Ask HN: What is the reason behind the rise of cryptocurrency?

[phoe17]

I have been following the rise of value but I am still unsure about reason behind its rise.

Most of the discussions point on crypto sub-reddits are about buying and HODL-ing. I sort of understand that people are investing hoping someone (A greater fool?) buys it from them at a higher value.Holding also discourages people from using it in exchange for goods and services. Isn't that defeating the purpose of a currency?

Also, what justifies Bitcoin's value at ~17k ?

I am interested in reading any neutral posts or articles analysing the rise of Crypto and where it is headed.

[bufferoverflow]

There are different reasons for the rise. The main ones I see are:

1) speculation

2) attractive store of value due to the deflationary nature (note that not all cryptocurrencies are deflationary)

3) True limited supply that's mathematically guaranteed. Gold supply, for instance, is not limited in any practical sense, there are trillions of tons of it in our Galaxy, it's all a matter of technological advanvements of its extraction.

4) secure transactions that can't be reversed (though you can use escrows if you want the reverse option)

5) low transaction fees (except for bitcoin)

6) inability of anyone to stop you from moving the money in your possession. See 'paypal sucks' stories, civil forfeiture.

7) works extremely well on the internet

8) fast transaction settlement

9) works over almost any protocol, you can technically manage bitcoins with a dumb phone over SMS

10) banking for those who doesn't have access to banking

11) libertarian aspect - no government control

The Bitcoin price is justified by the free market. People want it, they are willing to pay for it. That's true of any currency value, btw, since there are no government currencies pegged to gold, it's all based on whether people believe in the currency. When they stop believing, we get Zimbabwean dollar, Venezuelan Bolivar, USSR Ruble, Argentinian peso.

[alexasmyths]

Points #1 and #2 are contradictory.

A speculative instrument is the opposite of a store of value.

A 'store of value' is like real estate - low-risk, probably low-return, but you can park your money there and in X years, it's going to mostly be there. US Bonds.

Your bank account, i.e. USD is a decent, though not great 'store of value'. Your USD is not going to go $0 overnight.

Speculative investments are there to generate return almost always involve more risk.

BTC could go to $0 tomorrow. Suppose the US Gov. makes everyone legally declare their BTC assets as assets and they are subject to taxation etc.. That might pull the plug on BTC, but worse, cause a stampede crash in a highly volatile situation. There are many reasons that a rush-to-exit could happen for BTC. So - speculation - not a 'store of value'

These other fetures of BTC may have been important early on but they are not what gives it value.

Because nobody is using BTC as a currency, almost none of those points are pragmatically relevant - yes - in theory, they need to exist to have gotten it off the ground.

[Rmilb]

>BTC could go to $0 tomorrow. Suppose the US Gov. makes everyone legally declare their BTC assets as assets and they are subject to taxation etc..

BTC is ALREADY taxed as an asset. If you buy $4 worth of BTC, price goes up 20% and the next day you buy a coffee for $5 that is a Taxable event that you need to record and submit a record of your 1$ gain to the IRS to be taxed. Currencies like the euro ect have an exemption for low dollar amounts of gains that BTC does not currently have. If you hold for a year, you can get the 15% long term capital gains.

>Because nobody is using BTC as a currency

People used to when there were low fees. We will get low fees again, but until then, it opens up the chance for other coins to take BTCs market share.

[paulhodge]

They're different narratives but I think they are both in play.

If you ask a Bitcoin investor about why they invested, then they might explain it as a store of value, "digital gold", or etc. With that narrative, Bitcoin makes sense in the world, and isn't just a fad. And the erratic price is just a growing pain, it'll stabilize eventually.

But of course, the real reason many people are buying BTC right now is because of the speculative nature, they want to get rich quick. If someone's investment in BTC is significantly larger than their investment in bonds, commodities, real estate, etc, then "it's a store of value" is probably not the real reason they're buying BTC.

[phoe17]

> If someone's investment in BTC is significantly larger than their investment in bonds, commodities, real estate, etc, then "it's a store of value" is probably not the real reason they're buying BTC.

Are there any good articles or blog posts analysing this trend?

[thisisit]

It seems real estate is not great example. If we look at 2008, wasn't it because there were people speculating on housing?

[arisAlexis]

Declaring BTC and paying taxes will not bring it down. It will legitimise it as an asset

[candiodari]

I feel like this might even be true now, but you forget 1) and 2) from a historical perspective.

1) interesting solution to the double spend problem, and therefore usable as a currency (just like gold coins, apple macbooks, rolexes, ... are usable as a currency)

2) The government "controls" spending on drugs by checking the payments made to suspicious parties, not by checking the contents of packages coming in. In other words, bitcoin is a "legal hack" that basically allows you to get heroin delivered to your door like an Amazon package. Or guns. Or poison. Or illegal medicine/performance enhancing drugs/...

3) untraceable or less traceable payments. Which are basically allowing for criminal acts to occur on more scalable levels like hostage taking, for computers and of course for real. [1]

1 is probably played out at this point, but 2 is very much alive. (e.g. [2])

[1] http://www.telegraph.co.uk/news/2017/05/12/nhs-hit-major-cyb...

[2] https://cointelegraph.com/news/bulgaria-seizes-enough-bitcoi...

[Rmilb]

>Or illegal medicine/performance enhancing drugs/...

Like overpriced medication that is unaffordable in the US.

[anywherenotes]

Just to add to your '2)', some of those drugs maybe illegal in US, but legal in other countries, so you could probably now get cheaper medicine which isn't FDA approved.

[johncolanduoni]

For 3), you could say the same about most of the crypto currencies’ mathematical groundings. The properties of hash functions like SHA256 are far from guaranteed, and are subject to the same advancements in analysis and computing capabilities as those that have led to the deprecation of SHA1, MD5, etc., albeit with a different desired weakness.

[bufferoverflow]

If these hashes are broken, most cryptocurrencies have a plan to switch to post-quantum cryptography. It can happen very quickly, within weeks.

Also consider that if they are actually broken, we will have much bigger problems - no secure banking, military data compromised, all kinds of hacking of all kinds of infrastructures, etc.

[zakk]

SHA is already quantum resistant. The problem is with public key encryption, i.e. bitcoin addresses.

[johncolanduoni]

The problem that Bitcoin relies on being hard (with regards to the proof of work, not addresses) is different from the one e.g. the standard PKI relies on being hard. It's not very likely the hashes would be broken by an advance in quantum computing; there are some sub-exponential speed ups that have been explored but nothing that would break the blockchain. It would be more akin to the movement from GPUs to ASICs.

[sincerely]

why not implement post-quantum crypto now if there’s already a plan in place? this seems like a situation where “better late than never” isn’t true

[johncolanduoni]

The post-quantum algorithms haven't been around very long and as a result don't have the same level of confidence. Most post-quantum implementations that are in or nearing production use both existing methods (e.g. DH) and a post-quantum counterpart (e.g. New Hope) and combine them in a way that requires both to fail for there to be an issue (e.g. XORing the produced secrets together).

[arisAlexis]

There is one launching check out theqrl.org

[walrus1066]

2) attractive store of value due to the deflationary nature (note that not all cryptocurrencies are deflationary)

Could you give an example of one of these non deflationary currencies?

[bufferoverflow]

Peercoin, Novacoin.

Even Ethereum to small degree, though Vitalik mentioned the possibility of capping the supply.

[walrus1066]

Peercoin and Novacoin have gone up by 2,000% and 1,000% in the last year.

That's an annual inflation rate of -95% and -90%. Which is nuts for a currency.

Even during the great depression USD deflation was -10% max. In Japan, where deflation is a symptom of it's two lost decades, inflation was around -1%, and their central bank is throwing the kitchen sink to try to get it to 2%.

In short, if any of these currencies were widely adopted, it would devastate the economies of those who use it, because everyone would be stuffing their coin under the digital mattress instead of spending it on goods and services.

[djellybeans]

Add Dogecoin also. It keeps producing blocks indefinitely adding 10,000 coins each time.

[cletus]

Personally I see the three biggest factors as:

1. Rampant speculation. Note that a relatively few "investors" hold a fairly large percentage of BTC in particular.

2. Capital controls and wealth protection in certain countries (most notably China and Russia); and

3. Illegal activity (including money laundering).

If I had to guess, probably in that order (from high to low). The seedy side of this (3) is obvious and (to my detriment) is why I steered clear.

Cryptos may have been envisioned as an alternative currency but it's clear they're behaving far more like an asset class and that they have some bad properties for a currency to have, most notably the deflationary aspect and the inability to manage the money supply (which some will view as a positive).

It's really anyone's guess what happens from here. Thing is though, even though an individual coin is limited in supply my personal belief is that this will even out when people realize that different coins are essentially commodities so new ICOs are what will meet demand. I'm not sure when we'll get there however.

[jbob2000]

The seedy side of crypto is 100% the reason I am staying away. One of it's biggest benefits (lack of institutional control) is also it's biggest detraction; anyone who is trying to avoid law enforcement is using it. When you purchase bitcoins, there's probably a good chance you are funding: hackers who are holding systems hostage; child pornography/prostitution rings; illegal arms and drug dealers; scammers; etc. etc.

The banking system, for all its issues, makes collecting and moving large amounts money around very difficult. We are going to quickly find out that that is a Good Thing.

I really think the debate about crypto has been poisoned with malicious intent. We all sit behind our computers thinking the people on the other end are just like us, with wonderful ideas for a technological revolution, but we have no clue what the real motives are behind its push.

[rdm_blackhole]

This argument is not valid.

What about the drug dealers selling their stuff for cash?

I can do the same argument about fiat money. What about the tax dodgers crossing borders with suitcases full of cash that will end up in some offshore bank never to be seen again? The fact that some people use bitcoin to launder money is no different than a government paying a ransom to free a hostage in a hostile country.

`The banking system, for all its issues, makes collecting and moving large amounts money around very difficult`

That is why cryptocurrencies exist in the first place!

If I have money, that I have already paid taxes on, shouldn't I be free to do whatever I want with it without having to answer to a bank or a government like I am some kind of child that needs to be chaperoned? Why can't I use what is mine without restrictions?

Banks don't mind doing their dirty business deals behind closed doors and will deter anyone to look into their questionable business practices but for some reason, me, the average Joe who doesn't have lawyers on retainer to keep everybody at bay, I should be required to leave my money in a bank and hope that the banks are not going to lose it all like they did in 2008?

That doesn't make sense to me.

[jbob2000]

> I can do the same argument about fiat money. What about the tax dodgers crossing borders with suitcases full of cash that will end up in some offshore bank never to be seen again?

It's a felony to do that with more than $10,000 and if you wanted to move any serious amount of money (millions) you'd need a small truck. You risk getting robbed moving that kind of cash.

>>`The banking system, for all its issues, makes collecting and moving large amounts money around very difficult` >That is why cryptocurrencies exist in the first place!

You're missing my point; It's a good thing that moving large amounts of money is difficult. I can't see any legitimate reason why someone would want to move tons of money around, just write a cheque or do a bank transfer of some sort.

If bitcoin becomes the new currency, you aren't any more free than you were under the banks, you're just beholden to a different master - the people who maintain the cryptocurrency networks.

[Rmilb]

>you aren't any more free than you were under the banks, you're just beholden to a different master - the people who maintain the cryptocurrency networks.

Exactly. Bitcoin just like fiat is backed by trust in those who run the network. Bitcoin doesn't solve many problems as a store of value right now if you trust the government not to print trillions like they did after the 2009 crisis.

If you don't trust the developers, don't trust the coin.

[shawabawa3]

Gold's market cap is $8 trillion.

90+% of that value is as a store of value and speculation.

Cryptocurrencies could do that job better. Even with the high fees atm for bitcoin, it's still a hell of a lot cheaper than shipping gold

[phoe17]

I have a read a few people comparing Bitcoin's store of value to that of Gold's. That analogy does make sense but they started off by calling Bitcoin a new form of currency, have we given up on that use-case?

Also, Gold fluctuates a lot less and the exchange of Gold is often not anonymous. If I am looking for a place to put my savings why would I choose an anonymous market that is highly volatile?

I understand that this logic is negated by Bitcoin's current value.

[bassman9000]

For those buying gold for apocalyptic/pre-apocalyptic situations, crypto makes no sense. If everything goes to hell, there'll be no usable Internet, so it'll be difficult to verify transactions in sufficient nodes. But a chunk of gold will still be a chunk of gold.

In a more probable scenario, strong regulation kills the crypto.

I believe either scenario is far from plausible, but the case for gold makes sense for people that do.

[AnimalMuppet]

Could they?

I have a pretty good idea that gold will still be valuable 100 years from now in every country in the world. (Maybe not the same value as today, but still valuable.)

Bitcoin? I have much less confidence.

[xwvvvvwx]

Bitcoin is worth $17k because thats how much someone will pay for it.

Right now the blockchain space is in a clear bubble. A lot of people (many uninformed) see the price rise and don't want to miss out. This drives the price higher.

At some point there will be a correction. Nobody knows the timing or size. My guess would be that this will not happen until we see the failure of a major blockchain.

With that said blockchains are a remarkably powerful new tool and if they can be sensibly scaled they will be extremely impactful. Blockchains allow for the creation of self sustaining, trustless, autonomous marketplaces. A lot of intermediaries are about to be automated away by these protocols (think about platforms like Airbnb or Uber).

Some useful parallels can be drawn with the dot com bubble. A lot of valuations were totally unjustified, but you would have done very well if you bought and held Amazon stock in 1997 (66,600%).

A more interesting question is whether Bitcoin is the Amazon or MySpace of the blockchain revolution.

I have found the following resources to be very instructive:

- The original Bitcoin whitepaper: https://bitcoin.org/bitcoin.pdf

- Mastering Bitcoin: https://github.com/bitcoinbook/bitcoinbook

- The Ethereum wiki: https://github.com/ethereum/wiki/wiki

- The Bitcoin Core mailing list: https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-d...

[Finnucane]

>Also, what justifies Bitcoin's value at ~17k ?

Rich people in non-democratic countries worried about currency export controls and sanctions. Other methods of parking money externally (real estate, etc.) are subject to restriction and seizure.

[phoe17]

Isn't the high volatility a major drawback to this use-case?

[__sha3d2]

The volatility is supposedly temporary

[throwaway2048]

if you cant move out money at all, you will happily take a rather large haircut to be able to do so.

[venganesh]

No one knows to be exact. BTW, that's "Cryptocurrencies" not Crypto.

[starshadowx2]

Both terms are widely used and are correct.

[bdcravens]

"Crypto" has a different meaning among different audiences. I know many in cryptocurrency say, "Sorry guys, that's OUR term now" but in a diverse audience like HN (many of which work with crypto libraries on a regular basis) I don't think you can make that assumption.

[bassman9000]

Full stack has also a widely different meaning depending on who you ask in HN. Most people here may think the stack goes from the app server to the frontend. The stack is much, much more than that. So most people use it wrong.

No one cares. It's not that important. Context is everything. Crypto is well understood in this context to be cryptocurrency.

[bostik]

About as correct as using "anal" for shortening "analysis".

(Apologies for the snark.)

[starshadowx2]

I don't see how this is a good anal (shortened form of analogy) as I've never once heard or seen people use that as a short form. If it became widely used and accepted then sure, it would be just as correct.

"Crypto" as a term is widely used now to mean both cryptography and cryptocurrency.

[egwynn]

“Correct” is a tricky thing in language. There’s basically no difference between “widely used” and “correct”. My guess is that the tech community will generally resist using “crypto” to mean “cryptocurrency” while the general public might (though hopefully won’t) adopt it anyway. If so, it'll end up just like the word “hacker”.

[malikNF]

While true, it would be really great (although I think its too late) if people would use the term "Cryptocurrencies" instead of "Crypto", since Crypto used to mean cryptography.

Pretty much its just like the hacker v cracker debate.

[starshadowx2]

"the hacker v cracker debate" is (in my mind at least) over. There were and are many people who don't like the way the word "hacker" is used, but so what? Language changes, slang evolves. "Crypto" used to only mean one thing, now it means two. What's really the big deal about that?

[maxerickson]

Or cybercash.

A word that needs ruining there.

[cameldrv]

My interpretation is that there are multiple factors at play on the demand side:

1. Initially drug, and other illicit item dealing. It's hard to process payments for an illegal or risky business. Bitcoin (mostly) has no one to reject you as a customer. I would not be surprised if major smuggling networks were starting to use Bitcoin, as it's seemingly much easier and less risky than carrying huge wads of cash across borders.

2. Circumvention of capital controls and economic sanctions. People in Argentina, Zimbabwe, Russia, Iran, Venezuela, and China have, to varying degrees, a limited ability to process financial transactions with the outside world through the usual SWIFT/correspondent banking networks. Bitcoin solves this problem. The relatively high transaction costs are not too much of a barrier for these types of transactions, since they tend to be larger.

3. Speculation. Crypto has been shooting through the roof, and people are piling on the bandwagon.

4. Tax avoidance. Significant holders of crypto assets may want to diversify out of crypto, but can't because it will create a paper trail and trigger a form being sent to the taxman. In some cases, these people may have owed taxes in prior years which they haven't paid, and they don't know what to do. Some of them have tried to diversify their holdings by trading into altcoins or ICOs to put off the day of reckoning. IMO this factor explains a lot of the explosive demand for ICOs.

5. "Asset Protection." Crypto provides what many believe to be an off the books/untraceable store of value. This might appeal to people being sued, people going through a divorce, or people under criminal investigation.

6. Possible foreign government interests. Some countries, Russia in particular, resent the centrality of the U.S. in the world banking system, its ability to cripple economies by cutting off banking relationships, and the dollar's role in the world oil trade. These countries might be contributing to the hype, and perhaps even buying crypto to create legitimacy for alternatives to the U.S. dollar.

[alexasmyths]

"Also, what justifies Bitcoin's value at ~17k ?"

Nothing - it's a meme, a fad - a rampantly speculative one that involves money.

So many press articles touting 'BTC breaks $X' price point - it's clickbait - and also many jornos and bloggers have positions which they are not disclosing yet, though this is changing.

Because there is no way to value BTC, it's funny game. Someone on Bloomberg indicated a valuation technique which related BTC to popularity in Google searches. Which is rather interesting: BTC's value is a function of it's popularity. Which explains a lot.

ICSs are 'hot' because we've seen how much 'money people have made' in BTC and so major bets are being placed on ICOs.

They are a magnificently easy way to grab money from people who kind of think they are 'making an investment' but really their not getting much at all. An IPO with 0% dilution.

[kenpomeroy]

Of course Bitcoin's value is a function of its popularity - it is a network. Networks become more valuable (and more useful) the more popular they are.

[quickthrower2]

Like other currencies, it is all about confidence. Why do people work so hard for $USD which has no inherent value? Because it has value due to people's confidence in it. And the comes from having an entire society and tax system based on that currency.

Now with Bitcoin the confidence is coming more from speculation as to what it could be, and that indeed a "greater fool" will buy for a higher price - but with the finance casino preparing to add this game to their game floor, there is a good chance you will find such fools.

I saw today a car being advertised for sale 1 BTC. I live in a very non-tech city so word is spreading. There are limited coins and demand will increase. Newcomers will not question or care about "oh it used to be $50 for 10000 BTC why should I pay this much"

[awareBrah]

Amongst some of the people I know, cryptos _currently_ provide much better investment returns than the stock market. These people have a bunch of extra money lying around, why settle for 3-10% returns when you hear stories of crypto graining thousands of percent. To them it’s not about the potential or the technology, it’s strictly the returns over time.

[workthrowaway27]

I don't know what the reasons for the rise are, but I bet it's largely driven by Chinese investors/speculators rather than anything happening in the US, but I think that is reported on less because it is not very visible if you're not based there.

[superquest]

Interesting point.

Can you point to any evidence that Chinese money has been behind large share of 2017 Bitcoin purchases?

[Top19]

As others have indicated, the WSJ said EXACTLY this this morning. 80% of Bitcoin investors are individuals from Asia.

[tobydownton]

Except that all Chinese exchanges / ICOs got banned a couple of months ago. The US is probably that largest market, it's the home of Coinbase ... I just don't see what you are basing this assertion on.

[workthrowaway27]

Here's a WSJ article from today that makes a similar claim. https://www.wsj.com/articles/the-force-behind-bitcoins-meteo...

Edit: Also, I don't think the closure of the Chinese exchanges matters much since they can still buy Bitcoins, the exchanges just can't operate in China.

Edit 2: And my reason for the assertion wasn't any special knowledge of cryptocurrencies, but rather that there's lots of Chinese money pushing up asset prices in other markets, so I don't see why they same wouldn't be true of cryptocurrencies as well.

[AnimalMuppet]

Just guessing here, but... If I were Chinese, and I liked the idea of cryptocurrency (especially the untraceable part), and the government banned it, do you think that ban would make me less interested in it? Or more?

[jason_slack]

Working with Chinese co-workers, I think it would make them less interested. The penalty for disobeying their government is severe.

[itamarst]

It sounds like you've already answered your question :)

[dzek]

I'm wondering why a lot of cryptos (eth, ltc, many more) use price is going up since circa 4 days. Like something happend or is going to happen.

[sharemywin]

bitcoin futures market is making it more main stream. futures might lead to an etf which would explode the value.

[phoe17]

It could be because of the hype around the cboe's Bitcoin futures.

[jgamman]

people with 10s of Giga $$ hiding in tax havens are moving it to the next hidey hole. maybe they started it, mined the first few hundred thousand coins and now they're just dumping $$ into it at regular-ish intervals for long enough that the rest of us just get used to it. maybe a bit like how the Brazilians got the Real which is an interesting story in and of itself.

[c0nducktr]

People behave irrationally when there's FOMO.

[aviv]

FOMO

[down]

bitcoin is like a bank account, is mostly a movement against banks and money printing, I personally, had a few months paychecks as savings in an account, after a year, I got less money, the commissions were bigger than the interest, after a few other months when I wanted to close it, I have to pay money out of pocket, for the commissions, everything that f... the banks, is welcome in my book, I'm surprised after them crashing the economy in 2008 and getting away with it, we are still their bitches and we are OK with it, fool me once, fool me twice.

[roro5678]

I think people are losing trust in govt and banks

[bdcravens]

These are reasons for Bitcoin to exist as a currency, but doesn't really explain its value as a tradable instrument. After all, plenty of people sell Bitcoin and happily send the money to their bank.

[lucozade]

Which is ironic considering the high levels of trust required in actors in the BTC ecosystem.

[arisAlexis]

1 store of value 2 new economic shift 3 blockchain revolution

[rurban]

China

[johansch]

Russian/chinese money laundering.

[Top19]

Just out of curiosity and because I’ve become so jaded with what constitutes upvotes on HN, I scrolled to the bottom to see the most downvoted comment.

It seems like yours, which is funny because I completely agree with you.

The front page of the Wall Street Journal today was very clear, 80% of investors in Bitcoin are from Asia.

[angel_j]

Snowden