[Construct]

Four days ago, Bitcoin was under $2 USD. Now it's over $4 USD (depending on when you refresh the page). There are 6 million bitcoins in existence, and trade volume is only about 54,000 according to the biggest exchange. There aren't enough bids/asks to soak up more than about $100 USD without throwing the exchange rate one direction or the other.

For example, right now (as I write this) exchanging $1000 USD for some Bitcoins is all it takes to push the exchange rate up $0.10 from $3.77 to $3.87.

What a lot of Bitcoin newcomers don't realize is that Bitcoin depends on 'mining' to generate new bitcoins. Computers run cryptographic hashes to find the 'winning' has which is less than the current difficulty target number. The computer that finds this hash is awarded 50 BTC. The difficulty target is automatically adjusted upward to keep new bitcoin generation at a constant pace.

Some quick research shows a handful of big players in the mining market who have invested heavily in high-end GPUs for dedicated bitcoin mining, some with over 50 GPUs running 24/7 for months now. These guys are bound to have huge quantities of bitcoin they are eager to unload when the price is right. Meanwhile, news coverage is driving exploding popularity, which appears to be pulling the exchange rate sky high. On paper, many of these guys have become overnight millionaires just by running a bunch of computers 24/7.

Of course, as these players cash out the exchange rate will fall. These guys are too smart to sell all at once and flood the market, but with volatility like this I'm willing to bet a lot are eager to pull their bitcoin out of the game before the bubble pops.

Meanwhile, hardware enthusiasts all over the internet are rushing to buy GPUs to dedicate to mining. They don't seem to realize that the bitcoin system automatically adjusts to keep the bitcoin generation rate constant at 50 BTC per 10 minutes. As the mining market becomes flooded with new 'miners' the difficulty will climb rapidly, until it becomes unprofitable to run a GPU if you have to pay for electricity.

Finally, bitcoin is highly illiquid. My research was brief, but I couldn't find an easy way to exchange small amounts of BTC for USD that didn't look terribly sketchy or involve a lot of fees. Stores aren't eager to accept bitcoin because the exchange rate at the moment can easily swing 10% between when the user presses 'check out' and the transaction is processed.

The bitcoin system is a very interesting concept, and it was clearly implemented by some very intelligent people. But as it currently stands it's just a playground for speculators and market manipulators. Expect some carnage in the coming months.

[kiba]

As a bitcoin veteran, I expect carnage, always. I learn that the hard way several months ago.

Moreover, I tend to be fatalistic about the price of bitcoin. Whether or not the market is manipulated, as long goods and services are popping up in the bitcoin economy, we'll be alright in the long run.

[joe_the_user]

But isn't bitcoin supposed to not just work but actually be somehow better than ordinary currency?

Wouldn't that include being more stable? Or am I missing something?

[gwern]

Exchange rates are set by supply, and demand. Bitcoin has through technical means controlled the supply part of the equation, but how can it control demand? So fluctuations in demand will cause changes. In the growth period, Bitcoin can't be stable, and it would be impossible for any currency to do so without extremely precise statistics on how a currency was being used and control over inflation (so you could, say, adjust supply exactly to match fluctuations in demand).

In the long run, most of the obvious equilibriums for Bitcoin are very far away from whatever it's currently trading at. If Bitcoin fails and becomes playmoney, then it's overpriced by hundreds of times; if it succeeds and replaces any sovereign country's currency, then it's undervalued by hundreds or thousands or millions of times. So in the long run, you must expect it to not be 'stable', but to change drastically - in some direction.

(If this isn't convincing, try applying the double reversal test Nick Bostrom devised for combating the status quo bias (http://www.nickbostrom.com/ethics/statusquo.pdf) and anchoring (http://en.wikipedia.org/wiki/Anchoring). Suppose that Bitcoin were at $2 rather than $4. Would you be saying 'obviously the right price for Bitcoin is $4, so I should buy some'? I doubt it. )

When Bitcoin is supposed to be stable is when demand for it is not varying; supply will be stable by the Bitcoin architecture, and hence, the overall equation wouldn't change in that situation. This differs from fiat currency in that you are only vulnerable to changes in the demand part of the equation - there is no Fed or other cabal that can hurt you by manipulating the supply part of the equation.

[rorrr]

Imagine Amazon starts accepting bitcoins. The rate will probably skyrocket to more than 100 USD.

Actually, digital currency is inevitable, it's only a matter of time till there's some global currency not controlled by one government. Bitcoin is a pretty good candidate.

[lukev]

That depends entirely on the rate at which Amazon accepts bitcoins.

[xnerdr]

As a bitcoin veteren, what, if any, do you expect will be the US reaction once it becomes big enough to cause problems?

[cookiecaper]

I expect that they will do everything possible to marginalize or damage it.

[27182818284]

So far the US reaction has been positive. The CIA is paying BitCoin members to give talks about it. As someone pointed out in a Bitcoin forum, unlike Liberty Dollars or E-Gold, Bitcoin could prove to be a useful way of securely and anonymously paying people off

[JeremyBanks]

> The CIA is paying BitCoin members to give talks about it.

A BitCoin developer to give a talk about it to them.

[borism]

I wouldn't make much out of CIA doing something. They have done crazier shit before.

[ceejayoz]

> So far the US reaction has been positive. The CIA is paying BitCoin members to give talks about it.

By that definition, the US reaction to IEDs in Iraq has been positive, as people with bomb making experience are brought in to give talks about them.

[iwwr]

What sort of problems?

[tba]

Potential issues with anonymous currency include money laundering and assassination markets.

[gwern]

Link for those not familiar: http://en.wikipedia.org/wiki/Assassination_market

Personally, I think assassination markets could be a net benefit (think of the bounties on someone like Kim Jong-Il), but then, I like them enough that I write stories about them so I'm biased: http://www.gwern.net/fiction/The%20Ones%20Who%20Walk%20Towar...

[tba]

"think of the bounties on someone like Kim Jong-Il"

Did you ever think of the bounties on anyone inconvenient to governments or big businesses? The founders of The Pirate Bay, Julian Assange and Bradley Manning, BP whistleblowers, environmental activists and climate scientists – would society be better off with them all dead?

[borism]

think of the bounties on someone like Kim Jong-Il

Now think of the bounties on average folks like you and me in comparison.

That's right, our lives will instantly be worth pennies and there'll instantly many folks around with incentive to murder.

[lsc]

well, I'm not a bitcoin veteran, but I lost a few bucks to the e-gold thing; what's to keep bitcoin from suffering the same fate?

[sgornick]

e-gold was a centralized system. When they got shut down, you no longer had the ability to receive value for your holdings.

Bitcoin is decentralized. The ability to spend is protected by the private crypto keys in your wallet stored locally (assuming you store your bitcoins on your own computer.)

As long as there is a network of nodes out there ( current view: http://maps.google.com/maps?q=https://smsz.net/btcStats/bitc... ) and your software can reach one or more of them means: 1.) you still have the ability to spend your bitcoins at any time 2.) the recipient has the ability to know that those coins were not spent previously

Shutting down e-gold involved taking down the center. Bitcoin has no center, no "master node" -- only peers.

The most central aspect of bitcoin is found in the exchanges. Those worried about an e-gold situation happening again do not have amounts of any significance (either USD or bitcoins) held by an exchange.

[JulianMorrison]

There's nobody with an off-switch.

[lsc]

yeah; this is what scares me more about bitcoin than e-gold.

With E-gold, the government went after the owners, and they were able to shut the whole operation down; I lost maybe two hundred bucks worth of gold.

Now, when the government decides to shut down bitcoin, what happens? there is no central 'off switch' - just like drugs, they will have to go after the users, or like illegal information, they will have to go after the viewers.

I mean, I think I'm being a little bit paranoid here, but I just don't see the government leaving a system that works so well for money laundering in place, and all the things I can think of the government doing to dismantle bitcoin seem like they would be quite unpleasant for the users, over and above just losing the money invested.

[JulianMorrison]

Mining is supposed to fade away in importance - it was just a way to bootstrap. And huge computing power applied to mining means that it's so much harder for a hostile entity (hello, US government) to plug in a supercomputer and steal control.

[forensic]

Right now it is trivial for a government, botnet owner, or even a sysadmin with access to several thousand machines to completely corner the bitcoin market and actually use a cartel to "steal" bitcoins from others.

Bitcoin is not controlled by a central authority. Instead it is controlled by any specific individual or group that is able to get about 30% of the computing power of the network. While this is very expensive for your average middle class person, a typical millionaire or billionaire (not to mention government) could completely dominate bitcoin overnight.

Bitcoin is NOT democratic. It's ruled by people who are wealthy in conventional currency because those are the people with access to the most computing power.

[Unseelie]

That's the case with any currency or stock..It doesn't stop IPOs.

[forensic]

the entire point of bitcoin is to be free from government control unlike normal currency