I was going to wait before writing an epic post with my full thoughts on the implications of the creation of bitcoin, however it turns out that I'm pretty busy these days and thus don't really have the time to dedicate to the topic that it deserves. I've decided instead to address specific issues and questions as they arise with regards to the subject.
We've just watched the bitcoin ecosystem swell from about 3.50 on the 29th of April to about 32.00 on the 9th of June before crashing almost back down to 10.00 between the 11th and 12th of June, rebounding to 25 and as I write this it is currently holding at 19.00.
There's a few points I'd like to make on this.
I recall reading an article with regards to the Linux operating system and its skyrocketing growth back in 1997; breathless articles would quote a 1200% increase in usage in the last year. This sounds like a huge deal now and actually would be considering the existing installed base. However back then it was simply a way of hyping something that was not at all well known and thus the initial installed base was not that large to begin with. A 1200% increase on 10 is only 120 but it makes a lot better copy to talk about an installed base exploding by 1200% rather than the numbers in question.
Small ponds make even small waves seem like major disturbances. For a commonly accepted currency to experience the volatility of the past few days in the bitcoin market would be utterly catastrophic, but if you take a look at the market depth of the largest bitcoin exchange you can see that the numbers required to have a drastic effect on the price are very small indeed relative to the numbers that would be required to have a similar effect on a large fiat currency.
At the present time one could push the price up above 32 with barely more than a 900k investment. Alternatively they could push the price down to 14 with barely more than 100k. Small pond, small force, big ripples in the actual price we're used to looking at. As and if the market grows more, the depth will act as a stabilising force upon the accepted value of the currency as it does in every other currency and meteoric volatility such as this will vanish into the past. Even moreso when the outcome of the coming war on cryptocurrency is over, as we already know the supply of bitcoins and the rate at which they will expand as well as the final figure.
Now, as for the actual intrinsic value of the currency;
1) What is the cost of the current system?
Global GDP for 2008 59.62 trillion per year vs financial services industry 264 billion per year (source: wolfram alpha). This however does not account for the cost of externalities, which are far fuzzier and harder to nail down, personally I measure them by watching the price of gold as an indicator of the general faith of the market in the current currency regimes. That particular indicator has gotten interesting in the recent past, I will leave it as an exercise to the reader to decide for themselves what this means.
2) What is the current and future volume of the cryptocurrency in question?
Approximately 6.5 million currently, with an extra 50 per 10 minutes reducing over the course of the next 30 years to a total of 21 million in 2041.
3) What is the regulatory response to the existence of this new cryptocurrency?
The US government has already fired the opening shots in the war against cryptocurrency using silk road as it's casus belli. Pournelle's law suggests that they will do whatever is in their power to assure that cryptocurrencies in general and bitcoin specifically do *not* gain a mainstream foothold. It is directly deleterious to the existence of current government bureaucracies in general and financial regulatory agencies in particular that they fail to put a cork in this particular bottle. The development of cryptocurrency is as close as it gets to a digital declaration of independence and if there's one thing governments just can't stand it's groups of people getting along just fine without them.
4) In the event that the answer to question three is to clampdown, how effective may the regulatory authorities actually be in carrying out their policies in this particular instance?
That they have thus far failed to shut down decentralised peer to peer filesharing is not final evidence that they will also fail to shut down decentralised peer to peer cryptocurrencies. The stakes are much higher for them and they stand to lose far more from this particular battle. That said, the measures required to actually ensure victory here are so extreme that any victory in this war is pretty much guaranteed to be pyrrhic at best.
A successful peer to peer cryptocurrency immune to counterfeiting and regulatory hijack through runaway quantitative easing, effectively a form of digital gold with cryptography rather than centralised agencies packing men with guns as its backing could be defined as worth in overhead less than 0.4% of the overhead of the global GDP offset by the likelyhood that the incumbent regime will successfully destroy the new contender. These are fuzzy measures, and even then just defining the acceptable overhead for the currency does not define a suitable base value for it, however my point is that questions of whether the currency is worth 10 per unit or 30 per unit or anywhere in between are not estimates upon the value of having a successful decentralised peer to peer cryptocurrency, they're bets on the likelyhood that the currency will succeed at all.
If bitcoin fails it will not be the idea that fails, it will be the human race that fails to fully grasp the nature and stakes of the game. It is reasonable to place bets as to which side in this particular conflict will prevail. If the current regime succeeds bitcoins will be worth effectively nothing. If it fails, they will be worth astronomically higher values than they currently are or have ever been. Until this open question is closed, the traded price will not reflect intrinsic value, merely the likelyhood of success or failure of the system at any given point in time.
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