WSJ Video - Bitcoin Commentary By Chuck Jaffe
Chuck Jaffe, senior columnist for Marketwatch, goes on camera to reiterate all the talking points that are followed by journalists wishing to steer their readers away from Bitcoin. To determine whether or not Jaffe hit them all, here’s the scorecard:
Somewhere, Jaffe’s notes must have gotten mixed up because the term “ponzi” was not used whatsoever and there was no alarm raised over electricity being wasted from mining Bitcoin.
On a more serious note — either Mr. Jaffe cannot grasp the concept of how a decentralized currency requires no bank intermediary or he purposely confuses things because repeatedly mentioned were “online banks”.
Online banks are generally used by those who are non-technical because to use Bitcoin the way it was designed where the coins are kept in a wallet locally is something that requires secure computing practices to be followed and for reliable backups to be maintained.
Thus Mr. Jaffe’s later point about bitcoin not being ready as an investment mechanism for the “average person” is useful commentary at the present time.
Multi-factor authentication (e.g., Mt. Gox’s yubikey), for example, reduces significantly any security risks with online bank-like ewallet services and is a dead-simple concept for most who are technical. Our banking system has not yet forced us as consumers to adopt true multi-factor authentication and as a result the “average person” will have a learning curve to climb when first using an online ewallet with these security mechanisms.
Of course, during this commentary Bitcoin’s attributes were not touted. These include:
The Bitcoin ecosystem is constantly evolving and the shortcomings some see with the currency are being addressed. The hybrid wallet model used for BitcoinJS / Webcoin, for instance, will likely be the innovation that boosts bitcoin use by mobile users. Some exchanges are introducing margin trading and shorting — mechanisms that will add liquidity and will help to lower Bitcoin’s exchange rate volatility.
These are examples of improvements that are in Bitcoin’s near future. If demand for bitcoins rise as a result, the currency having a limited issuance means that most of the supply would have to come from those willing to part with their holdings — something that may not happen unless the exchnage rate reaches a significantly higher level.
Those choosing to retain their bitcoin holdings are likely those who are seeing the future prospects for Bitcoin rather than succumbing to Jaffe’s rear-view-mirror analysis.
Jaffe had also published commentary in Marketwatch recently.
Feedback on Paul Krugman’s attempt to use Bitcoin to make a point about monetary systems continues — the latest being a post on Present Cynosure. An excerpt:
Krugman completely neglects the fact that non-speculative markets for Bitcoin are still poorly developed. In his argument he does not distinguish between speculation and other types of transactions. As Surowiecki writes, this distinction is fundamental.
If Bitcoin is so great, why isn’t it catching on?
Finally [with wallet encryption], I can tell my friends about Bitcoin, and I don’t have to lay awake at night wondering if their Bitcoins are being stolen by crazy hackers from the Caribbean.
Just imagine how many projects are on the go that we don’t yet know about, or how many haven’t even been thought of yet. Patience is a virtue, and it’s desperately needed here.
The tipping point will come eventually - I’m convinced it’s inevitable - but it’s not going to happen tomorrow.
Volume on Bitcoinica’s trading market has been very high — likely as the result of much forced selling on behalf of accounts that had seen their valuations plummet below the required margin maintenance levels.
However traders waiting patiently on bank transfers to move funds funds to the exchanges also have the ability to speculate on bitcoins at these levels (currently under $2.50 USD) thanks to Bitcoinica. This service provides the ability to purchase bitcoins funded with leverage available from the bitcoin balance on deposit at Bitcoinica.
With 5X leverage, a deposit of 10 BTC gives the trader the ability to purchase over $100 USD worth of bitcoins (at current market exchange rates). At the same time, if the trader is fully leveraged, a 20% drop in the market price — even one lasting a mere number of seconds, will cause forced selling which leaves the trader with almost nothing remaining.
This is a service for those who are aware of the risks and know how forex or similar trading systems function regarding the trading spread, Bitcoinica can also be used to short Bitcoin — with similar levels of risk as being margined on a long position.
Exchange rate fluction risks are not the only concerns that traders should be aware of. Bitcoinica just opened to the public in September, 2011. The site has a copyright mention referencing a xWaylab, Inc (a Delaware corporation) however the site does not yet provide a terms of service and it is not known from which jurisdiction the service operates. The service does not appear to address regulatory requirements reference in this alert from FINRA.
With no minimum deposit or balance requirement — experimentation to learn the system using trivial amounts of bitcoins can occur with no disadvantage versus larger traders.
The Economist revisits Bitcoin, months after it previously covered the digital currency at about the time the exchange rate hit its to-date peak. Excerpts:
It is hard to say for sure why Bitcoin crashed the way it did. One plausible hypothesis holds that the currency’s rise was the result of a speculative bubble. As the currency made more headlines around the globe (including in The Economist), less techie types wanted in on the action. Then, like Mr Falkvinge, they decided to cash in, and the bubble burst.
Those who have remained faithful to Bitcoin claim to be unfazed by such wild market swings.
The huge burst of buying followed by months of trading at descending levels more than ninety percent below the peak is nothing anyone wished to see but many of the metrics are still strong. Bitcoin isn’t going away.
The number of daily transactions has trended down since the peak but its drop has been about half, which is logical because if much of the activity was related to transactions to and from the exchanges, less of that activity would show up in the transaction totals.
The timing on when bitcoin will start to rise isn’t known but what is known is that the amount of new currency issued will be dropping in the future. The digital currency is inflating at the rate of 7,200 BTC per day at present. That rate will drop by half to 3,600 BTC per day in a little over a year from now. At the current exchange rate that means inflows of just $10K USD per day will cause the price to equilibrate. $10K USD for a currency that can be used globally with advantages over many of the competing payment and redemption systems that exist now. Even those with low expectations for bitcoin should understand that the long-term potential is tremendous.
In terms of dollars traded this volume doesn’t even rank in the top ten but with the BTC/USD exchange rate below $3, this level of volume has never before been seen.
The selling did cause the BTC/USD price to drop about 20% from the level just prior to the selling however as USD funds were moved to exchanges to take advantage of the selling the price started to rise to about the $2.70 level — a drop of about 10% from the levels seen in the days prior.
A tool available to traders caught without USD funds available when the selloff happened is the Bitcoinica exchange. Bitcoinica allows the value of bitcoin deposits to be used to obtain credit when purchasing additional bitcoins on margin. Leverage is provided up to five times (5X) the value of the bitcoins or USD deposited.
Margin leverage is not recommended unless the trader is experienced and even experienced traders will find their entire position wiped out following the forced margin selling that can occur when the price moves opposite to the traders desire.
Volatility causing the price to move 10% is not unusual for bitcoin so with this record level of volume to not result in an even larger price drop might indicate that a price floor in the $2s has possibly been found.
This would be welcome news for Bitcoin traders who have seen their holdings drop dramatically over the previous months. The price in the low $2s was seen several weeks ago so this selloff did not bring new lows when considering the past couple months.
If you take the proper steps [Bitcoin] is the most portable money ever. For that element of safety and liquidity therefore I think everyone should hold some BitCoins, perhaps at least 0.1% of their net worth, in their portfolio.
I would take a bet for BitCoins to hit $7.50 by June or July at around a 50-70% probability.
If you want to buy any Run To Gold products using BitCoins […] we can make a deal with a substantial discount.
BTC/USD Finishes 2011 Up 1,473%
The last trade for 2011 at the leading Bitcoin exchange was at the rate of $4.72 USD. For the year, Bitcoin’s exchange rate rose from $0.30 — a 1,473% increase. For the fourth quarter, the exchange rate dropped from $5.14 — an 8% decrease. For the month of December, the exchange rate rose from $3.06 — up 54% for the month.
The number of transactions where Bitcoins are used for both the transfer of funds and for commerce has not risen for the past quarter. The explanation for the exchange rate rise would seem then to be mostly attributed to a combination of short term speculation and the use of the currency as a store of value rather than it being due to organic demand from use as a trading currency. World financial events that have motivated investors towards precious metals such as gold might be having the same effect in driving investor interest in Bitcoin.
Because there is so little definitive information that can be learned from observing the transaction data of a pseudonymous digital currency, speculative theories are plenty in explaining the price rise. Whether or not this is simply greed being stronger than fear at this point is hard to tell. What is known is that rallies of this current magnitude have already occurred for Bitcoin more than a dozen times over the past year-and-a-half.
January 2012 Wrapup
The Bitcoin exchange rate continues its upward march with a January closing price of $5.49 USD, a number 16.3% higher than the 2011 closing price.
Even with this gain the month-end price was still well below the month’s high when the exchange rate topped $7 several times earlier in the month. Much of the reason for that level being reached was likely speculation attributed to the currency being the topic of an episode in the television legal drama The Good Wife which aired in the U.S. on January 15th, 2012.
At the fundamental level, the month showed impressive growth in the number of transactions processed daily — though investors are cautioned that these bitcoin metrics are easily manipulated and to consider this factor before using these metrics when making investment decisions.
Additional progress is being made with the ecosystem surrounding Bitcoin. The financial intermediaries BitInstant and Paxum both added significant functionality that will help expand Bitcoin’s reach further, around the globe.
Just under a quarter-million bitcoins were issued (or “generated”, or “mined”) during the month worth nearly $1.5 million using the average daily valuation of $6.10. Mining is back to being moderately profitable for the miners paying typical electric rates using typical mining hardware though as happens normally, there is only a short lag after the price moves before mining difficulty will catch up such that profitability nears breakeven.
While there aren’t any single upcoming developments that are expected to have a major impact over the next weeks, Bitcoin is showing resilience with growth in its utility as a currency and also as a store of value. In 2011 it was January which was the month that things were relatively quiet and then February was the month when the pace quickened.