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Bitcoin drops again

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Smiling Dave Posted: Fri, Aug 26 2011 11:06 PM

Another 15% to $8.50 at mtgox.

Would you invest in a stock with a chart like that?

 

Will its death be slow and lingering? Or will it just snap like a dry twig at some point?

 

Here's an article from Marketwatch.com that asks the key question all the bitcoiners just fail to grasp, emphasis mine:

The issue is whether Bitcoin will ever be so widely adopted that it acts like a real, stable currency.

Interestingly enough the article compares bitcoins to beanie babies.

Bitcoin, right now, isn’t just popular, it has the feel of a mania, like tulips in the 17th century or Beanie Babies in the late 1990s,

where supporters appear ready to suspend rational thought as they throw money into something that they desperately want to succeed.

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John James replied on Sat, Aug 27 2011 12:14 AM

It makes for a catching analogy ("oh wow I remember those!") but it's not exactly accurate.  People wanted Beanie Babies because...well because eveyone else wanted them.  They wanted to collect them.  Like Pokemon.  "Gotta catch em all."  It was a collector's game.  And that was their hot time.  Just like every other collectible has its heyday.  Bitcoins are not collectibles.  And people don't want them because they're trying to complete a "set" of unique bitcoins.  The people buying and using bitcoins see them as a useful tool...something to substitute for the currency they currently use, as much as they can...and hopefully fully replace it.

People were not buying beanie babies because they felt they were a part of a movement to change the modern monetary system.  Bitcoin users do.  That's a big difference.

 

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John Ess replied on Mon, Aug 29 2011 4:27 PM

John James, it's true it was collectible and part of a movement.

But I think part of the appeal of beanie babies was that people expected a future return on hoarding those monstrosities in their houses.  And having a few of the rare ones when they went on sale in limited edition.  I think I remember 'pogs' were the same.  Caused by the success of Star Wars action figures and other stuff that was left in the package.

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John James replied on Mon, Aug 29 2011 10:52 PM

John Ess:

John James, it's true it was collectible and part of a movement.

But I think part of the appeal of beanie babies was that people expected a future return on hoarding those monstrosities in their houses.  And having a few of the rare ones when they went on sale in limited edition.  I think I remember 'pogs' were the same.  Caused by the success of Star Wars action figures and other stuff that was left in the package.

All of that does nothing but support my point.  I'm not sure why you led off with "but".

 

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Irdial replied on Tue, Aug 30 2011 7:48 AM

 

An essential feature of the standard attack against Bitcoin is to point to the price charts generated by a single Bitcoin exchange and then use that as definitive proof of Bitcoin's unsuitability for any purpose.
 
The attack uses these single source charts to 'prove' that Bitcoin is a mania, like the Dutch Tulip mania or Bollengekte of 1637, or that Bitcoin is 'insecure' or any other fundamental flaw, technical, financial, philosophical or psychological you care to mention.
 
Let us be perfectly clear; these Bitcoin detractors are ignorant of what Bitcoin is. They are near horizon thinkers, dullards, luddites, and the sweetest irony of it all is they are peddling their flawed ideas on a medium that directly disproves their theories.
 
I have already debunked and quashed many of the fallacies that are routinely trotted out whenever Bitcoin is discussed by the ignorant on our blog; now I want to clear up a different fundamental mistake that all the current detractors of Bitcoin are routinely making, which is perfectly exemplified by the recent MarketWatch video item, which unintelligently parrots all the anti-Bitcoin nonsense as if it were being read from a centrally provided script or press release.
 
The fundamental mistake these ignorant people are making is this; Bitcoin is not an investment, it is a container and payment method.
 
When you think about Bitcoin in these terms, it becomes instantly clear that Bitcoin itself should not be treated like stocks or commodities. If you think of Bitcoin as only a container you use to shuttle payments to people for things on and off-line, you immediately understand that looking at stock market style charts of its value from a single exchange as a way of gauging its future potential is completely ridiculous.
 
Bitcoin's potential lies in its power to facilitate peer to peer purchases; it is not a commodity or a stock or a company, it is a method, a container, a protocol that people use to make purchases between themselves.
 
Think about it this way; if, in 1997 you were told about a thing called 'the Internet', that would replace sending letters, utility bills and postcards through the mail to people all over the world at no cost, via a system that would not be run by any central authority and which was sure to utterly change the world and make people millions of dollars, you would be interested in it as an investment.
 
Someone could (having fundamentally misunderstood what the Internet actually is) buy many domain names and then issue certificates against them, put these certificates into an exchange, and then start to sell them to investors. Charts would have been generated, and as a land rush began as the potential of the Internet became apparent to everybody, you would have seen a massive spike in the quoted prices of domain name certificates.
 
Unique names like 'sex.com' could have been bought into by syndicates, who issued shares in it so that the cost of investing in 'rare' domain names could be spread out. You could buy shares in that domain name syndicate, and see their value rocket up.
 
Are you beginning to get the picture? Domain names are nothing more than a method to instruct client programmes on computers to connect to a numeric address that refers to a server computer on the internet. They have no value in and of themselves; the value in a domain name rests solely in the work that programmers put into expressing the ideas of entrepreneurs who run the websites the domain points to. 
 
A three letter domain name like 'sex.com' is no guarantee of success on the web in and of itself; the same is true of Bitcoin. No one would have paid a billion dollars for the domain name 'google.com' before Google put millions of man hours and genius into their software, for example.
 
If you want to 'invest in the Internet', you need to invest in a company that uses the internet to provide value to people. You cannot invest directly in the Internet, which is nothing more than a series of protocols defining containers for information that have been agreed upon by individuals. When you think about Bitcoin in these terms, you start to understand why all these foolish pundits sound so ridiculous. They literally have no idea what they are talking about.
 
Bitcoin is a way to convey value from one person to another without a third party. Email is to postal services as Bitcoin is to money. It has no monetary value in and of itself; it has a very high utility, not intrinsic value. This is why looking at a single chart from MTGox and inferring anything about Bitcoin in general, or its future, or its utility and true nature is completely absurd. This is why attempting to apply Austrian monetary theory to Bitcoin is a fool's errand. Bitcoin is not money, any more than a leather wallet is money or an email is a letter written on your personal stationary; you would not define a wallet as money, or a domain name as money or a piece of paper with ink on it simply because someone buys and sells them as goods.
 
The real issue is not whether Bitcoin will ever be so widely adopted that it, "acts like a real, stable currency". The only issue is wether or not it is widely adopted, and when the disruptive effects it will have on the current crop of online payment systems that are in thrall to the State, begin to emerge.
 
And Bitcoin is a very very disruptive technology.
 
Think about Bitcoin in comparison to PayPal. PayPal is essentially a centralized brick-less bank, that keeps a ledger of user's accounts and transfers, and which charges per transaction fees. It strictly controls how much of your own money you can withdraw from them to your own bank account, how much of your own money you can spend at any one time, and PayPal are notorious for their freezing of user's accounts, service problems and lust for compliance with the regulations of the State. For example, users of PayPal unfortunate enough to live under the yoke of the government of India have recently been informed that they will not be allowed to receive payments that exceed $500 per transaction and that they will not be able to keep any of their money in their PayPal accounts longer than one week; all money received into PayPal must be transferred to their Indian bank account within 7 days.
 
I will take for granted your outrage at these anti-human and arbitrary restrictions.
 
Now consider Bitcoin. Bitcoin turns every user into an operator of their own fully functional, trans continental, free of State control PayPal service. They can accept money and then transfer Bitcoins from their computer to anywhere in the world instantly, without interference from anyone. They can accept Bitcoins on their computer in exchange for goods or services in a similar manner. The key insight that mainstream thinking people are missing is that Bitcoin can be exchanged for anything, not just money. Its accounts are essentially disposable and not tied to you permanently. You do not have to identify yourself to any third party in order to use it. If you adopt Bitcoin you are at liberty to use it in any way you like, with as much of your money as you like.
 
When you think about Bitcoin correctly, you can begin to see that its potential is as big as the advent of the internet itself, since money is half of all transactions. In the same way that email disrupted the postal service, Bitcoin will disrupt the making and receiving of payments. If you want to send a post card, you do not have to use a postman or government mail. You simply send an email. From your mobile phone. This is taken for granted, now, but it represents a tectonic shift in the way people communicate.
 
Think about how the internet and Fraunhofer-Gesellshaft's Perceptual Audio Coding software (that powers the MP3 file format) has changed the way music is distributed and consumed. No more buying Cassettes, Vinyl records and CDs in stores; no more middle men between the musicians and the music lovers. This is what Bitcoin is going to do in the realm of money transfer. And of course, the circle will be completed when music lovers pay tributes to their favourite musicians with Bitcoins.
 
Very small payments will now become possible and plentiful...anyone can develop their own money transfer and content monetizing service on top of Bitcoin without having to interface with one of the main payment processing companies. This represents a massive shift and unprecedented opportunity on a global scale. There are so many possible uses of Bitcoin you could spend all day imagining its potential uses, and you might still completely miss its killer application.
 
None of the people try to pour cold water on Bitcoin ever mention Namecoin, which is a DNS alternative based on Bitcoin. This is probably because they are ignorant of what Bitcoin actually is, and are simply regurgitating what others have written and said about Bitcoin, rather than doing their own thinking about it. DNS, as I say above, is the system of marrying words with the numeric addresses of computers on the internet. It is how people connect sites on the net with their browsers, allowing them to type in a name instead of a number. The DNS system is being attacked by the State as a way of taking publishers off-line. Google "ICE domain seizures" to find out what I am talking about. Namecoin has the potential to decentralise the DNS system, making it impossible for the State to seize domain names and attack publishers.
 
This is only one possible future use of Bitcoin, and as we have seen with the appalling totalitarian police state scandals surrounding government sabotage and poisoning of the centralised DNS system, Namecoin could remove the power of the State to control this critical part of the Internet infrastructure.
 
The potential of Bitcoin is obvious to those that are intelligent, that understand computers and software, who have some knowledge of the present state of and recent history of the internet and the problems of money transfer online. Anyone who knows what this really means is awestruck, gobsmacked at how everything is about to fundamentally change.
 
To conclude, whenever you hear anyone attack Bitcoin, your first response should be to be skeptical of the intelligence and depth of understanding of the attacker. They will cite any or all of the following to try and dissuade you from adopting Bitcoin:
 
  • Bitcoin has no backing
  • The exchange rate is volatile (with obligatory MTGox chart)
  • Bitcoin is a Speculative Bubble
  • Bitcoin is used for buying drugs
  • Bitcoin is run by amateurs 'The MyBitcoin Fiasco'
  • Bitcoin is only for techies, not for the average person
 
All of these reasons for avoiding Bitcoin are straw men, trotted out by the unintelligent who cannot think for themselves, have weak powers of insight, are very probably computer illiterate, or who are philosophically predisposed to disliking Bitcoin because they have mistaken it for money due to other people have claimed that it is money.
 
The first and last straw men are particularly galling. The dollar is backed by nothing, and these same people insist that it is money simply because other people accept it as money, but by magic, this logic cannot simultaneously apply to Bitcoin. The Internet was once 'only for techies' and now everyone uses it, and the people who do not are the exception, the 'disadvantaged' who must be helped to get onto it. If it were not so tragic, you would think these pretexts for rejecting Bitcoin were funny.
 
I predict that the same will be true of the mass adoption of Bitcoin as it was for the mass adoption of the Internet. In the very near future, the people who do not use Bitcoin for sending and receiving payments will be the exceptions, and the disadvantaged.
 
I will leave it to you to extrapolate from that, what the true value of Bitcoin is.

 

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TANSTAAFL replied on Tue, Aug 30 2011 8:13 AM

You sir, are confused. First you tell us bitcoin is not money. Then you go on to describe how it is used as money. One rhetorical question for you...

Have you read "the theory of money and credit" by Mises?

Obviously you have not because if you had, you would not be so confused.

 

If it is not money then why did you name it Bit"coin"?

 

Who is benefitting from the expansion of the number of "coins" in circulation?

 

 

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John Ess replied on Tue, Aug 30 2011 9:36 AM

"All of that does nothing but support my point.  I'm not sure why you led off with "but"."

I thought you were saying that they wanted them just to have them.  Whereas I am saying they wanted to use them eventually, at a later date when they become able to.  And the hype was mainly that you buy early, you get more money later.

Which is not unlike bitcoin. Though, I could be wrong.  And bitcoin has at least the advantage of not having to keep toys in your house.  But the gamble is the same.  If there is no use in the future, buying them now to use later won't be beneficial.

Though to be fair to toys, some of them are fetching outrageous prices.  I hope I am wrong about bitcoin and it turns into a success.

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John James replied on Tue, Aug 30 2011 10:39 AM

John Ess:
And the hype was mainly that you buy early, you get more money later.  Which is not unlike bitcoin.

It's obviously impossible to tell, but I'd be willing to bet at least a majority of bitcoin users have at least a considerable amount of belief in its viability as a store of value and unit of exchange, and hope to see it gain in popularity so that they might use it for (eventually) all transactions they currently conduct with fiat currency.  I doubt most bitcoin users are simply speculators thinking they'll buy some now and sell them later for a profit, like any other speculative investment...which would have to be the case if it were "just like beanie babies."

 

But the gamble is the same.  If there is no use in the future, buying them now to use later won't be beneficial.

There is a difference between "buying for future use" and "buying for speculation".

 

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Kakugo replied on Wed, Aug 31 2011 4:21 AM

I've just read the whole article and I have to agree with it.

It first shows that right now Bitcoin is acting more as a commodity than as a currency. That is correct.

Then it goes on saying there are two problems with Bitcoin right now.

The first is acceptance: being a completely voluntary currency you cannot force people to accept it as legal tender. If you walk into my shop and offer me Bitcoin instead of dollars, yuans, euros or silver coins, I can refuse to accept them and there's nothing you can do. If you offer me legal tender of the country we are in and I refuse you can go to the law and force me to accept it.

The second is security. For most people interested in Bitcoin that's the biggest issue. If somebody robs my bank they'll just take the money they have in the counters. My account won't be touched. If somebody hacks into my credit card account I can block the account and ask for a refund. Up to this moment there's no such security for Bitcoin. The Mybitcoin fiasco sent alarm bells ringing far and wide: was the website genuinely hacked or was it an old fashioned scam? Did the website owners take every possible step to ensure safety? Did they provide guarantees to their customers? The answer is "we don't know".

Bitcoin is at this point a "Wild West", like the article says. Just like the "Wild West" there are opportunities right now to both make lots of money or go bust. There's no guarantee Bitcoin will steadily increase its acceptance base in the future: in fact it may even contract due to scandals like Mybitcoin. In short it's a gamble and probably not a very good one. But it can provide useful insights and lessons for the future.

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If one strips away the ad hominems, we are left with the following summary of Irdial's defense of bitcoin.

1. Bitcoin is a wallet, so don't expect it to have the properties of a currency.

2. Just as the dollar is backed by nothing, so bitcoin can succeed despite being backed by nothing. Mises' regression theorem has nothing to say on this matter.

3. Since bitcoin is a wallet, looking at it's charts and analyzing them as one would those of a stock, [say of a wallet company], is foolish.

4. Just as we buy things nowadays by handing over an empty wallet, so too we will all [but for the disadvantaged] someday buy things by handing over bitcoins. 

5. Bitcoin is a method, a container, a protocol. When you give someone $17 for a bitcoin, you are paying him for a method, a container, a protocol. When you go to the one restaurant in NYC that accepts bitcoins, and you buy a meal and offer a bitcoin as payment, you are paying with a method , a container, a protocol, a wallet. So don't be a luddite and think bitcoins are meant to function as money.

6. The proper analogy to understand bitcoins is the domain name of a website. Just as domain names have value because a good domain name attracts visitors, so too bitcoins have value because they are methods and containers and protocols.

7. The key insight that mainstream thinking people are missing is that Bitcoin can be exchanged for anything, not just money. Thus it is not even pretending to be a means of exchange, but rather a method, a container, a protocol, a wallet.

8. Just as you cannot buy a piece of the Internet [because it's only a protocol], but only of a company that provides goods and services via the internet, so too you cannot buy a bitcoin [because it's only a protocol], but only.....uh oh. I need help understanding this one.

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Nielsio replied on Wed, Aug 31 2011 7:40 AM

Government moneys are backed by force. If you don't have them, you go to jail. If they were not backed by anything, they would drop to 0.

 

Learn here what the Austrian analysis of bitcoin is, using the means-ends framework: http://vforvoluntary.com/bitcoin .

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Wheylous replied on Wed, Aug 31 2011 11:17 AM

If you don't have them, you go to jail.

Do you?

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John James replied on Wed, Aug 31 2011 11:54 AM

Wheylous:
Do you?

Technically he kind of mispoke, but that's more or less correct for the vast majority of people.

 

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Nielsio replied on Wed, Aug 31 2011 12:02 PM

Wheylous,

Try going without dollars for a year and see where you end up.

(I don't actually advise you try it)

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Wheylous replied on Wed, Aug 31 2011 5:24 PM

Haha. I'm not arguing they aren't useful, but you said they're backed by force.

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Nielsio replied on Wed, Aug 31 2011 6:04 PM

If you don't pay your debt to the government with dollars, you go to jail. If you resist, you're shot.

 

Government money are get-out-of-jail tickets.

 

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Wheylous replied on Wed, Aug 31 2011 7:21 PM

Try going without dollars for a year and see where you end up.

To Europe with the Euro? :P

I'm kidding, but do you have a source that you can cite? Not that I don't trust you, I just participate in policy debate and am thinking of running an AnCap argument and want to have sources for all of my claims.

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You're looking for a source that states if you don't pay your taxes in US dollars you'll be imprisoned?

 

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Wheylous replied on Wed, Aug 31 2011 8:16 PM

Yes. I know it sounds silly, but it the stupid debate league you need to have every fact cited to someone (this excludes rationalizations from their facts).

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Nielsio replied on Wed, Aug 31 2011 8:30 PM

Wheylous,

 

The circled part:

 

And here you can learn about how this all came to be historically, and what kind of distorted reality we live under today:

 

The Economics of Legal Tender Laws (by Jörg Guido Hülsmann)

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Wheylous replied on Wed, Aug 31 2011 8:35 PM

http://www.treasury.gov/resource-center/faqs/Currency/Pages/legal-tender.aspx

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy.

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That sounds to me like a roundabout way of saying they have a right to refuse service.  As in, you walk to the counter, order something and then try to pay with a Benjamin, they can just say "sorry" and not give you your item.  I guarantee you, if someone performs a service for you, and you attempt to pay them in pennies, and they refuse to take it, the law is on your side.

And what does any of this have to do with taxes?  I really hope you don't think the government is a "private business, a person or an organization."

 

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Wheylous replied on Wed, Aug 31 2011 8:42 PM

The treasury website disagrees, saying you can refuse to take bills higher than $20, implying you also wouldn't be forced to accept pennies. Do you suggest vending machines are illegal?

Man pays with pennies, gets fined:

http://newsfeed.time.com/2011/06/06/man-pays-medical-bill-with-2500-pennies-gets-140-fine/

Do note that it is for misconduct and not for pennies, but still.

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Nielsio replied on Wed, Aug 31 2011 9:10 PM

Okay, you win. When the tax-man comes by you can pay him in blueberries or play him a song on your guitar. Or you can flat out refuse to pay, and there's nothing they're gonna do about that.

 

But then you have one thing left to explain: if government pieces of cotton are backed by nothing, and nobody uses it in production or consumption (which is actually a federal offense), then how does it have any market value at all? How does it fit in the means-ends framework of human action?

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Wheylous replied on Wed, Aug 31 2011 9:13 PM

I am supposing I am walking into a trap when I say it has perceived value...?

I am unsure about taxes (those might necessaitate dollars), but I meant businesses accepting money.

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Dropped again, below $8.00.

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below $7.50

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$7.05. In other words, 30% in ten days.

Do I hear $6.50?

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Clayton replied on Tue, Sep 6 2011 12:28 AM

@Wheylous: I think it would be more accurate to say "If you engage in any sort of economic activity whatsoever and you never possess US dollars (in the US), you are breaking the law." You must pay taxes on any economic activity - there's a tax law for everything. US taxes can only be paid in US dollars. Hence, if you've engaged in any sort of economic activity this year, then you must at some point get possession of US dollars if only so you can pay them to the IRS to settle your tax obligation. The citation is the US tax code. If you'd like a detailed refutation of all "frivolous tax arguments", just search that term in Google and click on the irs.gov link.

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Clayton replied on Tue, Sep 6 2011 12:29 AM

Bitcoin is not money. It never was. Without government adoption, it never will be.

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$6.40 at mtgox.

get out while you can

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two days of nail biting as bitcoin rose above $7, but old reliable is now at $6.30.

 

 

Target: Zero.

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Yes, to that we can agree, Clayton.

I am saddened to find videos on Youtube where people pay businesses with pennies as a prank and then call the police claiming it's national law to accept the "legal tender."

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6 bucks even, do I hear $5.50?

I do believe we've hit an all time low [after the peak of $30].

From $30 to $6 in three months.

I imagine Pete Surda and Irdail and Moonshadow and all the other Defenders of the Bitcoin Faith are too busy grabbing as many bitcoins as they can at this bargain price to write their long posts showing how foolish we are to doubt.

P.S. Dropped to $5.95 in the time it took to write this.

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$5.44!

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You are having so much fun :P

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You are having so much fun :P

Heck yeah. After 38 pages of being called an ignoramus, this feels good.

$4.86 BTW.

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Gosh darn, I got it all wrong.

1. I kept saying bitcoins are totally useless with no intrinsic value. Luckily Paul Krugman corrected me:

In effect, Bitcoin has created its own private gold standard...

Truth be told, I'm taking that line out of context.

2. I thought a three month drop from $30.00 to it's current $4.78 is a wile e coyote type crash. But no:

The dollar value of that cybercurrency has fluctuated sharply, but overall it has soared. So buying into Bitcoin has, at least so far, been a good investment.

3. Would make a great ad campaign. Bitcoin. Paul Krugman likes 'em.

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gotlucky replied on Sat, Sep 10 2011 12:47 AM

3. Would make a great ad campaign. Bitcoin. Paul Krugman likes 'em.

Low blow.  Let's keep this above the belt.

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Smiling Dave,

 

you have yet to provide actual arguments. You are the one with blind faith in fairy tales.

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