for free but charges a commission when you trade. But to see the prices of the contracts, you had to get your account up and running and deposit a minimum of 0.1 bitcoins. (You can buy bitcoins in fractions.)

I decided to check out Coinbr, a brokerage firm that allows you to trade options on MPEx without opening an account there. You still have to deposit 0.1 bitcoin in a Coinbr account to get started. But MPEx allows anyone to see the prices of its contracts, so you know what you are getting into before you start.

Here we go: If you are betting against bitcoins, what you want to do is buy a put option, which is a derivative contract that allows you to sell something at a set price. If the actual price of the thing falls below the set price, or strike price, you make money.

You could also sell a call option, the right to buy at a set price, but that is riskier and requires collateral. So I stuck to looking at put contracts.

It cost 0.045 of a bitcoin, or $49.50, to buy a put contract to sell 1/10 of a bitcoin at a strike price of $1,100 per bitcoin. The contract expires at the end of the month and will expire worthless if the price of a bitcoin is above $1100 at that point. But the value of the contract will go up before then as long as the value of a bitcoin drops.

Let's supposed bitcoins were to fall to $500 by the end of December, a 55% plunge in less than a month.

If that were to happen, the price of my bitcoin put contract would jump.

Here's the problem: To book my profit, I ultimately want dollars.

With normal currency options you can choose to collect in whatever currency you are using to bet against another currency. So if you are betting the price of a euro will fall against a dollar, you can collect in dollars when the contract settles, thereby offsetting the fact that the euro just dropped in value.

You can't currently do that with bitcoins. All of the bitcoin options and futures contracts are settled in bitcoins. This is a very bad deal. Because even if I end up with a bitcoin windfall, they will be worth a lot less when I convert them back into dollars.

Here's the math:

To open an account, it has to be funded with 0.1 bitcoin, which will cost $110 as of Thursday morning.

The put option costs 0.045 bitcoins, leaving 0.055 bitcoins still in the account.
After our imagined 55% plunge, the value of the put contract has soared to 0.12 bitcoins.

Combine that with what is still in the account, and it's now 0.175 bitcoins.
At a bitcoin price of $500, that's a mere $87.50.

That means even if you are right, and you call the top of the bitcoin bubble, correctly predicting a whopping 55% plunge in the value of the currency and do all of this, you would lose $22.50.

You can get around this by upping your bet against bitcoins. If instead you buy two contracts, for $99, and once again the price plunges 55%, you will end up making a whopping $15. And I haven't factored in fees, which would probably run you about $4 for the whole transaction, including the dollar-to-bitcoin round trip, taking your profit down to $11.

On top of all that, this isn't like trading on the New York Stock Exchange. Midday Wednesday, MPEx appeared to shut down, and the prices of the contracts disappeared. I was told this happens a lot. As of early Thursday, the exchange still wasn't listing prices. What's more, after running through my math of the trade with a Coinbr broker in a chat room, with the conclusion that basically the trade doesn't make sense, he offered to sell me contracts at 0.033 bitcoins, so I could buy three contracts instead of two with my 0.1 bitcoins. That led me to question just how real the prices MPEx was quoting were.

All of this may explain one reason why the price of bitcoins until recently has been heading straight up. Why bother betting against it?

=============

 

Didn't they say something like that 400 years ago about tulip bulbs?

Aren't bitcoins equally stupid... backed only by the "greater fool" to pay a higher price?

 

http://en.wikipedia.org/wiki/Straw_man

 

Yes correct

al

 

Wrong!

Al

 

Bitcoin is just a step in the evolution of exchange between individuals. If you presented credit cards during a barter economy you will get the same puzzled faces and skepticism.

It is not going away. Whether Bitcoin will survive is one thing, crypto currency is here to stay.

It will take a certain form, one form that would be regulated. Until then Bitcoin will thrive and be used.

 

I have an issue with this idea of a deflationary algorithm. It implies is that the prices of goods is going to decrease relative to the new cryptocurrency. In other words, the price of the crytpocurrency is going to increase relative to the goods. Keeping only the algorithm in mind and not involving other variables, this can only occur when the quantity of the crytpocurrency is reduced. This also implies that the pre-exiting cryptocurrency is taken out of digital circulation.

Being in circulation means there are holders of the currency in its entirety. How is it going to be decided which holders lose their currency for the quantity to decrease? If all lose their currency equally then the decrease in the quantity is offset by the increase in value, neutralizing the change in price and making the currency non-deflationary. If only a select lose their value then there has to be a mechanism to decide which ones. Are users going to even adopt a cryptocurrency with such power to take away their stored wealth? Forget about using it to trade and make profit, a large number of holders are there to protect their assets from inflationary pressures in the real world. Deflationary cryptocurrency isn't even providing that. In the real world usually debt is issued to bring in the floating currency as cash is exchanged for the debt with interest. What's being offered here?

Somehow it seems the idea in the article has not been clearly thought out, as far as the deflationary part of the currency is concerned. Unless some explanation is in the offing, this whole line of reasoning seems suspect. Why bother with the other analysis if the first paragraph can't hold some scrutiny.

Gringo

 

Absolutely, the Elite (Illuminati) will make sure of that.

They want a cashless society, so they can store all your money in digital form in microchip implants and make you a slave for life.

 

http://theeconomiccollapseblog.com/...r-than-most-people-would-ever-dare-to-imagine