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These Three Graphs Prove That Bitcoin Is a Speculative Bubble

Bitcoin is a speculative bubble, and I have the graphs to prove it. Surprisingly, I just need three of them.

All my numbers come from blockchain.info, whose data is independently verified by — you guessed it — the bitcoin blockchain (explanation here).

When compared to the regular economy, bitcoin’s macroeconomic figures are vastly more accessible and reliable: all bitcoin transactions are publicly registered as to quantity and time, and that’s a standard that the U.S. dollar can’t hope to meet. In bitcoin, all your transactions are anonymous, but they’re also made in public. And that lets us do a good deal of macroeconomic analysis without the hedging that it usually requires.

My first graph shows the daily number of bitcoin transactions per U.S. dollar of bitcoin’s total market capitalization:

BitcoinChart1

This chart shows a dramatic reduction in the total number of transactions, irrespective of size, per dollar of bitcoin’s market cap, from December 2012 – December 2013. In absolute terms, market cap has generally gone up, and the number of transactions has mostly just bounced around a lot. The total value of bitcoin is going up, but it’s mostly getting parked rather than being put to work. Apparently there just aren’t a lot of appealing ways to spend bitcoin, anecdotal news stories to the contrary notwithstanding.

Instead, an increasing amount of bitcoin’s putative value (as measured in USD) is being squirreled away by larger and larger miner-investors. It’s not fueling a diversifying, all-bitcoin economy: if it were, transactions would be keeping up with or even outpacing market cap, particularly if bitcoiners came to rely increasingly on bitcoins and decreasingly on dollars for day-to-day purchases. That’s very clearly not happening.

Instead, people are mining additional bitcoin, and speculators are buying in – and thus both of them are growing bitcoin’s notional market cap – but these folks simply aren’t adding all that much to the number of daily transactions. Even a bitcoin mining pool would only disburse its proceeds once, and if the individuals in the pool mostly just held their bitcoin, you’d get a graph a lot like the one above.

This is not a growing economy. It’s a hope for a growing economy — despite strong evidence to the contrary. And there’s a word for that.

My second graph shows the daily total transaction value of the bitcoin economy, denominated in U.S. dollars, divided by the total market capitalization of the bitcoin economy on that day, again denominated in U.S. dollars:

BitcoinChart2

This is an attempt to look at the velocity of bitcoin. The velocity of money is an important number in macroeconomics, at least in the real world. Allowing for some expected (and expectedly large) daily fluctuations, the velocity of the bitcoin economy has stayed fairly stable. It doesn’t seem to be trending upward or downward over the last year.

But how fast is the bitcoin economy, really, and how does it compare to the U.S. dollar?

In the standard procedure for finding the velocity of money, we take the total transaction value for the time period and divide it by the average amount of money in circulation.

Deep breath: The average number of bitcoins in circulation during the year was 11,275,182. And the total value of bitcoin transactions, denominated in bitcoin, was 76,390,490. Using figures given in bitcoin, the velocity of money was thus 6.775.

That’s actually fairly close to the U.S. dollar’s M1 velocity over historical timescales. It’s also fairly close to the figure for last year.

But there are at least couple of very serious methodological problems here.

First, whether we like it or not, we need to reckon the velocity of the bitcoin economy in U.S. dollars and not in bitcoins. That’s because a great deal of evidence suggests that bitcoin is being used as a method of payment, but not as a unit of account.

No one ever keeps their books in bitcoins. Vendors can make bitcoin available as a way to pay for things, but they always, always, always measure bitcoin’s value in dollars, and they adjust bitcoin-denominated prices continuously so that the sticker price is the same in U.S. dollar equivalents. Bitcoins are simply too volatile; their price fluctuates too wildly to do it any other way. Shopkeepers don’t usually care to be currency speculators.

So we need to recalculate: Bitcoin’s dollar-denominated total transaction value for the year was $13,029,440,205.00. And bitcoin’s dollar-denominated average market capitalization for the year was $1,866,267,446.79. That yields a velocity of 6.98.

That’s again very close to the estimated velocity of money of the U.S. dollar.

But now we come to the second methodological difficulty: The above similarities are probably an illusion. The entire bitcoin money supply consists of something a lot like M1-type money: that is, it’s essentially all either circulating cash or (effectively) demand deposits, like checking accounts. But the entire dollar money supply is much larger, and those other parts have their own velocities and particular properties, complicating the picture in ways that I don’t quite feel anyone should speculate on. Bitcoin has security and privacy features that differ from M1, and bitcoin M2 will be another creature entirely, if and when it exists.

The key here is that nothing seems to be happening all that dramatically in bitcoin’s velocity of money over time. It’s not circulating more rapidly over time, which is what one should expect if it were taking off as a currency, and if more and more transactions were of the form of people passing bitcoins around for stuff. Instead, most transactions (that is, most that don’t go dollar-to-bitcoin-and-then-stop) are likely to be money-to-bitcoin-to-stuff, after which the merchant reverts to the dollar as soon as possible. If the bitcoin economy were becoming independent, we might expect a takeoff in the velocity of money, but we’re definitely not seeing it yet.

And now we’re ready for the third graph, which is the real smoking gun. The blue line is the average value of all bitcoin transactions for the day, in dollars. The orange line is the dollar-denominated price of one bitcoin multiplied by five:

BitcoinChart3

The conclusion is clear: the mode bitcoin transaction likely consists of a fairly rich American using disposable wealth to buy an arbitrarily chosen quantity of bitcoin for speculative purposes.

In layman’s terms, the typical bitcoin buyer likely thinks as follows:

“I’d like to get me some bitcoin. And I think… oh… maybe five of them will do. Now — how much do they cost again?”

How much does bitcoin cost? These folks don’t even care – they just want some. Thus we can conclude:

The mode bitcoin is probably mined, disbursed, and never goes anywhere thereafter. The mode transaction is someone buying an arbitrarily chosen amount of bitcoin and then sitting on it forever. Consumers using bitcoin to buy stuff (other than dollars) appear to be few and far between. Bitcoins circulating without immediate reconversion to the dollar are likely very few. And all of this has been true for at least a year.

This trend cannot continue, because disposable income – and enthusiasm for a fad – are both finite. The value of one bitcoin can continue to explain bitcoin’s average transaction value for only so long, and situations in which current face values of an asset determine how much people will buy are not just evidence of a speculative bubble. They are the very definition of a speculative bubble.

My work is available on request, and I will be happy to take questions. I am an economics autodidact, and I freely admit that macro isn’t my strong suit. As a result, I’ve probably made some mistakes, and I welcome corrections. Lastly, I have to say that all of this seems clearly true to me — so far. Tomorrow could easily prove me wrong, but I’m pretty sure it would need new data to do so.

Update: Commenter Nick asked for an x y scatterplot of the correlation between bitcoin’s price and the average daily size of bitcoin transactions. That’s a fair request, and here it is, with logarithmic scales on both axes to preserve the movements at the lower price ranges. The correlation coefficient is .92, which is pretty darn high:

BitcoinChart4

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135 thoughts on “These Three Graphs Prove That Bitcoin Is a Speculative Bubble

    • Wrong, wrong, and wrong.

      I am a firm believer in the quantity theory as regards things that fully function as money. But right now, bitcoin isn’t one of them.

      Currently bitcoin is a means of payment, but it’s not a unit of account. Other things just aren’t denominated in bitcoin, except insofar as they’re also denominated in U.S. dollars, with a floating bitcoin price. So inflation in bitcoin is meaningless — for now.

      Worse, the size of the bitcoin economy relative to the national economy is both tiny and very highly flexible. Entry and exit from the bitcoin economy are very easy. As a result, the change in the quantity of bitcoin says precisely nothing about the change in bitcoin-denominated prices. The theory is good where it works, but bitcoin isn’t one of those places.

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  1. Bitcoin suffers from a deep structural flaw that will likely prevent it from ever becoming an everyday transactional currency in it’s current form. All the Bitcoin servers have to be updated and verified for every Bitcoin transaction. So it can take several minutes for a transaction to clear. That’s fine for a brokerage account transaction, but who the hell is going to put up with that in the checkout line at Target? (And if you just raised your hand imagine being the people behind that guy.)

    What you would need would be some outfit like the Visa/MasterCard network to approve the transaction and then clear it after the fact. But that requires reversability and then you’ve lost your anonymity.

    Anonymous, Digital, Convenient. Choose any two.

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    • I agree this is a problem, but I think it’s likely a fixable problem. A processing company could easily sell speed for transaction fees while maintaining anonymity. They’d have to bank up some reserves to make it work, but it’s on paper viable at least.

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    • Apples to oranges. It take an hour for a Bitcoin transaction to completely clear to the point of irreversibility. When you look at that same figure for other payment modes (wire transfers, checks, credit cards), it’s pretty fast. People usually don’t need to wait for that threshold, and when they do, Bitcoin is faster.

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      • But “clearing to irreversability” isn’t even a thing for those other modes of payment. The window for unwinding a transaction is indefinite when the meatspace identities of the participants are known.

        Bitcoin purports to be the digital equivalent of walking into a store with cash and buying something, and being able to do so anonymously. Totally different paradigm.

        I can say this much. If I owned a retail store you wouldn’t be walking out of there until I knew beyond a shadow of a doubt that your coin was legit. And that’s about ten minutes on average. Online is different since I can easily hold off on shipping until it clears.

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      • I was referring to *technical* reversibility; obviously, conventional mechanisms have the possibility of *legal* reversibility, to the extent that you can find the person and the money at all.

        The credit cards you mention leave you open to the possibility of chargebacks within ~45 days, and yet you don’t make customers stay in the store that long!

        So that I’m not confused with many advocates, let me say that I don’t think the possibility of chargebacks is always bad; me point was just that on an apples-to-apples basis, bitcoin isn’t much different, and often much better, than conventional payment mechanisms.

        In cases of weakened trust between the parties, you do need to layer a protocol on top of the (technically-irreversible) exchange in order to re-establish trust, but this is no different from how it works with cash.

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      • , Let me try again.

        1. The whole point, or at least one of the points, behind Bitcoin is that it purports to be the digital equivalent of cash. Agree or disagree?

        2. In reference to #1, it’s not much difference in use as one of those anonymous, pre-paid debit cards you can buy at a convenience store. Agree?

        Now, imagine if you will, that when you swiped that pre-paid card at the gas station, instead of the “Approved” or “Declined” coming back in seconds it took up to an hour for that code to come back. If I’m running a retail establishment with cashiers serving a line of customers I guarantee you it won’t take long for me to decide to post a sign saying “No Pre-paid Debit Cards Accepted.” I’m just not going to be interested in fooling with it.

        I’m not saying it isn’t a solvable problem, but that solution is going to involve a third-party processor willing to assume that risk. And I don’t see any way around that involving either loss of anonymity to that processor or very substantial transaction fees or likely both, since for the foreseeable future that transaction also involves conversion between the national currency and the highly volatile Bitcoin.

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      • True that. But I’m just exploring why Bitcoin hasn’t taken off as a transactional currency. I’ve been doing some reading today and the typical use case appears to be offshore gambling at 50%, followed closely by child porn, various aspects of the drug trade, gun sales, and cross-border transfers. Basically black and grey market stuff.

        It has to break out of it’s current paradigm and become suitable for purchasing gas and groceries if it’s to survive, much less thrive. Because here’s what’s going to happen. It’s going to attract increasing and not positive attention from governments. It’s going to get regulated in such a way that anonymity goes out the window. At that point it’s useless as a black currency and has to compete toe-to-toe against dollars and euros and yen and yuan and all the rest. And that’s something it can’t do in it’s current form.

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  2. Isn’t “Bitcoins aren’t really money” a lot like “Kim Kardashian isn’t really of any importance”? Or perhaps “Ayn Rand wasn’t really a philosopher”.

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    • No, since the latter two are pure matters of opinion (in practice), and also attacks on their targets.

      “Bitcoin is/is not money”, in the economic sense of money is something we can actually determine.

      Is it being used as money – a medium of exchange whose vastly predominant or only value is as a medium of exchange? And is it usable for all or almost all exchanges one might want?

      I think it mostly meets the former – it certainly has no intrinsic value, so it isn’t a commodity, and its entire point is that it can be exchanged.

      But the latter? You can’t hardly buy anything with a bitcoin now, and its only value in exchange boils down to “it can be exchanged for a currency you can spend“.

      I’d say it’s a token for actual money, not money itself, just yet – plus it’s subject to a speculative issue, as mentioned above, because the token value isn’t clear and stable yet.

      (Not a token in the sense of “token money” vs. “fiat money” or “commodity money”, but parallel, where it’s a token for the fiat money itself, on the grounds that that’s the only kind anyone has anymore.

      Could it eventually be money, in itself? Certainly; the only feature of a money that it lacks now is general acceptance. It’s fungible, divisible, and can be exchanged.

      Is it money now? Doesn’t seem to be – precisely because it lacks general acceptance.

      Contra jr below, cows and other livestock were a medium of wealth, but they don’t meet the economic criteria for being “a money”. You can’t give someone half a cow [not “half a cow worth of meat”, which is different!], and cows don’t store well, and indeed cows aren’t quite fungible.

      A livestock economy isn’t a money economy, it’s a barter economy.)

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  3. situations in which current face values of an asset determine how much people will buy are not just evidence of a speculative bubble

    Isn’t this true of all money? The current value of the $US determines how much of it people are willing to buy. Same as with any free floating fiat currency. Also, since currency is almost always some durable good that has little in the way of any other use, the difference between the value of said good if it were not a currency and its value when it is, is entirely made up by speculation.

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    • Trade has a much bigger impact than speculation. The USD is an odd example because there are lots of financial instruments that people like to buy that are priced in dollars. But let’s use a less common currency for a country with a dominant industry, like the Bangladeshi taka. People outside Bangladesh will buy the amount they need to buy the requisite amount of textiles. Will the strength of the taka have an effect on how much is needed? Yes. But it is definitely not the primary driver of taka purchases. Foreigners buy taka to buy and sell tshirts, people buy bitcoins to buy and sell bitcoins.

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    • The current market price of a dollar, in other currencies, does float. But the demand for dollars is clearly the result of people wanting to do things with them besides just holding them. Typically they want to spend them — to buy products whose prices are denominated in dollars. What I’ve done here is to show that people buying bitcoins appear to be buying an arbitrary amount and holding, not spending.

      When people buy to hold an asset based solely on its market price, that’s a speculative bubble.

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      • “When people buy to hold an asset based solely on its market price, that’s a speculative bubble.”

        I agree. (To be picky, I would add that it is only a bubble if the price is rising, which causes people to want to pay more and expect even higher prices. It wouldn’t be a bubble if people bought bit coins like low-yield bonds, i.e. just to store cash with no expectation of long term earnings.)

        Of course, there are some speculative bubbles that never seem to pop: high end art seems to be one.

        And aren’t term bonds, with very low interest rates, similar in that they can’t be used (until they mature) to purchase anything. (And bitcoins can be sold for cash, just like long term bonds). Obviously bitcoins don’t pay interest, but their draw might be related to inflation or whatever.

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      • I’d not say it’s proof of a bubble, if just because I don’t think you can ever prove that something is a bubble. What you can definitely say is that people are not using it as money, but as a commodity that is relatively non-perishable. Since people are not buying it because of how useful it is, then sure, we can also say that the reason they buy it is speculative. But with speculation, you never know if the reason it’s being held is just to sell it off later as people just keep bringing the price up until it collapses, of if it is because people see potential for Bitcoin to be actually valuable in the future, and the price increase just means that people are guessing that yes, it will be valuable, so a price increase is warranted.

        Now, I personally believe that the market will clear out to pretty much zero, but the fact that people make wrong guesses doesn’t mean it’s a bubble. Imagine a special kind of lottery, where numbers are handed out, and instead of selecting a winner, the people organizing the lottery kept naming some numbers as losers, until at the end, there is only one number, which wins. Lottery tickets would then increase in value over time, until at the very end, one ticket is the winner, and is worth some millions, but the rest are worth zero. If I bought a ticket when there’s only 10 good numbers left, I’d rationally be paying a ton of money compared to an original owner that bought it when there were hundreds of thousands of numbers available. The price went up, but that would not mean there was a bubble on some numbers that eventually lost, does it?

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      • Bob,
        This ain’t silver. Bitcoins have no inherent value. Therefore, considering them as a commodity and not money is a sleight of hand. They occupy something in the interim between the two. Their worth is based mostly on who the greatest fool is (as is gold, for what it’s worth. the actual need for gold is relatively minimal).

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  4. Jason, first, thanks for doing this. Good christ, why isn’t it a reporter?

    But there’s not nowhere near enough game theory here. You aren’t looking at BTC the guys who run this thing…. you are imagining scam artists, Ponzi, not Zuckerberg and Bezos.

    Bitcoin isn’t a oddball trade investment. Not like bulbs.

    Your data says clearly members of the HEGEMONY sensing that there might be a long term game changer – are putting their first foot forward and buying 5 coins – $2500, $3500, $5000 who knows? who cares, it could be what??? … if it topples the global currency market you will own 5 / 21,000,000 of all the money!

    Of course not really, along the way to that nirvana there would be crisis, and soar, crisis, and soar, as different kinds of people, with different levels of risk tolerance and fortunes, got out of their 5 coins, or got more comfy and buy more, etc.

    NOW put yourself in the minds of the guys running this start up 9they themselves are locked in another game amongst themselves) – they are as smart as you, they are recognizing the ONLY way for them to become global overlords is to what?

    Make sure the guys each buying 5 coins, don’t lose interest, don’t stop believing. And remember, there’s a LOT of folks who live comfy in the top 5% of the global hegemony.

    So what would you do if you were the the loose collective of guys sitting on future fortunes?

    Is the only answer increase velocity? Is it really about medium of account?

    You do want there to be enough volume on the buy side, you gotta keep the guys with throw away $5K money trusting, have you seen that tested?

    What else do you do? Think like a start up guy with designs on world domination…

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    • I don’t actually imagine — much less do I theoretically require — a Ponzi scheme here. When real-world financial bubbles burst, many of the existing Ponzi schemes get revealed, but they aren’t the agents driving the financial bubble. Even Bernie Madoff, the largest Ponzi schemer in history, didn’t drive the bubble last time (total theft: $18 billion). The real engine of disaster was the subprime crisis (total losses: several trillion worldwide); it had the side effect of revealing what Madoff was up to, but Madoff was very much not in charge of the thing.

      The hegemons of course don’t want to see the bubble collapse, because with it would go their paper profits. But — game theory! — they face an insoluble coordination problem. Once one of them decides to start liquidating, the party will soon be over for all of them.

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      • There’s no coordination problem. Do the Fed bankers have a coordination problem?

        The large miners (Banks) are all allied already. There is a Satoshi (Bernanke).

        You need to reimagine view them as a FIRM, a prisoner’s dilemma that already been agreed too, we fight together boys, otherwise we hang separately.

        The people you are talking about – the members of today’s hegemony are simply hedging their bets, that there might just be a toppling of the Bank Oligarchs, by the BTC oligarchs.

        BANK OLIGARCHS —- HEGEMONY —————————— BTC OLIGARCHS

        The game is can the BTC figure out how to woo the hegemony towards them.

        That’s the frame.

        It’s a startup man, it’s not a “market.” Craigslist is a “market” but it took down paid classifieds (and destroyed newspapers).

        Kodak vs. Instagram

        Microsoft vs. Google

        This is the frame.

        Whether or not it works, is based on the go-to-market strategies of the firm.

        It’s not a “bubble” unless you can call when it is going to pop, and it STAYS popped.

        The theory on the ground is that it has a many rounds of higher lower, and eventually the firm has to woo the hegemony to BUY STUFF with it, but that’s a long time away, no?

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  5. Say you are Satoshi, what is the effect you funding a BTC lottery? What if you start paying people in BTC to work for you, paying them over the wages they make today, but leaking part of what they earn over time? What kind of people would you hire who would be most likely to buy other stuff with BTC?

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  6. Pingback: These Three Graphs Prove That Bitcoin Is a Speculative Bubble | Bitcoin Mining Review

  7. Hi Jason,

    You forgot to mention in your article how BTC is readily and directly convertible into a variety of other cyrpto-currencies as well as traditional currencies, thanks to service providers online. That throws your analysis out the window, IMO.

    The US dollar is not so easily converted into other currencies and it is loaded with $17 trillion in debt, plus another expected $80 trillion over the next 20 years. BTC is the new safe haven. Gold prices are actively repressed by the Financial Stability Board of the BIS as well as the PPT over at the US Federal Reserve, which means gold will never be a safe haven.

    You also forgot to mention how the World Bank and IMF created vision documents for a currency similar to BTC, about 15 years ago. BTC is their creation, IMO. Social engineering ensures you will never know this fact directly.

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      • > The US Dollar can be effortlessly converted into practically any currency that exists.

        Word. During my trip to the US I received crisp american dollars from an ATM machine using my South African bank issued (i.e. Rand based) credit card, and at a very reasonable exchange rate at that – much better than brick and mortar currency exchange outlets.

        I’m sure the same courtesy will be available to any American tourist visiting SA, you can pay for almost anything with your US bank issued credit card these days, and currency exchange will be done automatically and instantly.

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      • I just listened to a few and you are right.

        But the Orb has always been…inconsistent. And not always tasteful.

        Have you heard the Darkside record? That’s what it SHOULD sound like. I dig that one a lot.

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      • “But the Orb has always been…inconsistent. And not always tasteful.

        Have you heard the Darkside record? That’s what it SHOULD sound like. I dig that one a lot.”

        i have not heard the darkside record i think? dunno.

        the orb is here or there often, true, but when they’re there they are totally there. and when they’re not it’s just the worst.

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    • 1) Who cares about those crypto-currencies? Nobody enough to affect anything.

      2) “The US dollar is not so easily converted into other currencies “?

      Are you insane? It’s the most convertible and converted currency in the world.

      3) Show us these alleged IMF/World Bank documents and that it’s “their creation”, exactly?

      “about 15 years ago, and it was either the IMF or World Bank or both and it’s some sort of thing like a white paper” doesn’t exactly make it easy to find.

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  8. Jason> Deep breath: The average number of bitcoins in circulation during the year was 11,275,182.

    That graph is misleading. There is a lot of “dead” bitcoins lying around, for one simple reason – people who mined them in the early stages lost or forgot their passcode/key, so ultimately the superiour security of Bitcoin is simultaneously it’s biggest downfall. Once your “wallet” is gone, it really is gone forever and there is no way of getting it back.

    One guy on Reddit bitcoin sub did some kind of blockinfo search and discovered that there are well in excess of 20,000 wallets with exactly 50 bitcoins in them – most of these wallets have not been touched since 2010. Which most likely means that they belong to early adopters who mined 50 btc (exact mining block size at the time) and then lost them due to forgot password/lost hard drive, etc. That’s well over 1 mln BTC gone, forever. Satoshi, the founder of bitcoin, reportedly owns 980K btc, he has not been seen or heard from since 2010.

    Bottom line is, at least 2 mln BTC, as I strongly suspect, are “dead money” and will never be recovered or transacted.

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    • You haven’t disproven, or even contradicted, anything I’ve been saying. When some money has a velocity of zero, that gets averaged in along with the rest. As it should. That’s the point of measuring money’s velocity. It’s an average.

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    • How does Bitcoin ‘rot’ affect the analysis? If I lose my wallet with 25 BTC in it, then that is [21 M less 25] BTC in the world, forever. Repeat that 840,000 times and the currency vanishes altogether.

      If I run my wallet through the wash, M0 for dollars goes down very (very) slightly, but the Fed is always generating many more dollars. This is not really true for BTC.

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  9. At present, we know what bitcoin is: a speculative bet on the viability of an alternate currency. We do not, however, no what bitcoin will become.

    In other words, the ultimate value of one bitcoin might be $1,000. It might also be $0 or $1 million. My guess is closer to zero, but it’s just a guess.

    The deflationary nature of bitcoin likely makes it a poor currency, but it would be damn interesting as an experiment in decentralized monetary policy. Bitcoin may also have a future as a payment system, but that’s largely going to be dependent on how governments react to it.

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    • By the way, to add some precision to this conversation, a bubble refers to a phenomena of the price movements of a particular asset. The term bubble doesn’t refer to the asset itself.

      It’s quite possible that we are in the middle of a bitcoin bubble and that bitcoin will eventually have some value that is greater than zero. Those two things are not mutually exclusive.

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  10. You know why I think it’s a bubble? Because I’m hearing about Bitcoin the same way I heard about flipping houses, and from the same media outlets.

    Thankfully, we shall be spared “Mine this Bitcoin” shows on TV, since they’d be really boring.

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  12. Could you redo the third plot an x vs y scatterplot? Plotting two time series on top of each other to show a correlation can be misleading and is generally viewed as bad practice.

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    • Sure, I’ll get a scatterplot up soon. I wanted to show the close correlation between the two bitcoin surges and associated crashes, and this did it. But you make a fair criticism.

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  13. Pingback: Using Bayes’s Rule to Think About a Bitcoin Bubble | Eli Dourado

  14. “The mode transaction is someone buying an arbitrarily chosen amount of [art] and then sitting on it forever. Consumers using [art] to buy stuff (other than dollars) appear to be few and far between. [Art] circulating without immediate reconversion to the dollar are likely very few. And all of this has been true for at least [as long as art has existed].”

    This trend cannot continue, because disposable income – and enthusiasm for a fad – are both finite. The value of one [art piece] can continue to explain [art’s] average transaction value for only so long, and situations in which current face values of an asset determine how much people will buy are not just evidence of a speculative bubble. They are the very definition of a speculative bubble.

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  15. Not to put words in your mouth, but you could argue this, nearly word for word, about gold.
    (though with substantially less accuracy in the amount of shadow gold in the system).

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      • Americans bubble gold (and to a lesser extent silver).
        The extent to which Indians hold gold and silver is more “increased demand.”
        (in short, there are both bubbly reasons and non-bubbly reasons for gold and silver to be increasing in price).

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  16. whether bitcoin is a bubble or not is irrelevant. bitcoin will live until a better cryptocurrency replaces it. a true monetary revolution is here, and the world will be better for it. rejoice.

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    • First thought: What’s the quality of the data set?

      Second thought: How long as that been true?

      Third thought: The variation between dollar and yuan is vastly smaller than the variation between either and bitcoin. What I say about dollars may still hold true even if yuan is a larger share of the market cap. Or it may be even more true. I need to look this up….

      Fourth thought: Guests are at the door, can’t look into it further right now…

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      • Looking at it this morning, I see that bitcoincharts.com is an opt-in service, and that many of the big names in U.S. bitcoin trading aren’t included. It’s an incomplete data set. It’s an interesting possibility, but we need better information to follow it up.

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      • I’m not trying to prove anything here, just trying to open your mind to possibilities other than US citizens wanting to transact in BTC are the driver of BTC’s value. Also, out of curiosity, which big names in US bitcoin trading are not on bitcoincharts?

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  17. Some observations:

    Money is a proxy for trade—a proxy made formerly of metals with intrinsic value, then metal-backed paper with little intrinsic value and now electronically transacted with no intrinsic value—it facilitates trade by allowing for more transactors to get a fair and mutually beneficial value for their wares.

    Trade has increased because we have more to trade, so money also needs to increase to prevent hoarding, the antithesis of trade and destroyer of wealth—both for real and on paper. This is why handling the velocity of money is important. This is why the metal-backed currencies had to be broken when real wealth—a.k.a. options to spend and make time—exploded. This is also why BTC will likely always be a hoarder currency.

    Now then the question—will BTC suddenly lose its value? If BTC is purchased and not spent and the demand for it as a safe haven continues—the sky is the limit*, no matter the amount of actual transactions for goods instead of currencies. But while this hoarding will contribute to savings, it won’t contribute to real wealth creation until it’s traded. And since it will likely never be a main currency, its volatility will likely continue, which can lead to the sudden popping of the bubble if everybody starts to treat it like a crazy game of hot potato. A sudden devaluation would spur many to “lock in” profits and few willing to trade for BTC over a suddenly appreciating and relatively stable currency in regard to actual trade.

    Which brings me to the other question—is this the top? The S&P 500 in 1998 and 2004 seemed like they were tops. They were both speculative bubbles. This is also a speculative bubble, but how much value is there in an anonymous, government-free currency? It is more than possible that as a savings instrument, it will continue to rise.

    My guess, next year it will be 10000 or 10 USD/BTC. It’d probably be wise to buy a straddle.

    *if you subscribe to a Kurzweilian view of the future, not even the sky will hold it down.

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    • As an investment instrument it will bounce around creating winners and losers more or less at random.

      As a transactional currency it will mostly be useful for moving money around the black markets. That’s the only space where the advantages outweigh the disadvantages on net.

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      • Actually, the fact that it is anonymous means that you can hide money there, so as an investment vehicle, it may be better than a Cayman account, which may lend itself toward some semblance of stability while cementing it as a financial savings/hoarding instrument. So if I may fix your statement:

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  18. This article is distorted. From Jan 1 to today transaction volume increased by 209%, Market Cap by 7815% and total value of transaction by 3738%. (charts & data) This indicates “hoarding” is happening more than “use” but this is not exactly a bad thing, at least no more so than governments increasing stock piles of gold. Hoarding is not a bad thing so long as utility remains. And it has, by %3738 and growing (see charts at link). If we apply the meaning of “transaction” as you do, as a measure for utility and velocity, this would indicate a dramatic increase of use for goods and services.

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  19. Earnest question: why is it that economic discussions of BitCoin fail to consider its role as a black market currency? Surely the fact that BitCoin is the go-to currency for mail order illicit goods should be considered in metrics of its use.

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  24. This may be a good backward looking view but necessarily a good forward looking analysis. There is much that hasn’t happened that could change much of bitcoins state. This includes institutional money, continued fiscal geopolitical instability and POS interfaces that make B2b and B2c trade in bitcoins very real ESP in hyper inflationary economies

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  26. This article is great for people who’ve not got any Bitcoins to feel better about themselves. Other than that it misses some pretty key points, and in some places is frankly misleading.

    1. The number of transactions for practical use IS going up. About 300% this year. The top graph is misleading, as is the second… Comparing transactions to market capitalization in dollars, in a year where the value of BTC (in dollars) has gone through the roof, effectively provides an inverse of the price in dollars, but does little to prove or disprove use for practical transactions. Your graph makes it appear as if the number of transactions is going down, when this is factually not the case.

    2. You say that the number of transactions have “mostly just bounced around”. This is simply not correct, assuming you are trying to establish its real world practical use for transactions. Understand that Bitcoin exchanges have to move substantial BTC between accounts (addresses) daily, for example in and out of cold storage. (This is akin to putting money in and out of a safe, but generates transactions on the public record all the same). Consequently, this graph taken from the same source as your charts, and showing the number of Bitcoin transactions while excluding transactions between popular addresses, is the most accurate view of practical use. Growth of 300% in a year is not bad and is certainly not ‘bouncing around’!

    3. It’s usefulness for in person transactions such as at a physical store is, as many commenters say correctly, constrained by the 5-8 mins it takes to confirm a transaction, but this is not where the currency shines (and in fact is being solved anyway). This is old world thinking here… i.e. a dollar can be used in any circumstance – online, physical store, wire transfer. On the contrary, Bitcoin as a currency simply ‘has its place’. It works fine for online orders (I ordered a computer a couple of days ago and paid fine with Bitcoin), it also works great for wire style transfers between individuals and businesses, and in both cases has (effectively) zero transaction fees – in stark contrast to credit cards and regular wire transfers. Think of it this way… an online merchant could sell its products 2-3% cheaper tomorrow than its competitors, assuming it offers Bitcoin as a means of payment. Imagine if Amazon announced it was accepting Bitcoin next week… Would that change your view of Bitcoin being (not) a currency?

    The simple fact is there are only a tiny number of places to spend Bitcoin at the moment, but that number is growing. It will accelerate in 2014 as API’s for online merchants mature, so that merchants can readily integrate Bitcoin into their shopping carts, which is not easy right now. Bitpay is one example of a company offering this service.

    It is certainly true that a large number of people are hoarding and many are hoarding for speculation purposes. But I agree with the commenter who says that many are also waiting simply for the opportunity to spend it.

    Give it time!

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    • “This article is great for people who’ve not got any Bitcoins to feel better about themselves.”

      Would you believe that I actually hold a small amount of bitcoin myself?

      Probably not. Now, can you recommend what I might do with it, right now, other than holding it? That right there is the problem.

      As to giving it time, we’ve had four years. With all this enormous potential, seems like all we’ve got to show for it is Satoshi Dice.

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      • Jason, man if you thought it was a bubble, you would SELL.

        Instead you are part of the hegemony, imaginging that there is a small chance you might in future hold 5/21,000,000 of the dominant global currency.

        You are in the pen being managed by the firm, the oligarchs, and if you aren’t selling they are doing fine.

        You are being managed by Twitter.

        You are being managed by Android / iPhone.

        You are being managed by many firms – guys who if they manage you get rich.

        This doesn’t mean the firm will survive.

        I am trying to get you to think about it the way a FIRM would think about it.

        Stop wondering who has to adopt BTC, or what BTC needs…

        And think about like like you are the firm that owns and controls most of the BTC, and you are literally prepared to GIVE BTC AWAY if need be to get people using it.

        WHAT WOULD YOU DO?

        It’s a real question, think about it like Twitter thinks about your grandma.

        What would you do?

        Tell us.

        That’s where you put your brain down for everyone to measure. That’s the billion dollar question.

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      • Jason, man if you thought it was a bubble, you would SELL.

        Not if he thinks the bubble has a ways to go before it pops.

        Instead you are part of the hegemony…
        You are in the pen being managed by the firm, the oligarchs…

        You are being managed by Twitter…

        Comedy gold, from there on out.

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      • Jason, man if you thought it was a bubble, you would SELL.

        Oh no. Not at all!

        If I thought it was a bubble — but I thought I might be wrong — I would HEDGE.

        That is, I’d hold a small amount of bitcoin, of a purchase price that I could afford to lose. Then I would write what I thought was probably true about its value.

        If bitcoin goes to zero, then I’ve improved my reputation while losing a pittance.

        If bitcoin goes to a million, I’ll have a poorer reputation, but I’ll be crying all the way to the bank.

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      • Oh sure, all the time. And maybe this is an overly picky issue, but in the above comment Morgan suggested that if you thought you had proof that bitcoin was a speculative bubble, you’d act on that evidence. He might be reading too much – as I am – into the phrase “Bitcoin is a speculative bubble, and I have the graphs to prove it.” That’s all.

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      • OK, re-reading Morgan’s comment I’m not sure that his argument is anything like the argument I’m attributing to him. I really don’t know what he’s arguing there.

        Sorry. In hindsight, I should have have just stayed out it.

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      • I see what you mean.

        My position is that right now, the data says “speculative bubble.” Very clearly.

        Now, something might come along and justify the speculation, but here we are four years into the existence of the bitcoin protocol, and it hasn’t happened yet. That’s why I wrote in the original post, “Tomorrow could easily prove me wrong, but I’m pretty sure it would need new data to do so.”

        If that new data comes along, I shall humbly revise. But not until.

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  27. hey Jason, would you mind providing me with the Raw data or sources you’ve used on creating the first and second graphs? I would really be interested in looking at that. Appreciate it.

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    • It’s not easy, and that’s also part of the problem. I’ve seen made available a very short-term put option, but no long-term puts, and nothing that effectively offers to the public the chance to make a short sale. It would have to be arranged privately between the parties, hence some significant transaction costs.

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      • Interestingly enough, I was just reading about a fellow who made bank shorting the CDO mess during the last bubble.

        One thing he noted? How very difficult it was to do so. He started trying to short the market a sizeable amount of time before the peak, but he was unable to find any good way of doing so.

        Basically ended up telling his broker to keep his eyes out for anything, anything, that would function as a short on, well, the entire mess of CDOs and whatnot.

        Finally found something, less than a year before the peak — plowed in every penny he could beg or borrow to keep in the game until the collapse.

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      • morat,
        Shorts are called that for a reason.
        They shake money out of you the longer you hold the position.

        It’s EASY to call a bubble (The Fed’s starting to look for one in housing again. Yay active Fed).
        It’s HARD to call the timing of a popped bubble.

        Your friend would have made more money shorting President Bush (assuming he was a day trader–which he probably wasn’t. Bush was unpredictable enough about showing up on air that you couldn’t make the longer trades based on him).

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      • Not my friend. Just read about him. Guy’s a billionare now, lives out in California. He started trying to short CDO’s before there were any financials ways to do so, and when he finally could it was some obscure “effectively a short” thing involving third and fourth parties.

        All I recall is (1) the difficulty he had shorting CDOs and the shadow market in them and (2) the fact that he was up to his eyeballs in debt (something to do with keeping the shorts going? I dunno) when the market finally collapsed and he went from basically dead broke to, well, billionaire.

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  32. Why aren’t bitcoins circulating?

    Firstly because of the near parabolic price increase. Why use something today that is worth double tomorrow.
    Speculators are both bad and good for BTC. Without speculators, the bubbles wouldn’t happen and btc wouldn’t be in the mass media. However in the short term, speculation hinders retailers directly (not using bitpay) adopting BTC because of the volatility.

    Secondly because there are only limited number of shops accepting it and the middle man services are a hassle. It’s much easier to speculate on BTC than to spend it.

    It’s the second chicken egg problem, the first was why would anyone “use” a virtual currency if nobody else is “using” it… that one is pretty much solved.

    The problem now is that for the price to have any resemblance of stability, circulation needs to skyrocket. Why would anyone circulate their BTC if the price could soar tomorrow?

    I currently see 2 factors that can help this situation:

    – JoinHoney.com integrating BTC in their extension:http://www.reddit.com/r/Bitcoin/comments/1sqznf/im_one_of_the_developers_of_honey_a_browser/ should make it easier to use BTC at large online stores.

    – The BTC community/developers are making it easier everyday for retailers and others to adopt, directly or indirectly.

    Bitcoin has all the markings of a “fad”, but the true value of it lies in the protocol, its number of different uses and security.

    The protocol has a bright future, be it trough Bitcoin or some decendant with better usability, security and brandability.

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  34. You’re trying to prove something that we all agree with buddy. Bitcoin is speculative. Investors are speculating that in the future it will take off as a currency. No intelligent person would disagree with your thesis.

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