Bitcoin chart from Mt Gox exchange 

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Context 1

... . This looks small, but when compounded monthly, the yearly yield is 19.6% per year, which is 13.5% above the formal 6.1% per year yield. This can put debtors into a ‘cash crunch’ because they no longer can afford to pay their bills and service the loan. That means the bank will foreclose on the collateral for the loan, which is usually the assets of the business or individual. If it is a business, then the employees lose their jobs, suppliers don’t get paid, and that business stops producing wealth in the real economy. Employees that lose their jobs can no longer afford to pay their bills and service their loans, and so other loans go under. That is the cycle that the Federal Reserve has been fighting with quantitative easing. In addition, when money increases in value relative to goods and services of the real economy, then hoarding of money becomes a winning strategy. The higher the rate of increase in the value of money, the more effective is the hoarding (or miser) strategy. This may appear trivial to naive readers who might think that if the money is deposited into a bank that the bank can pay some level of interest, so it’s all fin e. But banks make their money on the spread between what they pay for money and what they receive in net return on loans. When the currency is increasing in value (deflating) what a bank is able to pay in interest can become less than zero. Less then zero is not typically an attractive interest rate to depositors. When loans go bad in larger fractions than normal, the bank doesn’t make as much money as it did and there are fewer creditworthy borrowers to pay the bank for loans. So depositors can’t make much, and they may not be able to get their money back because the bank has too many bad loans. If depositors have amounts larger than the bank has in deposit insurance, then depositors can get caught in the downdraft. That sort of thing is what motivated people in the great depression to save their money in a mattress so they wouldn’t lose it, and that crisis resulted in the FDIC. As already seen, money that is hoarded is not productive money in the real economy because it is not invested and can’t be made t he basis for loans. Consequently, the economy has to suffer. Looking at the chart in figure 1, one can see a bubble occurred more than once that drove up the price of bitcoin, deflating the currency. Analyses of the bitcoin blockchain record show that hoarding is a serious issue[13-15]. Bitcoin proponents have answered criticisms about deflation with declarations that lack evidence. For ...

Context 2

... and Sirer point out a serious technical vulnerability of bitcoin[30]. Bitcoin depends on the longest block-chain being the honest one. It has been understood from inception that this requires that the majority of nodes are honest. However, Eyal and Sirer describe a vulnerability that begins at 33% of computing resources. An implication is that a government (or wealthy private party) can take control of a cryptocurrency with this design (which is all cryptocurrencies now in existence) by applying superior computing resources. Even if the bitcoin algorithm is modified, it is evident that bitcoin will always be vulnerable to brute force application of sufficient computing resources to overwhelm the system. Bitcoin is currently designed to be divisible into units called satoshis that are 0.00000001 of a bitcoin[8]. That bitcoins are so divisible is supposed to mean that because 21 million bitcoins (the asymptotic limit) x 100,000,000 satoshis per bitcoin, is 2,100,000,000,000,000 (2.1 quadrillion) that bitcoin can be a viable global currency capable of supporting virtually any degree of expansion on the scale of nations. Bitcoin proponents may take issue with the above statement because I did not subtract 1 from 2.1 quadrillion to symbolize staying below the asymptotic limit as Karpeles has done[8]. However, for these purposes, using a limit that is larger than the real one is just as meaningful. Additionally, there are prob lems with Karpeles’ calculation. Subtracting 1 from 2.1 quadrillion satoshis is not correct because bitcoins are mined in integer units, not satoshis, and cataloged losses of bitcoins have almost entirely been in whole units, at least 26,609 of them[24]. (In this use of the word “ loss, ” a bitcoin loss is a documented removal from the system of a bitcoin entity that cannot be replaced.) So the minimum theoretical number of satoshis to subtract from 2.1 quadrillion is 100 million. Based on the 26,609 documented bitcoins lost, the actual upper limit is lower by at least that many bitcoins, which is 2.66 trillion satoshis. The true upper limit may be hundreds of thousands, perhaps millions fewer whole bitcoins, because people have reported losing digital wallets, and there is no visible difference between a lost bitcoin and a hoarded bitcoin[14]. In unauthenticated reports, people lost some large wallets in the early days when they didn’t think bitcoins mattered and mining them was relatively quick. Per figure 1, at the valuation of November 15, 2013, bitcoins sell on Mt.Gox for a nominal $430 each, with a wide range. The 2012 GDP of the United Kingdom in USD was $2.44 trillion[32]. If all bitcoins were available for use in commerce, then in order to support commerce equal to the U.K. alone, each bitcoin would have to appreciate 270 times from its current peak for a total of more than 2.3 million times its earliest valuation. Not gold, silver, diamonds, oil, beanie babies, nor any other valued commodity – not even tulip bulbs[33] has achieved that. All evidence available indicates that such a wild deflationary increase in valuation would not occur. In the real world, exchange rates for precious metals have not increased in price more than one or two orders of magnitude, even over periods of time like a century as shown for gold in figure 2. But let us forget about that and presume, for the sake of argument, that the USD valuation of each bitcoin rose to approximately $116,600 over the next 5 years as required to match a significant economy in the world. Generating a transactional economic value close to the UK’s economy spendin g virtually all the bitcoins in existence each year would allow us to minimize the required rise in bitcoin valuation. Starting from the valuation of $430 per bitcoin would require bitcoin’s valuation to multiply by 271 times over 5 years. That would be a 109% monthly compounded interest rate. It is impossible to imagine that commercial trade transacted in bitcoins or centi- satoshis would be robust if the valuation were increasing at such rates. No rational player would use bitcoins for spending purposes. Certainly, there are irrational participants in every economy, but it is not in the least credible to believe that virtually every player, from the wealthiest to the poorest would spend large amounts of rapidly appreciating bitcoins every year. Nor is it credible to think that a fraction of players would spend so many bitcoins that their transaction volume would approach the necessary GDP through high velocity of money through the system. Without one or the other, the level of appreciation required to allow bitcoin to support an economy of a mid-size nation would be far higher. A higher rate of appreciation means an even greater incentive to hoard, which further decreases the credibility of bitcoin supporting actual commerce. Consequently, it is impossible to imagine that the user base for bitcoins used in commerce could enlarge enough to drive such a valuation increase. The valuation of bitcoin will always be determined by speculation, not by utility for spending. It is believable that motivated transactors will continue make use of bitcoin as an alternative for a black and grey-market payment system, although regulators and law enforcement are making that more difficult. However, what will drive speculation is the creation of an enlarged, or simply wealthier, speculator pool. Despite a report that the Cypriot financial crisis triggered the major rise in the price of bitcoin[36] the Cypriot crisis timeline does not line up well, although it may be possible that some account holders bought bitcoins. Lacking harder evidence, the entry of the Winklevoss twins appears most likely to have driven the most recent price rise – they claim to have acquired 1% of currently available bitcoins for their proposed ETF[20]. There is little evidence the speculator pool has enlarged much in numerical terms, but no statistics are published. On a bitcoin “Myths” web page is a discussion of bitcoin and fractional reserve banking[8]. An anonymous blogger at Blogdial, cited by Matonis (who was in turn cited by the ECB) ...