Bit Coin

What is the value of BitCoin at the end of the great Keynesian Experiment?

By Arend Lammertink. December 3d, 2013.

There is a lot of discussion these days about BitCoin. Many people compare it to gold and only look at the charts to conclude it is in a bubble. They do not look at the fundamentals, which is necessary to make an informed decision about whether or not to take a position in BitCoin. In my opinion, anyone should have *a* position in BitCoin, based on it's future value after the end of the Great Keynesian Experiment has arrived, an event which will occur and probably sooner rather than later.

So, what IS BitCoin, really?

It is primarily a secure transaction system, which enables anyone on the planet to transfer funds to anyone else on the planet, without any bank or third party in between. It is NOT primarily a store of (intrinsic) value, or at least not at the moment now it is still in it's infancy.

What is the value of BitCoin?

At this moment, BitCoin is just a niche market within the global virtual currency markets, which are dominated by government fiat money. Strange as it might sound, these are also virtual currencies in the sense that they are backed by nothing but trust. And since both government fiat and crypto currencies are backed by nothing but trust, a very important aspect determining the value of virtual currencies in general is the amount of trust people have in the issuer or controller of the currency. Once the trust in the issuer or controller of a virtual currency is gone, the value goes to zero in the case of a digital currency or the value of toilet paper in the case of paper bank notes. Other aspects are the amount of currency units in circulation and the amount of "market management" and MOPE in order to influence the perception of trust and thus the "value" of a currency. Since at this moment most government fiat currencies are still afloat and hardly any capital controls are implemented, the value of the BitCoin (system) is rather limited.

However, when the end of the great Keynesian experiment has finally arrived, the situation will change beyond recognition. It does not take a PhD degree to be able to figure out that the current Weimar-style QE policies of the bankers around the globe will lead to a hyper inflationary meltdown sooner rather than later. Many people complain about the volatility of the BitCoin, but that will soon turn out to be a walk in the park compared to the volatility by which government fiat currencies will chase one another to the bottom when measured in terms of real money: physical precious metals.

Then, the question becomes: what is the value of the BitCoin system when the end of the great Keynesian Experiment has indeed arrived?

How are you going to pay someone at the other side of the globe or even just across the country, when government fiat halves in value by the hour during a hyper inflationary meltdown? I mean, Peter Schiff might have a point about the usability of BitCoins NOW, because of the volatility and necessary conversion steps into government fiat, but who on Earth is going to want to convert a deflating currency into units of hyper inflating government fiat once TSHTF?

Another argument also mentioned by Peter is: "People want gold" and "it has a proven value!". Yes, that is correct and I have no doubt that will continue to be the case. Physical precious metals are and remain to be THE instrument of choice for keeping your savings safe.

However, people also want to keep their money under their own control, instead of under the control of the government and the bankers. They don't want to pay taxes when they hand their hard earned money over to their children. They don't want the government to put capital controls in place or downright confiscate their wealth as they did in Cyprus. They want to make payments internationally safely, fast and secure. So, there are a lot of reasons people want to have the convenience of virtual currencies for making transactions, the same conveniences which have made government fiat currencies attractive for decades after ending the gold standard by Nixon.

What currency are we going to use for transactions once the end of the great Keynesian Experiment has finally arrived? I think that at that moment, there is NO alternative but virtual crypto currencies that can fulfill all these requirements. Precious metals can store value and be used as money, yes, but you can't 'wire' them anywhere without a functioning transaction system. In other words:

After the end of the great Keynesian Experiment, BitCoin will be a great system for 'wiring' precious metals across the globe, provided the volatility of the BitCoin is sufficiently low by then.

And the BitCoin system can do quite a lot more than just performing transactions of BitCoins. Stefan Molyneux gives a nice explanation of what this system can do:

I have been skeptical about BitCoin for a very long time, too. I just couldn't figure it out. Kind of reminds me off when I couldn't figure out why on Earth people would give software away for free. I remember so well that when I was first able to download free software like Richard Stallman's gcc compiler set. I thought: download that stuff and put it away safe, before those fellows change their mind!

When I 'got' it, I understood that it is possible to work together on projects for a common goal, in this case the need for useable software. Because of the way open source software is structured, it is published in human readable source code, it creates an eco-system wherein a programmer can re-use parts of software already made by someone else and thus work very efficiently. I won't go into details here, there is plenty of literature available on that subject.

The same story goes for BitCoin. All of this comes down to "the power of money", the power to create (virtual) currency. And in our current state of affairs, that power belongs to the governments and the bankers.

Remember Stamp's warning?

"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits." — SIR JOSIAH STAMP, (President of the Bank of England in the 1920's, the second richest man in Britain).

And Henry Ford?

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

If we want to make an informed decision about whether or not we should have a position in BitCoin, we need to realize that the real value of the BitCoin system is to be found in the fact that it essentially returns the "power to create money" from the government to We, The People. No government oversight, no banks needed, no corruption. Ultimately, it will be up to the people to make a choice which virtual money transaction system they prefer:

1) government fiat money, which is issued bearing interest by banks and comes in an ever increasing supply thus decreasing the buying power of the currency by design and therefore a system which transfers wealth from the people to the bankers by design;

2) a currency issued by ordinary people in a limited supply of max some 21 million 'coins', bearing no interest, whereby it's 'coins' can be hoarded and stored pretty much anonymously without any government control whatsoever.

Which virtual currency do you think the people will trust once the end of the Great Keynesian Experiment has arrived?

To me, it is clear that a currency system which does not deprive you from your wealth by inflation by design is clearly to be preferred, which means the BitCoin system is highly attractive as a monetary system, because there is no (monetary) inflation to speak of. Yes, the money supply will still grow, but it is limited by design of the system to something like 21 million 'coins'.

So, the idea behind the system, an independent non-inflating global currency system issued by ordinary people cutting out the 'man in the middle' is highly attractive. The system has the potential to render the complete current financial system obsolete. The system also allows for dispute settlement, contract validation, etc. which offer very interesting possibilities.

Is BitCoin THE system of the future or are we going to have competitors and new versions?

That is pretty hard to tell, but there are some considerations which are important. First of all, BitCoin is open source. The system can be adapted for future needs, without breaking the current 'coins' in circulation. So, in case governments would start to try and control it, we would be seeing a cat&mouse game, whereby the (programming and mining) community routes around these controls, just like we saw with the evolution of peer-to-peer file exchange from NapSter to bittorrent. The difference between that evolution and this one is that the BitCoin itself is just 'data' which has been validated by encryption. The means of transporting this data can be adapted at will without breaking the 'data standard'. In other words: the architecture allows all kinds of adaptions to counter attacks by governments, etc.

Another point is that the security of the system depends on the amount of processing power available to do the cryptographic validations, etc. These are performed by so-called 'miners', a network of thousands of high performance computers designed specifically for solving the cryptographic puzzles which make the BitCoin system secure. Now of course, one can theoretically build up a rival network for a rival crypto currency, but one would really need a LOT of hardware in order to rival the amount of processing power currently applied to keeping the BitCoin system secure. In other words: yes, the source code can be used to make a competing system, but without having massive amounts of processing power available to keep the system secure, the system is vulnerable to attacks by "the powers that be", which also have massive amounts of processing power available.

If I had to make a bet right now, I would bet that the BitCoin basic core and architecture will indeed survive and will become the dominant monetary system at some point in the future. However, predicting is very hard and especially when it handles about the future.

I personally have hardly any position in BitCoin, I own 0.005 BTC to be exact, but I am thinking very seriously about getting some more. I think everyone needs to have *some* position in BitCoin, even if only like 10 bucks, as I have now. I would not advise anyone to bet their life savings on it, but it's well worth a small bet.

As it appears to me now, this system has the potential to allow We, The People to just buy our planet back from the bankers. It might fail, yes. But it might also succeed. And if it does, we are talking about the value of a bitcoin to be something like 1/21 millionth of current global government fiat virtual money supply.

All told, anyone looking for all of the U.S. dollars in the world in July 2013 could expect to find approximately \$10.5 trillion in existence, using the M2 money supply definition. If you just want to count actual notes and coins, there are about U.S. \$1.2 trillion floating around the globe.

If we only consider all the dollars in existence, we would thus be talking about a value of about half a million \$ per bitcoin, IF bitcoin indeed becomes the dominant monetary system of the future.

Of course, that remains to be seen, so it is clear that at this moment investing in BitCoin comes with a considerable risk that the system somehow gets broken, most likely because of government intervention, or that another, improved system takes over. However, considering the architecture of the system as I understand it, these risks are not that high compared to the potential of what this system can mean for ordinary people, once widely adopted, especially considering the fact that the end of the Great Keynesian Experiment draws one day nearer every day.

I would say that the chance that an investment in BitCoin will turn out to be a better bet than an investment on the stock exchange is pretty high, all together.

In other words: a (small) bet on BitCoin seems to be well worth the risk at this moment, but my life savings are and remain to be in physical precious metals.

Update Dec 5th, 2013: Debt system vs Credit system

There is a fundamental difference between crypto currencies and virtual government fiat:

  • Virtual government fiat is debt based: it is brought into circulation by banks as interest bearing "debt".
  • Crypto currencies are credit based: they are brought into circulation by a group of people, which you might compare to a virtual "State", and are simply given away to "peers" using essentially a "lottery" process. Fundamentally, though, they do NOT bear interest and do NOT have to be repayed.

The problem with the "money as debt" paradigm is that *only* the "debt" is brought into circulation, but *not* the "interest". In other words: by design, there is NEVER enough "money" in circulation in order to pay off all debts + interest. That's the fundamental problem with virtual government fiat! It's a system which "leaks" away wealth stored in the currency by design, because the interest is *not* brought into circulation.

BitCoin is a credit system. ALL currency units are simply brought into circulation by creating them out of thin air in a limited quantity and then just give them away as in a lottery. There is no "interest leak" and no "paying back", which is basically the same principle as Lincoln's greenback and the "mefo bill system" which enabled Hitler to re-build Germany after the Weimar debacle:

Lincoln issued his famous greenbacks to fund the Civil War without enslaving the American people to the 30% interest demanded by the bankers. Lincoln refused to plunge the people of the nation into a debt they could never pay back, and issued his own currency instead.
“... (we) gave the people of this Republic the greatest blessing they have ever had – their own paper money to pay their own debts...”

A Mefo bill (sometimes written as MEFO bill), named after the company Metallurgische Forschungsgesellschaft, was a promissory note used for a system of deferred payment to finance the German rearmament, devised by the German Central Bank President, Hjalmar Schacht, in 1934.
Mefo bills followed the scheme for which the Öffa bills were the blueprint.
As Germany was rearming against the terms of the Treaty of Versailles they needed a way to fund rearming without leaving a paper trail; Schacht created this system as a temporary method to fund rearming with only one million Reichsmarks in capital. Schacht has later said that the device "enabled the Reichsbank to lend by a subterfuge to the Government what it normally or legally could not do".

And the essence of the Mefo Bill:

Hjalmar Schacht formed the limited liability company Metallurgische Forschungsgesellschaft, m.b.H., or "MEFO" for short. The company's "mefo bills" served as bills of exchange, convertible into Reichsmark upon demand. MEFO had no actual existence or operations and was solely a balance sheet entity.

Let's re-write this a bit:

"The interweb's "BitCoins" served as bills of exchange, convertible into virtual government fiat on demand trough "exchanges". BitCoin had no actual existence or operations and was solely a balance sheet entity."

Get the point?

Current government fiat is issued as debt.

Greenback's, MEFO's and BitCoins are issued as credit.

"Money as debt" sucks wealth away from the People and transfers it to the bankers in a negative (hyper) inflationary spiral. It rewards "lending" and "speculation", while sucking away wealth of "producing".

"Money as credit" returns the power of the printing press to We, The People and transfers virtual wealth from the banker's debt system back into the owners of the credit notes, aka "BitCoins" in a positive, deflationary spiral. It rewards "saving" and "producing".

So, what is the value of a global credit-based currency which deprives the bankers of their power?

In other words: let's all bet one dollar that this internet-based credit system will make the bankers poor:

Update Dec 9th, 2013: Some of my comments on TF Metals report:

Re: The Argument Against Digital "Currencies"

You can't compare BitCoin with commodities.

What virtual currencies are is essentially ONE thing and ONE thing only:


It does not matter what the "value" of the "items" on the "book" are!

What really, really, really matters is in what direction the items on the books flow.

The "book" itself is a ZERO SUM GAME!

With government fiat systems, the items are burdened with "interest". So, the items on the book flow from the "customers" to "the debt issuer" by design. It may look like interest is just a small percentage, but you get interest over interest and thus an exponential process, whereby the value REPRESENTED by the items on the books move from the people to the bankers. After all, it's a zero sum game and the bank ALWAYS wins, because ALL items on the book come with a price: interest.

With BitCoin, NO INTEREST is being charged on the items on "the books" and thus it is really a ZERO SUM game by which one can exchange "value" represented by an item in a book-keeping system WITHOUT any "interest leak".

When you take this all the way down to the fundamentals, then BitCoin is essentially the same thing as current virtual government fiat systems with one BIG difference:

You don't have to pay the 'interest' price which makes you loose to the bankers.

To put it in yet another way: virtual currencies, including government fiat, are nothing but book-keeping systems. They simply register who "owns" how much of the REAL pie.

With virtual government fiat systems, part of the pie is take by the government and the bankers by design. In other words: YOU loose, by definition, by design.

With BitCoin, the pieces of the pie simply move back and forth between different 'account holders'. There's just no 3d party taking away crums of the pie over and over again.

So, there is no question that from the perspective of 'account holders' the BitCoin book-keeping system is vastly superior to the government alternative.

Whether or not you want to call this book-keeping system "real money" is irrelevant. What matters is that virtual government fiat systems are about to go to zero, because there is an alternative system available, whereby the bottom line is that the 'user', the 'account holder', gets more bang for the buck because there is no interest to pay to the banks.

To put the Tulip argument in perspective....

Let's consider how well the Dutch fared with this stuff after the initial "value" was a bit over-estimated:

  • In 2011, total horticultural production amounted to €8.6 billion. Exports (including re-exports) amounted to €16.2 billion. Horticulture accounts for 39 percent of Dutch agricultural production. The share of horticulture in the total Dutch exports in 2010 was 4% (share of agricultural exports 34%).
  • The Netherlands has an exceptionally large share of the world trade in horticultural products, at 24%. In trade in floricultural products worldwide, the Netherlands is dominant with a share of 50%. In bulbs, the share is even 80%.
  • The Dutch produce 4.32 billion tulip bulbs each year, some 53% of which (2.3 billion) are grown into cut flowers. Of these, 1.3 billion (or 57%) are sold in the Netherlands as cut flowers and the remainder is exported: 630 million bulbs in Europe and 370 million outside of Europe.
  • For the fourth year in a row, the Netherlands is the world’s biggest exporter (in value) of fresh vegetables. The Netherlands exported 4.6 billion kilos of vegetables in 2010, with a market value of € 4.2 billion. A little-know fact is that the Netherlands is the world’s top producer of onions.
  • The Dutch are the world’s largest exporter of seeds: the exports of seeds amounted to € 1.5 billion, growing 5% each year.
  • Of the approximately 1,800 new plant varieties that enter the European market each year, 65 per cent originate in the Netherlands. In addition, Dutch breeders account for more than 40% of all applications for community plant variety rights.
  • The world’s largest auction company for cut flowers and plants is Dutch. It has 4,100 employees and sales of about €4 billion in 2010. Each day it sells 34.5 million flowers and 2.3 million plants and conducts 120,000 transactions using 46 clocks.

In other words: some 350 years after the so-called "disaster", the descendants of the "first movers" still account for about 80% of the global tulip market....

Re: Uncle Benny and his comrades are salivating at bit coin

Yes they are trying to figure out how to destroy that system. No way will they allow it to compete with their crapola fiat. Its such a great idea to be free from the monopoly and manipulation of fiat. But the crooks I am sure are in the works of crashing that system.
I think we are very close to the bottom in the metals.. Something has got to give soon.

Yes, they will throw everything at it that they got. The question is: who will win?

The bankers with their limitless supply of fiat BUT empty PM vaults and thus about to blow, OR the "geeks" having nothing but computers and brain power to counter the bankers coming attack(s)?

So, something has got to give soon. May be the metals explode, maybe the derivatives bubble blows, maybe BitCoin explodes in value. And may be the current BitCoin millionaires get smart and start diversifying into PMs, thus putting the pit on fire. Who knows??

Either way, something HAS to give soon. I don't advocate putting your life savings in BitCoin. You might loose it all IF the bankers win once again. But I DO advocate everyone to bet the bankers for "one dollar" that they will loose this round from BitCoin:

What if they lost? Would be fun, wouldn't it. :D

Let's put some numbers underneath our "one dollar" bet

Let's look at BitCoin from the perspective that it's a casino or a horse race on which we can place a bet, a bet that the "geek's horse" will outrun the "banker's horse" in the most spectacular horse race we have ever seen. A horse race, the outcome of which is "total control of global virtual money".

All right. Now let's suppose the winner takes it all, total ownership of global assets:

It's A "0.6%" World: Who Owns What Of The \$223 Trillion In Global Wealth

Ok, so the 'price' of the horse game is \$223 Trillion.

If BitCoin wins, then each BTC would have a value of 223 Trillion / 21 Million = about 1 Million.

All right, now we have to estimate our winning chance on the bet. Let's estimate that we have about a 1% chance that the BitCoin virtual currency system will eventually win from the banker's virtual currency system. That would mean that when we bet one BTC now, we expect a return of about 10 grand.

In other words: if we place a bet at one BTC at a price of \$1000 and we expect to have a 1% chance of winning the bet, our expected return would be 10 times our bet.

Not too bad at all. :)

About Government control

I have read some concerns about government control of BitCoin. I guess it is fair to say that technically, governments would probably able to track most people using BitCoin. However, if governments would want to outlaw BitCoin *and* enforce that on all their citizen, they would require massive invasions in the privacy of their citizen. It would mean that the taxing services would have to be allowed access to stored data on all bitcoin activities on the computers of tax payers. For the record: in most countries, these *are* different agencies than the secret services.

Giving the secret service, with well vetted employees, access to data for 'anti-terrorism' purposes is one thing. Allowing the taxing agencies, with thousands of employees and often a lot hired from contractors, is another thing all together.

I think if they would even thinking about doing that in Germany, the answer would be "NEIN!". The Germans definitely remember the Stasi and are very concerned about their privacy. And with the recent Snowden revelations, I would say: they can completely forget about getting such kinds of laws trough in Germany. The rest of Europe might be a little easier to convince, but even then, it would take months if not years to force trough parliaments in most of Europe, especially now that Snowden's revelations are still fresh in memory.

However, thinking about Germany, one never knows what they might do next. The Germans are not stupid and they like "sound money". In fact, the traditional economic policies which made both the Deutschmark and Dutch Guilder "hard currencies", are at least inspired by the Austrian school. After all, Austria is next-door to Germany.

Now things get interesting. Of course, all of you know that Germany wanted it's gold back from the Fed, but so far returned empty handed. And their Constitutional Court still has to make her final verdict on the legality of the ESM:

The German constitutional court, based in Karlsruhe, is currently deliberating on the legality of the European Stability Mechanism (ESM) and the ECB’s Outright Monetary Transaction programme (OMT). After the court had preliminarily approved the ESM in September last year, Karlsruhe had a hearing on the scope and boundaries of the ECB’s monetary policy mandate and the OMT programme and its consequences on the budget right of the Bundestag (the German parliament) in June and it is expected to announce its decision later this autumn.
Ultimately the court could force the German government to bring the ECB to the European Court of Justice or, even more dramatically, request Germany to leave the eurozone as the former constitutional court judge Udo di Fabio argued.

So, what will Karlsruhe decide?

Normally, it will be a "yes, but...". What is interesting then, is what comes after the but. Well, first of all, the German Constitutional Court has one and only one task: guard the German consititution. It is not to be involved with politics INCLUDING monetary policy. So, in a previous case, the Court decided that no matter what, the German Bundestag HAS TO HAVE the final say in "budgetary matters". So, the court basically said: "All is nice and well, BUT you have to make sure that the other Member States understand that as far as Germany is concerned the treaty has to be understood in such a way that whatever money is promised in the direction of the EU, no matter what, it HAS to contain a signature of the Bundestag."

All, right. So, what is going to be the "but" this time?

Well, Germany has a body where politics are decided and that is the Bundestag. It also has a body for "monetary policy" which is there because it needs to be independent from politics: the Bundesbank. The Bank that clearly does *not* agree with QE-European style. But the point is: there is only *one* institution which can have the authority to make decisions about German monetary policy and that's the Bundestag and NOT the ECB. So, expect to find the word 'Bundesbank' closely following the 'but' in the coming verdict of the Court.

All right. Now let's suppose the Bundesbank would be looking for an exit strategy to get out of the Euro, a very nasty political problem. The politicians don't want it, but the Bundesbank's nightmare would be over IF they could somehow, some way get out of this darn Euro and get a decent currency once again.


BitCoin's current market cap is just a mere 14 Billion. So, for a measy little 10-30 Billion they could buy themselves a lot of 'collateral' within a totally new currency system which would subsequently replace the Euro within a couple of months. End of problem.....

So in the end, how is this limiting growth of the supply of digital coins?

In the end, the security of the system depends on the amount of processing power "invested" to keep the network secure. If the network of "miners" or "validators" does not have enough processing power, the system can be over-run by what is called a "51% attack". And it the network is not secure enough, you risk of your coins being stolen, being double spent, etc.

In other words: it may sound simple in theory, "just make your own version", but your version will not be secure without tremendous investments in a "mining and validation" hardware. And a currency which is insecure is, well, basically worthless.

@ student for life

+10 hat points for you!

You nailed it: there are many aspects and viewpoints to this and no one can predict the outcome. I think it is very wise, from an investment point of view, to make sure to have *some* bitcoins, as an "insurance" as you call it.

In essence, the value of a CC is to be found in one thing:

The capability to perform global transactions *securely*.

That can be used for various applications, from "micro payments" to running the complete global economy. So, there are enormous possibilities, but there are also considerable risks. It might get hacked, but then again, hacking attempts might also be circumvented by the community, resulting in a stronger system.

In the end, there is just NO WAY to predict rationally whether or not BitCoin is going to succeed eventually. The only thing one can really deduce is that IF this system turns out to be secure enough to withstand the coming attack from TPTB, the price of the BTC will go to the moon and beyond.

In other words: putting money in BitCoin is basically a bet, a bet that this system will turn out to be a better place to put your money in than in virtual government fiat AND that BitCoin will also become the dominant CC, because of it's enormous "mining and validation" network which makes it secure, or at least is supposed to.

Sure, I understand... but I

Sure, I understand... but I also know several hundred global banks and investment firms that might possibly have the funds to make such tremendous investments in mining and validation hardware.

Yes, that's one of the reasons why it is so hard to predict where this will go. The problem is that normal CPU's are not particularly suitable for the kinds of calculations being performed in the BitCoin network: binary operations. CPUs used in super computers are optimized for floating point operations, NOT for binary operations. That is why some kinds of GPU processors as used on graphics cards are much more efficient. It has turned out that specific versions of ATI (now AMD) graphic cards have up to 10 times more performance than other GPUs. Today, dedicated processors have been developed specifically for BitCoin. There are systems which are thousands of times more efficient for BitCoin calculations than computer systems using normal CPUs or even GPUs.

So, they might have the funds, sure, but how fast could they rival the security of the current network? How fast could enough (additional) dedicated processors be produced for such a task? How much time do they have? How fast will the BitCoin network grow?

Questions, questions, questions.

It's just unpredictable what the outcome will be. The only thing with regards to security one can say is that the BitCoin network appears to be the strongest network of all rivalling CCs.

And who would John Q. Public prefer to buy their digital coins from? "Anonymous and scary" Bitcoins, or the all-new "Citicoin from Citibank?"

Hard to tell, too. I do have the feeling that a lot of people are just about fed up with the bankers. So, lot's of them might just take their chances and go for BitCoin.

BitCoin architecture from a technology point of view

One important aspect about the BitCoin discussion is it's character from a technology point of view.

As I posted before, from an economic point of view the system is essentially a credit-based virtual monetary system, in contrast to the current virtual government fiat debt-based systems. From that point of view, the systems which come closest to the BitCoin system are Lincoln's greenbacks and Hitler's "mefo bills". In other words: from an economic perspective, this system is fundamentally different from current virtual government fiat systems.

From a technology perspective, there are first of all the security features. Given that the system has been running for a number of years, whereby hackers would actually receive a financial reward when hacking this system which has not happened to date, it is clear that the security is definitely not bad at all. There are issues with online wallets and/or the exchanges, but these are not problems of/with the system itself. Primarily, the security depends on the availability of lots of processing power, which makes that the original BitCoin system clearly has the best cards.

Besides these points, there is the argument about "is this the umpteenth WordPerfect, FaceBook or whatever" or is this something different?

It is something different, because it is primarily a concept, an idea, an architecture. And while an application in IT land typically has a life-span of just a couple of years, an architecture often has a life-span of decades. Take the idea of a spread-sheet, for example. The concept is still the same as in Lotus 123, but there are lots of spreadsheet applications today which offer the same concept. When looking at the BitCoin architecture, perhaps the best comparisons are the Unix architecture and the e-mail standard.

Unix has a history going back to the early 70's:

"The history of Unix dates back to the mid-1960s when the Massachusetts Institute of Technology, AT&T Bell Labs, and General Electric were developing an experimental time sharing operating system called Multics for the GE-645 mainframe. Multics introduced many innovations, but had many problems. Bell Labs, frustrated by the size and complexity of Multics but not the aims, slowly pulled out of the project. Their last researchers to leave Multics, Ken Thompson, Dennis Ritchie, M. D. McIlroy, and J. F. Ossanna,[9] decided to redo the work on a much smaller scale. In 1970, Peter Neumann coined the project name Unics (UNiplexed Information and Computing Service) as a pun on Multics, (Multiplexed Information and Computer Services). Eventually, Unics supported multiple simultaneous users, and it was renamed Unix."

In the early 1990's, Unix was all but dead, because of the introduction of Windows NT:

Then came the open source revolution, started by Richard Stallman in the 1980s (WP link above):

"In 1983, Richard Stallman announced the GNU project, an ambitious effort to create a free software Unix-like system; "free" in that everyone who received a copy would be free to use, study, modify, and redistribute it. The GNU project's own kernel development project, GNU Hurd, had not produced a working kernel, but in 1991 Linus Torvalds released the Linux kernel as free software under the GNU General Public License. In addition to their use in the Linux operating system, many GNU packages – such as the GNU Compiler Collection (and the rest of the GNU toolchain), the GNU C library and the GNU core utilities – have gone on to play central roles in other free Unix systems as well.
Linux distributions, consisting of the Linux kernel and large collections of compatible software have become popular both with individual users and in business. Popular distributions include Red Hat Enterprise Linux, Fedora, SUSE Linux Enterprise, openSUSE, Debian GNU/Linux, Ubuntu, Linux Mint, Mandriva Linux, Slackware Linux, MEPIS, and Gentoo.
A free derivative of BSD Unix, 386BSD, was also released in 1992 and led to the NetBSD and FreeBSD projects. With the 1994 settlement of a lawsuit that UNIX Systems Laboratories brought against the University of California and Berkeley Software Design Inc. (USL v. BSDi), it was clarified that Berkeley had the right to distribute BSD Unix – for free, if it so desired. Since then, BSD Unix has been developed in several different directions, including OpenBSD and DragonFly BSD."

Today, Linux (Android) and derivatives of BSD Unix (Apple's Mac OS X and iPad/iPhone IOS) are running at most mobile phones, super computers, routers and lots of other hardware. Especially on the mobile and tablet markets, Unix derivatives dominate the market.

When we look at the BitCoin architecture from this perspective, then chances are pretty high that at least the architecture, the concept, has a long life in front of it.

Now the comparison to e-mail, which is not only an architecture, a concept, but it also contains a standard, a protocol. This protocol has also survived for a long time already and has been used by lots of different applications. Of course, several additions have been made to the protocol, but the basic protocol has survived. In principle, any modern e-mail client can still receive e-mail sent by the first generation of clients.

From this perspective, the BitCoin protocol with which the architecture is implemented can be compared to the e-mail protocol. It specifies the data-formats, etc. with with BitCoin clients can make transactions with the network. It is entirely possible and even to be expected that new client applications will be developed, with additional features, and that the protocol will be extended to add new possibilities to the system. Just like the idea of "e-mail attachments" has been added later to the existing protocol, without breaking the original protocol. In other words: chances are pretty high that the BitCoin protocol also has a long life in front of it, just like the e-mail protocol.

Going back from e-mail to the Unix comparison, we should add that the current BitCoin implementation is "open source", which allows others to implement new features on top of the current code-base, just like what is being done with Linux. Some of these will be embraced by the community and "make it", some of these won't.

All in all, the BitCoin system, from a technology point of view, is comparable to Linux, in the sense that it is an open source implementation of an architecture and a protocol, which together form the basis for a revolution comparable to the invention of e-mail and the internet. It is open source and flexible "enabling technology", which can be adapted to all kinds of future needs, without breaking the current protocol.

In other words: the BitCoin architecture / protocol / open source (reference) implementation is a force to be reckoned with from a technology point of view. Given the resilience of the Unix architecture within an open-source eco-system and the basic concept and architecture of the BitCoin system, it is fair to expect the BitCoin architecture to be able to survive quite a storm.

BTC vs PMs

The price of BTC in terms of gold and silver will be very interesting to watch. Of course, many BitCoin millionaires are "true BitCoin believers", but given the volatility of the BitCoin and the April crash, there is a certain amount of fear and uncertainty in the market. At some point, rational people do want to diversify. That's just plain common sense. You do NOT want to bet your life savings and profits on a single horse forever.

Since "BitCoin believers" do have a pretty good picture of monetary systems, one can expect the BTC millionaires to increasingly become interested in PMs, thus increasing demand, which demand only adds to the expected massive demand out of short covering. And there are signs that this is indeed happening:

Gold and silver bullion was apparently among the biggest selling items on Bitcoin Black Friday.
According to Bitpay, one of the largest Bitcoin payment processors, the top-three online retailers on November 29 were KnCMiner (whose gonzo order volume for its latest mining device we told you about yesterday), Gyft, and Amagi Metals.
Amagi Metals chief Stephen McAskill told BI in a separate interview that his site processed \$900,000 worth of bitcoin between Thanksgiving and Sunday. The biggest selling items were silver and gold coins and bars, he said.
"To me it makes sense," he said. "A lot of bitcoin enthusiasts are interested in sound money, money that doesn't lose value."

Just look at that number!

Almost \$ 1 Million in bullion demand in THREE days by just ONE outlet!

So, IMHO the stage is being set for a incredible rally in PMs. Once PMs take off, one can expect them to outperform the BitCoin, because there are massive short positions which HAVE to be covered AND we get additional demand because of "diversifying out of BitCoin".

Don't be surprised to see the BTC drop in value relative to gold/silver, such that 1 oz of silver will at some point be worth more than 1 BTC, no matter how high the BTC might go in terms of virtual government fiat.

Re: Could be a double top in

BTW, this is how a bubble looks like, it has a typical shape. All of them look the same, with log-periodic wave signatures ( read Sornette please about bubbles and why they occur ( herding) and why they must crash ) .

Yes, it looks like a bubble, but IMHO it's impossible to judge from the charts that it IS a bubble.

These are not Tulips, you know. What we are looking at, is an architecture, a protocol and an open source reference implementation of a decentralized virtual credit-based monetary system, in contrast to current centralized virtual debt-based government fiat monetary systems. I posted quite a lot of comments on a lot of aspects of the BitCoin system in this thread:

So, what we are looking at, is something different from all the bubbles we have seen before, because at it's very core it contains a number of ideas and concepts that could revolutionize the complete financial system.

And it is implemented as software and/or new technology, the adoption whereof typically shows an exponential growth curve, too, just as a bubble:

Exponential improvement in core digital technologies is fueling exponential innovation. The cost-performance of three core digital technology building blocks—computing power, storage, and bandwidth—has been improving at an exponential rate for many years. As the rate of improvement accelerates, we are experiencing rapid advances in the innovations built on top of these core “exponential” technologies. The current pace of technological advance is unprecedented in history and shows no signs of stabilizing as other historical technological innovations, such as electricity, eventually did.
These rapid advances have the power to disrupt industries. The disruptive potential of exponential technologies is amplified when they interact and combine in innovative ways. The impact is further amplified when technologies coalesce into open platforms and ecosystems. These reduce the investment and lead time required to drive the next wave of innovation into markets by enabling people and technologies to rapidly build on previous waves of innovation.

How do you know that this is a speculative bubble and not an "exponential innovation" growth curve?

The bottomline is that nobody KNOWS for sure. One can make an assesment and make estimates, yes, but one cannot predict how this plays out.

Given the aspects I have considered, I would estimate a bet on BitCoin has about the same chance of winning a game of Russian Roulette. Your assesment may be different, but no matter what, there is a chance BitCoin WILL become the dominant financial system of the future. One can estimate that chance to be it 1%, one can estimate it to be it 99% and everything in between. But no matter what number one might want to come up with, the chance of BitCoin becoming the system of the future is bigger than zero and less than one.

The same thing goes for the chance that this is a bubble and not an exponential growth curve. The situation is that complex with that many unknown aspects that IMHO technical analysis of the charts alone to conclude anything about this is basically useless in order to make an informed decision about whether or not to get a position in BitCoin.

Re: I know what I'd take

If it's an "or", it would be a no brainer, I'd take the gold.

Ideally, I would opt for 9.9 oz of gold and 0.1 BTC. 2035 is only two decades away. Given the history of Unix so far and the fact that the basic architecture of computers has not changed since at least the early 1960s, I would take my chances that the current architecture will at least still be useable two decades from now. Since diversifying just needs to be there in a well balanced portfolio investment and/or survival stategy, I would definitely diversify, if I could. I would also love to trade 1 pz of gold for 60 oz of silver, given the current prices. Silver just needs to part of the strategy, too. Heck, you might just need it to get some "old" computer going, so yiu can spend your 0.1 BTC :)

Come to think of it, I would happilly trade 2 oz of gold for 0.1 BTC and 20 oz of silver. Yes, it would cost some, but you just NEED at least *some* of all three in a wise strategy. You need BOTH sound money AND a way to 'wire' some kind of money across borders. If need be, you can afford to loose the 'wireable' part, but it sure is nice to have as a plan B.

However, when you look at the chart above..

However, when you look at the chart above, it is most certainly one very specific thing:
A speculative bubble.

As I said, it's pretty much impossible to distinguish a bubble from an exponential growth curve just from a linear chart alone. However, we can deduce some picture from the log scale charts.

Since we are talking about exponential phenomena, any exponential growth trend will be visable as a straight line. So, with a log scale graph, it is very easy to study exponential growth patterns.

When you look at the long term BitCoin log chart, you see a pretty long fundamental support line, which support currently lies at around \$ 200 - \$ 250. It is logical to assume this trend line to more or less represent the basic value of the BTC and that the part above that support line is the result of a speculative bubble.

However, there also appear to be a number of accellerations, which do blow off and lead to some side-way action, but after that, it just continues going up along the long term exponential trend, starting in Oct 2010.

So, I agree that there is a bit of bubble. A few days ago, I expected to see a dip right down to below \$400, but watching the market, I got the impression that there is reasonable demand in the market. The dips are being bought and to me, that is the market saying that it wants to go higher, so I bought the dip in two equal purchases at €800 and €670 or so. Just small purchases, as you will understand. This is a Russian Roulette kind of bet, and I do NOT want to do that with my life savings.

I still think that a dip under \$400 is possible, but it would also not surprise me if the bottom is already in.

To cut a long story short: yes, there appears to be quite a lot of air in the current price and thus a blow off towards the long term support is possible, BUT this is a volatile market and there's a lot of hype now, so it might just as well go higher from here.