The Bitcoin Bubble

My friend Jerry Brito is one of the best-connected and most insightful observers of the Internet I know, so when he starts talking up an Internet trend, I pay attention. But after reading his case for Bitcoin, a new digital currency, I remain a skeptic.

The article is worth reading in full, but here’s an important part of his case for Bitcoin:

The web has also seen all-purpose digital currencies, from defunct dot-com bubble start-ups Flooz and Beenz, to the slightly more successful e-gold. Unlike cash, however, digital currencies to date have had a third party intermediary monitoring transactions. That’s because digital cash is different from physical cash in one very important way: If I hand you a 100 euro bill, I no longer have it. You can’t be as sure of that, however, when the cash is just 1’s and 0’s. So it’s been necessary to have a trusted intermediary deduct the amount from the payer’s account, and add it to the payee’s.

Bitcoin is the first online currency to solve the so-called “double spending” problem without resorting to a third-party intermediary. The key is distributing the database of transactions across a peer-to-peer network. This allows a record to be kept of all transfers, so the same cash can’t be spent twice–because it’s distributed (a lot like BitTorrent), there’s no central authority. This makes digital Bitcoins like cash dollars or euros: Hand them over directly to a payee, and you don’t have them anymore, all without the help of a third party.

It’s an intriguing concept, but the fundamental question about any currency is whether its value will be stable over time. I’ll discuss why this seems dubious in a series of two posts. Today I’ll focus on the demand side; tomorrow I’ll consider claims that the supply of Bitcoins will be more stable than traditional currencies.

The fundamental demand-side problem is that it’s not clear why anyone would want Bitcoins—which are, after all, just entries in a database—in the first place. The obvious retort is that the same objection could be made of any fiat money system. The value of a fiat currency like the dollar is a matter of social convention: it’s valuable to me because other people will accept it as payment for stuff I want to buy. Theoretically, if you persuaded everyone that dollars were worthless, this would become a self-fulfilling prophesy. Conversely (the argument goes) all we have to do to make Bitcoins a “real” currency is to persuade some people that it’s valuable. And apparently, the creators of Bitoin have already succeeded in this task.

But dollars have at least two advantages over Bitcoins. The obvious difference is that the United States government requires taxes to be paid in US dollars. Since federal taxes represent a significant fraction of most peoples’ income, they will continue to demand dollars even if they prefer another currency for day-to-day transactions.

The more subtle difference has to do with network effects and transaction costs. Dollars underpin the American economy in essentially the same way that the TCP/IP protocol underpins the Internet. The original choice of a medium of exchange was arbitrary, but people needed to pick something and once the dollar was chosen it acquired tremendous momentum. Convincing Americans to switch to a currency other than the dollar is roughly as futile as convincing the Internet to switch to a protocol other than TCP/IP, and for the same reasons.

First, people have made tremendous investment—emotional, financial, and technological—in dollars. Millions of vending machines and cash registers are designed to work with dollar-denominated coins and bills. People expect to see dollar-denominated prices in stores, and they have an intuitive sense for what’s a reasonable dollar-denominated price for a gallon of gas or a dozen eggs. They have dollar-denominated bank accounts, get dollar-denominated paychecks, and expect to retire on dollar-denominated pensions. It’s really hard to persuade Americans to use something else.

Second, currencies are subject to massive network effects. It’s much more convenient to carry a currency that 99.9 percent of people accept than the currency that 0.1 percent will take. People who hold obscure currencies have to waste time and money converting it to a more popular currency before they can perform everyday transactions. And people who conduct business in multiple currencies not only have to perform a lot of extra math, they also have to worry about exchange rate risk—the risk that a change in exchange rate will suddenly make a previously profitable business model suddenly unprofitable.

Together these factors make the demand for dollars “sticky.” It’s hard to see any analogous stickiness in the demand for Bitcoins. As far as I can tell, there are few, if any, markets where Bitcoin transactions are more convenient than traditional fiat currency transactions. I’ve read some claims that Bitcoin is popular in the drug trade and other illicit markets, where the lack of intermediaries has obvious advantages. It’s hard to judge whether these claims are true, or whether such markets are substantial enough to support a new global currency, but I have my doubts.

Illicit uses aside, the demand for Bitcoins seems to be driven by a combination of speculation and ideological enthusiasm. And we have a word for an asset whose value is driven by irrational exuberance: a bubble. I predict this one will pop once the novelty wears off.

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57 Responses to The Bitcoin Bubble

  1. roger says:

    Yeah it’ll either pop, or…become the next best thing ever with 1000% gain for early investors. Any risk takers out there? 🙂

    Eventually it should stabilize, though…no really. It should.


  2. David says:

    Wait, where is your Bitcoin address for donations?

  3. Terry Smith says:

    No bubble. While it will not take over for the dollar, it is proof of concept that it can be done.

    Meanwhile, if anyone wants to offload some of those worthless BTC, I’ll gladly take them off your hands right here.


  4. cossolus says:

    Bitcoin is a fad, but only because anyone can clone the system and making a similar digital currency. So how many digital currencies like Bitcoin will there be in 5 years? 10 years? 20 years? That’s what makes it different from a fiat currency like the US dollar – nobody can legally clone it with another system that has identical attributes.

    That’s not to say you can’t make money trading bitcoin.

  5. Dude says:

    We forget the dollar wasn’t always the world’s reserve currency — it took over from the British pound, which took over from ?, and so on back through history, other examples including the Roman denarius.

    Which is to say that bitcoins might not take over the world, if they can be made relatively immune to debasement, they might provide the model for the next reserve currency.

  6. bomatson says:

    I agree that the timing is not right for something like BitCoin, there are lots more problems to solve that are more top-of-mind to consumers.

    At the same time, It’s inevitable that a more convenient digital currency will come into play that outweighs a lot of the network effect issues you’ve brought up, Timothy. When it’s overly-simple for me to convert to another currency that is supported on all devices (ie mobile, and supported by local businesses, similar to how Visa was introduced), then the switching costs will essentially be zero.

  7. Cubtastic says:

    It’s a very cute classroom project – but to really be accepted into the real world, will mean the government will have it’s hands on the flow of such bitcoin. Taxes, revenue and the likes just as with the dollar will come into play. So besides this being anything more than a social experiment – its about as smart as buying POGS if people remember those things..

  8. I agree completely with your retorts re: currency. I’m not sure “bubble” is an accurate depiction though because speculation and ideological enthusiasm are not inherently irrational.

  9. Eric says:

    I definitely understand the skepticism, but the concept doesn’t seem that strange. While the dollar is definitely entrenched, the actual act of purchasing and passing money around has become vastly more electronic. Credit cards, loans, trading, etc. all are almost entirely digital endeavors. The futures market is a good example of how that trading can become abused because it isn’t backed by a true market. It is this arena of transactions that bitcoin is most intriguing.

  10. Todd Bethell says:

    • Did you read only one article before you spouted off on Bitcoin? I strongly suggest you read “The Starfish and the Spider”: The Unstoppable Power of Leaderless Organizations. (Amazon’s “look inside” will tell you enough).
    • This statement is just stupid “the fundamental question about any currency is whether its value will be stable over time”. In what school of economic thought is that the fundamental question? Can you name “any” currency that has been “stable over time”? Leaving out the window of time being referred to is an armatures rhetorical tool.
    • There will be Bitcoin market swings, to be sure, but since when does ‘speculation’ or ‘exuberance’ delegitimize a thing?
    • You seem to be purposely overlooking Bitcoin’s simple technological advantages not to mention little things like PRIVACY and LIBERTY!
    • It is offensive to imply that the only people interested in it are criminals. Given that Bitcoin has a world wide market cap of only $6M with just a few hundred thousand changing hands daily what idiot would believe this is for illicit activity.
    • What ‘ideological’ motive might there be for linking “speculation and ideological enthusiasm” to “irrational”? Perhaps then you believe these other ‘irrational’ ‘novelties’ that will soon ‘wear off’: environmentalism, Tea Party, socialism, Christianity, private property, human rights, animal rights, democracy… etc.
    • E-Gold was not a novelty, it was intimidated out of business.
    • The ‘network effect’ is exactly what Bitcoin is getting. Unlike you, I am willing to admit that the very nature of Bitcoin will make this difficult for academics to quantify and study.
    • The dollar was not “chosen” to become the #1 medium of exchange (are you some kind of conspiracy theorist?). Bitcoin does not strive for or demand anything. Its utility in the global marketplace (not just American) will dictate its adoption.
    • You demonstrate that you have never tried Bitcoin when you say “As far as I can tell, there are few, if any, markets where Bitcoin transactions are more convenient than traditional fiat currency transactions.”

  11. Daniel says:

    this article is very miserable: the author already assumes bitCoins fail and tries to discredit it miserably. There are no fact here.

    “hard to judge whether these claims are true, or whether such markets are substantial enough to support a new global currency, but I have my doubts.”
    — well, can you share those “doubts” so we know what you talking about?

    bitCoins are amazing! more and more businesses uses so the network grows both vertically and horizontally. as of today, at least in the us, you can almost live off of bitcoins (you cant pay your utilities though). there are two amazing facts that makes this successful: 1) no middleman: you dont have to pay fees for transactions while fraud is kept almost at zero rate. 2) those transactions are tax free since everything stays within bitcoin system: you bought water with bitcoin and you sold it with bitcoins, there is nothing to report to the irs.

    now, lets remain real here. question is: is this a sustainable currency. nope! its very obvious that bitcoins give too much of a freedom to an average Joe. I can bet all my bitcoins very soon Feds will take over the network and shut it down. It is indeed possible to deal drugs and just use bitcoin as a currency system, THEN exchange those bitcoins into real dollars, untraceable. for that reason Feds will be very eager shut it down very quickly.

  12. Phil says:

    While I agree with Daniel on almost everything, I do disagree on the point of the Feds being able to shut it down. Bitcoin is so decentralized and redundant that the network will still function. Any US websites may be affected, but bitcoin is not just US based. I honestly doubt the Feds will be able to shut it down.

  13. lzsaver says:

    It seems that Timothy just want to buy bitcoins cheaper. 😉

  14. lzsaver says:

    It seems that Timothy just wants to buy bitcoins cheaper. 😉

  15. Chad says:

    Daniel said:
    2) those transactions are tax free since everything stays within bitcoin system: you bought water with bitcoin and you sold it with bitcoins, there is nothing to report to the irs.

    I agree with Daniel except for this statement. You always owe taxes. Income is defined as the receipt of a good or service without a prior debt. I.e. you mow someone’s lawn and get paid, that’s income. If you receive a lunch from a friend, that’s income. Catch is: most people don’t bother and the law says you can ignore up to $600 of income. So, people don’t commonly get busted for not reporting these things. Same thing goes sale taxes, aka Use Tax. You always owe taxes on good bought. It’s just that unless it gets back to the state, it’s hard to get caught.

    Anyone who actually does serious amount of purchasing had better set aside money for taxes. If the IRS comes knocking, you will owe taxes and penalties for the value in US dollars.

  16. Steven Kane says:

    “As far as I can tell, there are few, if any, markets where Bitcoin transactions are more convenient than traditional fiat currency transactions. ”

    You clearly have not researched Bitcoin very well. I can tell you two markets where Bitcoin is far more convenient than traditional fiat currencies:

    1. Micropayments.

    All I have to do to receive micropayments from anywhere in the world with Bitcoin is post a public key from my wallet (e.g. on my blog), and the transaction fee is 0 (aside from the known inflation with Bitcoin). What traditional fiat based transaction system enables that?

    2. International remittances.

    Suppose I want to pay dozens, or even thousands of people from numerous different countries a small sum of money for some work or tasks they have completed. How would I ever do that with a fiat based system without performing a huge mess of fiat currency conversions (e.g. U.S. dollars to Euros, Pounds, Yuan etc.)? All I have to do with Bitcoin is load up on BTC, have my international contributors download the Bitcoin client, send me their public keys and receive the BTC into their wallets. Sure, they probably won’t be able to pay the rent with the BTC, but they can do other things. They can save it, buy novelty items, or pay a fee to convert it to their fiat currency of choice via a third party exchange. However, the bottom line is that *I* as the sender don’t care. All I have to do is get the Bitcoin which enables relatively trivial international remittances.

  17. blastomere says:

    it’s not clear why anyone would want Bitcoins—which are, after all, just entries in a database—in the first place.

    It’s not clear — to you. There are however a community of currency experts who understand why the concept here is fundamentally superior to anything that has been built before. There are basic differences between Bitcoin and previous digital currencies. The concept is far closer to precious metals or collectibles than it is to fiat money. It’s based on a secure scarcity that doesn’t depend on a trusted third party like a central bank or an online game or bank. It’s true that like any other new entrant Bitcoin must overcome network effects, but you (and alas even the supportive article you quoted) seriously missed the important story here.

  18. asdf says:

    author is wrong.

    bitcoin is awesome!


  19. observation about bubbles says:

    It seems the bubble is actually the value of authors blog posts, they also seem to be “driven by a combination of speculation and ideological enthusiasm”.

  20. Max says:

    Bitcoin’s competition isn’t the dollar or Euro, it’s Paypal. The main application is person to person payments. Person 1 converts his preferred money into bitcoin and sends the bitcoin to person 2, who converts bitcoin into his preferred money. Somebody who doesn’t want to speculate on the future value of bitcoins doesn’t need to hold them for any significant length of time.

  21. byron says:

    Author makes comments which are fundamentally false to anyone with a passing understanding of bitcoins.

  22. noagenda says:

    Bitcoin excels for micropayments. Have a look at which combines user generated content and micro-patronage for an example. Sites such as lmptfy would not accept US dollars for donations that is certain.

  23. Tour Guide says:

    And here, kids, we see the quintessential American. Timothy imagines that most people need to pay their taxes in US dollars. He imagines that the Internet is a US state. He is quite certain that for Bitcoins to succeed, only Americans need to be persuaded. In his mind, no one else is a factor because 300 million Americans simply must be a majority on this wee planet. In any case, the rest of the world just muddles along with obscure currencies, you see. Now, I know your elementary school teachers taught you basic multiplication when you were little and so it’s strange to hear it referred to as a lot of extra math, but math is hard for some folks. Yes, I know your parents engage in seamless multi-currency financial transactions all the time, and that credit and debit cards make this even more mind-numbingly trivial, but Timothy might not know about such things. No! Stop, Johnny, don’t do it! If you throw those rands, euros, wons, Canadian dollars, yauns, rials, or Hong Kong dollars into his habitat, you’ll confuse him. When Americans get upset, they attack. Let’s just move on to the next exhibit, okay Johnny?

  24. Bèr Kessels says:

    I pay my taxes in Euro’s. Before that in Guilders, aptly named Fl. from Florijnen, which not so long ago was the predecessor of the Guilder. Currencies change.

    But still my Paypal account contains quite a few dollars. I have some due-payments, in dollars, on googles adsense.

    Are google ads a bubble about to fail, because they are in Dollars and I pay my taxes in Euro’s? Dollars are very much a virtual currency in .eu. Yet still they hold quite a lot of value, if they are in a certain network.

    Now, a $1-bill pinned to my wall is worthless here. But $1 on my paypal acct or on the due-payment in Google adsense is still worth €0.60 (€0.59, 0.58… :))

    The author only proves one thing: Too often Americans forget to look beyong America.

  25. Vandroiy says:

    It’s high risk, there may be bubbles, but the article just randomly bets on BitCoin failing.

    So the USD sits on a natural monopoly, and BitCoin is better, but has to fight that. This means risk is high, but if critical mass is reached, BitCoin can become a massive giant.

    THAT’S WHAT HIGH RISK INVESTMENT IS ABOUT, DUH. Pure bubbles are made by people who target to exit at the right point in time. This is different, we have people who don’t plan to quit, but rather to wait for BitCoin to become large and spend their BTC then.

    Investors know there’s a high chance of absolute failure. But IF it works out, they are likely to get a 400% increase in value, so even a failure probability of 80% is acceptable!

    So stop being a crybaby and help taking the next step in currency evolution! Free, fast, reliable international trade! A dream of so many might come true.

  26. Jerry Brito says:

    “Jerry Brito is one of the best-connected and most insightful observers of the Internet I know[.]” If I ever write a book, I’m definitely getting you to give me a quote for the jacket!

  27. Jerry, you can probably do better but I’d be honored to blurb a Jerry Brito book.

  28. Good two posts, Tim, but I think this is the weaker argument. (Implicitly, the second post agrees, because it assumes the demand problem has been solved if collusion is to become worthwhile.)

    In my opinion, BitCoin faces the same battle as any nascent standard, notably a two-sided market (chicken-and-egg) that limits the acceleration of network effects. However, we know that solving this problem is possible, just look at Google, or more apropos, payment card networks. The Visa network, too, had to convince buyers and sellers, but it has succeeded. High compatibility with cash is important, but BitCoin has that, and a variety of other incentives are possible (ease of use, ideological support, adoption by a large third-party, etc.). Obviously this isn’t easy, but it’s not insurmountable. The main problem, it seems, is a lack of obvious profit-motivation, thus making the recommendations in Shapiro & Varian’s Information Rules less relevant.

  29. Alex says:

    There are already a tons of websites and services that accept bitcoin as their currency. See
    This bubble would not pop. Internet needs a fully anonymous currency. Bitcoin fulfills it.

  30. anthony says:

    There are currently some very smart, very influential people (in the US financial markets) betting on Bitcoin. I’ve known about Bitcoin since March, and mostly “sat it out” until now. The deciding factor for me was the article on about the potential for illicit use of Bitcoins. It’s clear that no government is going to get behind Bitcoin, and it’s encouraging that people on Wall Street *think* criminals will. I’m not advocating using Bitcoin to do things that governments consider to be illegal, but criminal enterprises underpin our financial system to a much greater degree than people think. Don’t believe me? See – that’s $420 Billion with a B, dollars cleared by a Mexican exchange house through Wachovia, and a mere $50 million penalty. Who knows how many Billions (or could it be Trillions?) of “illegal” dollars run through our financial system annually. Suffice it to say that even if Bitcoin never took off due to its natural course, it surely would once criminals get ahold of it. And rest assured, that _will_ happen. If knows about Bitcoin, so will everyone else, and soon.

  31. David says:

    anthony, I agree with you completely. The main reason Bitcoin will work is because of governments! If governments allowed people to trade in traditional money such as gold and silver easier, (think e-gold and Liberty Dollar) then I think Bitcoin would be much less attractive of a currency. More government crackdowns will only make Bitcoin’s popularity increase.

  32. andy says:

    Silkroad. Don’t be a moron. Of course there’s a market where anonymous currency trumps dollars. And there will be many more.

  33. Walter says:

    The author keeps going on about how wonderful and entrenched the dollar is…. sure, but what happens when the US dollar becomes a worthless piece of junk that nobody wants and sucks other major fiat currencies down the toilet with it? Sure, we can pay for things with pre 1964 coinage (92% silver) but how do you buy something from somebody in Tahiti or Bangledesh or Amazon? Mail in a few old dimes? I don’t think so.

  34. Roger Davies says:

    Hi Tim, a well presented argument but not one that is terribly logical. I really have trouble understanding why there are so many nay-sayers? You say: “it’s not clear why anyone would want Bitcoins” when the same can be said of physical cash. I have made several purchases with Bitcoins over these last couple of weeks, so I can tell you that other people recognise their value and they can be used to buy things. (BTW the Bitcoin trade page is WELL out of date. There are so many more exciting site appearing for all kinds of things from food, to gifts and eBay trading sites. But you never take the trouble to look or do any research into this? By your own argument, having someone else recognise the value of Bitcoin, and be prepared to supply me with goods and services is all that is needed.

    You then go on to talk about paying taxes? But in reality people who pays with CASH!? Surely any sane person pays by cheque, credit/debit card over the phone or by setting up a standing order with the bank.

    Well anyway, I could produce an entire blog refuting each misled point, but there are better things to do in this world :). Tell you what, the proof of the pudding is in the eating. (in the meantime I strongly encourage you to read many of the links in my post)

    Keep this comment, bookmark it. You have blogged your opinion, and I have blogged mine. Let us see who is right 🙂 (in the meantime check the spelling of ‘Bitoin’ in the sixth para).

  35. BitCoin Speculator says:

    I think the author would be better off educating himself about something before he writes about it and dismisses it. With illogical reasons at that. I found out about BitCoin not more than 30 hours ago yet I can thoroughly rebut these points.

    1. The issue about the US gov requiring that taxes be paid in USD is moot because, as you acknowledge in the following sentence, there can exist a scenario where people use BitCoin day-to-day and only convert to USD for taxes. In such a scenario the USD will be worthless because what will the govt buy with them when no merchant will accept it.

    2. I agree with you that the USD is indeed entrenched in American society and economy and at large the world economy. But convincing people to move from the US dollar will not at all be difficult. We have the US Federal Reserve helping us by debasing the currency. The US govt is fast following the ways of Zimbabwe with ridiculous hyperinflation. I should know, I was living in Zimbabwe at the time.

    3. Your second argument is premised on the first which I’ve rebutted above

    4. Even if we assume all your arguments are correct, they in no way prove that BitCoin is a “bubble” as you assert in your title. All your arguments show is that the market for BitCoins will be small. But seeing as the BitCoin economy is only worth US$6million, how exactly is this a “bubble”? Even for a niche market. Are you telling me that thats all the crazy anarchists can muster? A measly 6mil?

  36. Erik says:

    One significant flaw in the author’s reasoning: Bitcoin vs. the Dollar is not an either-or situation. It’s not as if people need to chose one OR the other. If that were the case, Bitcoin would never gain traction. However, people can use BOTH USD and Bitcoin, meaning both can exist simultaneously. For this reason, many people will have no problem putting a small amount of money into Bitcoin assets, and this in turn grows the network effects to encourage further investment.

    Bitcoin doesn’t need to convince anyone to “switch”… so arguing that the USD has many more current uses/benefits is a moot point. And of course, naturally when people see the price of eggs skyrocket when priced in dollars, they will seek alternatives – Bitcoin offers a compelling alternative.

  37. Bitcoin skeptical says:

    One thing to keep in mind about all these gadflies who have appeared criticizing the author’s piece: In the early days of Bitcoins, it was very very easy for people to “mine” bincoins. As a result, there are a lot of early adopters who have tens of thousands of bitcoins.

    These people have a very ulterior economic motive to belittle and attack anyone who doesn’t feel Bitcoins will become a thriving success.

    Another thing for people considering Bitcoins: Please Google “Liberty Dollar” to find out what happened to another alternative currency like Bitcoins.

  38. Zeb says:

    The liberty dollar was not totally distributed, but had a central administration which could be attacked by the FBI. The Bitcoin system is like each one of us having their own intelligent wallet, that communicates directly with other wallets to make sure everything is neatly and corretly handled in each money transfer. Governments can not even peek into these wallets without us approving this in advance.
    They can not shut down the network. They can not tax these money. They can not charge transfer fees or transfer taxes. The are totally left out, and so are all others except these involved in the actual payment.
    Absolutely brilliant.

  39. Chris says:

    Nice one Tim. A lot of people are making technological claims about bitcoin that the technology can’t deliver. They are not inherently more secure against most forms of fraud, are not any more useful for virtual transactions, and do not evade transaction costs and taxes. The bitcoin bubble is being driven by a few transient factors, partly confusion over what the technology actually does and does not do, but I think the primary force driving it up is ideological libertarians. They probably do derive a subjective value from using bitcoins, much as religious investors derive value from investing in stocks that don’t contradict their moral values (eg. gambling, liquor) even if those stocks are under-performing other stocks that violate the investor’s beliefs. Once the market of ideological libertarians is tapped-out, I think that’s when the bubble will pop. Is there some place I can put my money that brings me a profit when bitcoin collapses? I want to bet against it!

  40. Adam says:


    If you can’t figure out a way to bet on the value of bitcoins falling against the USD, perhaps you shouldn’t be speculating on the usefulness of an alternative currency.

  41. iamagenius says:

    BitCoins is a Ponzi scheme. When it will end, no one knows. It might be an external event, ala online poker, or an internal event when the principals abscond with all their money, correction, all YOUR money. Believe me, when they leave, they are not going to take it in BitCoins! They will take it in good old American USD. The USD will always be the world’s reserve currency.

    When will it end? A recent article pegged the return at 200,000% since inception. Is that enough? Not enough?

    Regardless, I may throw some money at it. To have a substantial amount in there would be courageous and foolish. You might make a lot of money. You’ll probably end up with goose eggs.

    I appreciate all the machismo and swagger of all you early adopters. So I can count on you not to whine to Uncle Sam to kiss your booboo when your balance disappears overnight?

  42. Lenni says:

    Typical circular argument: you shouldn’t value Bitcoins because people won’t value bitcoins because people won’t value bitcoins because.. you get the idea. I’m sorry Timothy, but your reasoning is dumb as f*ck on a very simple level. You’re right in that people may not value Bitcoins in the future, but that’s not an argument that they shouldn’t. Also, the switch between US dollars and Bitcoins is not equivalent to a switch between the TCP/IP protocol and another protocol, and my counter-argument will depend on the specifics behind your (purposefully?) vague argument: If you meant to say a switch between the TCP/IP protocol and another, equally useful protocol, well, you may be aware of the Federal Reserve printing US dollars pretty much at their own with – this is not possible with the Bitcoin, and with the US economy and government moving in the direction they do, this will will become more of a necessity than an advantage when inflation kicks in – in short, the two cases are not equivalent; If you meant to say a switch between the TCP/IP protocol and another, superior protocol, I’m not sure which protocol would be superior, but I do know that it’s possible to implement superior protocols locally with compatibility to the outside network if one so wishes, and there is thus nothing to stop a superior protocol from seeding and spreading as people find it more useful, in the same way that Bitcoins are exchangeable for Dollars – in short, you’re wrong about the difficulties of switching between protocols or between currencies.

  43. Praedor says:

    I am considering jumping into bitcoin mining, perhaps priming the pump with a small purchase, BUT…it is foolish to assume that because it is distributed, like bittorrent, so it cannot be shut down.

    Really? It is trivially easy to shut down torrents, irrespective of their being decentralized and distributed. Firewalls do it all the time. An ISP can easily choose (or be ordered to) shut down torrent(like) systems. I am currently at a job where it is impossible to run/operate such a system.

    I have also found it impossible under certain providers (at workplaces) to run/use tor. That too can be blocked (so no Silk Road access).

    China is itself doing a fairly “good” (evil) job of blocking access to all sorts of content/info/capability. AT&T or Cisco could very easily (in collusion with the US govt) kill off the bitcoin system anywhere – Cisco is not located only in the USA. Bitcoin can also be hacked, debasing the value – I’d bet there are coders/hackers at the NSA or at the beck-and-call of China that could crack the key system used and counterfeit bitcoins, even though it would be computationally “hard”.

    Finally, a finite pool of merely 21 million bitcoins limits the life/lifespan of bitcoins. They will become ever more expensive as time goes on, assuming no hits to the system by governments, so that only a fraction of a fraction of people can even look at them. Not even gold is so limited – gold is continually mined and the pool continually expands. Technically, gold is a finite resource but bitcoins are hardcoded to be. Sure, that is because it is actually a proof-of-concept system only but still, this limits its utility.

  44. Bitcoin skeptical says:

    I was proven right. The bitcoin went from $28.92 to $11.01 in the course of two days. The bubble has popped, and no amount of attacks and insults and technical discussions of how Bitcoins are different from Liberty Dollars (in essence, it’s the same problem) is going to change that.

  45. Reggie says:

    I agree with Erik’s comment and want to amplify what I see as the central argument — in order to be a viable medium of exchange, it isn’t necessary (or even remotely credible) that Bitcoin replace the USD or any other fiat currency. (How on earth could Tim even set that up as a straw man?)

    A thing derives value from being valued, and a commodity is tradeable by virtue of the existence of counterparties that are (a) happy to engage in mutually satisfying trade with each other, and (b) are able to discover each other and set up trades.

    Tim, would you really dispute that Bitcoin lacks any of these characteristics?

  46. dxtra says:

    Bitcoin skeptical,

    looks like the bubble is bubbling 20$, right?

  47. Snipergirl says:

    Basic problems with the arguments presented here:
    1) Unnecessarily emotive- “Americans are familiar with the USD so they won’t use bitcoins” and “Sellers won’t use bitcoin because they have to use more maths and not enough Americans use it”
    2) Only addresses America, Americans and the system there- most of the world’s money is in fact outside America.
    3) It’s circular reasoning – a point which has been raised earlier by others.
    4) It ignores that in fact sellers *are* offering it and buyers *are* buying in it already.

    If Bitcoins succeed or fail it’s for reasons other than the ones outline in this rather shallow article.

  48. Bitcoin skeptical says:


    The bitcoin, as I type this, is below 15 at More to the point, look at the chart of the value of a dot-com stock for 2001; it went down, then breifly went up, then went down to 0.

  49. lolbubble says:

    Its great to have a currency that goes +/-30% a day, it makes life that much more fun. Also hardcoded deflation isn’t a benefit, what this currency achieves is not much different than paying with gold coins. That was anonymous and it wasn’t a fiat money system, it also didn’t work well. Btw, there is a reason why payments are not anonymous and that is to fight crime, making it anonymous again is taking a step backwards.

  50. voice of reason says:


    Given the fact that bitcoins are relatively new, I think the instability is not surprising. When observing the average value over a longer period of time, however, I find it relatively stable. Of course it is not a technology to try if you do not have a kind of speculating mind set required to be a early adopter of anything innovative.

    As for the anonymity: I wonder why cash wasn’t banned yet…


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