Price of bitcoins if they get banned

[weenie]

Stef had a calling show, where he said that the price of bitcoin would rise if governments would ban them. I think he's completely wrong, and would like to get my argument reviewed by others, so Stef can correct himself if I'm right.My argument: The price of heroin soared under prohibition, because heroin is a consumer good. That means its final intention is for users to consume it, so the government can't really alter the demand, because it rests solely on the wish of heroin users to get high. Bitcoin, on the other hand, is a currency, and its price can be negatively influenced by prohibition. If bitcoin gets banned, fewer merchants will accept it, and being traded for other goods is the only purpose of currency. That means demand will fall, without a decrease in supply, and the value of bitcoin will therefore decrease.The empiric proof for my argument can be found in the slump of the price of BTC, after China banned banks from using it. If Stef was right, the price should have soared, but it didn't, because the supply remained constant, but the demand decreased.What do you guys think?

[dsayers]

If bitcoin gets banned, fewer merchants will accept it, and being traded for other goods is the only purpose of currency.

 

Except that Bitcoin isn't just another currency. It's virtually frictionless, anonymous, and inherently secure. Additionally, something that is secure and anonymous is literally unbannable.

 

The empiric proof for my argument can be found in the slump of the price of BTC, after China banned banks from using it. If Stef was right, the price should have soared, but it didn't, because the supply remained constant, but the demand decreased.

 

The only proof that a singular example provides is that something CAN happen. Bitcoin had never been subjected to a country banning its use to any degree, so of course people who don't fully understand are going to be panicked. China has the largest population of any country, so that's quite the impact.

 

Just to be clear, the supply is constantly rising for now.

[st434u]

I agree, weenie. Under prohibition of drugs, governments go after producers, and only target consumers by association. The policy is mainly damaging the supply side, but keeping demand somewhat constant. As such, the price goes up. If governments ban Bitcoins, they are very unlikely to go after miners. Instead they will go after the exchange platforms, and businesses who accept them. Thus they will be mainly damaging the demand side, while keeping supply somewhat constant. Another thing that would happen due to the targeting of the exchanges, is that the spread would grow larger.

 

Nevertheless, I don't think this makes a big difference, because I think Bitcoins will lose all their value regardless of whether governments ban them or not.

[weenie]

Except that Bitcoin isn't just another currency. It's virtually frictionless, anonymous, and inherently secure. Additionally, something that is secure and anonymous is literally unbannable.

 

It is a great currency, but a currency nonetheless. You try to obtain it, because you believe people will exchange goods for it, on its own it's pretty worthless. That's why in the long run 1 bitcoin will be either worth a lot or 0. Heroin is unbannable too as it would seem, but it doesn't stop govenments from prohibiting its use.

 

 

The only proof that a singular example provides is that something CAN happen. Bitcoin had never been subjected to a country banning its use to any degree, so of course people who don't fully understand are going to be panicked. China has the largest population of any country, so that's quite the impact.

True, the example with China doesn't prove my conclusion, but it might disprove Stephan's. He said that if a country banned BTC, its price would rise. China partially bans BTC and its price falls. His theory must have a flaw. I don't think blaming it on irrational speculators is helpful either.

 

 

 

Just to be clear, the supply is constantly rising for now.

 

Yes, that is true. It is constantly rising thoug, so we can easily account for that in regards to the price fluctuations.

 

 

Nevertheless, I don't think this makes a big difference, because I think Bitcoins will lose all their value regardless of whether governments ban them or not.

Why is that?

[st434u]

Why is that?

 

Check this other thread going on right now in this same forum:

 

http://board.freedomainradio.com/topic/38337-bitcoin-intrinsic-value-and-mises-regression-theorem/

[Daniel Unplugged]

I entirly agree with your premise weenie, and, perish the thought, think that Stefan is completely wrong on this one. ps. I love bitcoin

[Cosmin]

There's another argument which I don't hear very often: if bitcoin gets banned, you risk going to jail if you use it. I'm guessing most people would prefer to be poor outside than rich in prison, so demand would drop significantly. That's why people don't try to buy groceries with heroin, right?

[dsayers]

It is a great currency, but a currency nonetheless.

 

It's much more than a currency even in the ways it's used as currency. You can't just ignore these characteristics. Cosmin says it could land somebody in jail even though being anonymous, it couldn't realistically even be tied to somebody. Assuming this is true, would the risk of getting caught be valued different if it meant the difference between incurring $50,000 in transaction costs vs a few cents? The frictionlessness alone makes it highly valuable even in the event of a ban. The fact that its security and anonymity significantly reduce the chance of getting caught almost nonexistent, you can't just ignore these characteristics.

 

True, the example with China doesn't prove my conclusion, but it might disprove Stephan's.

 

Your original claim was that it proves your point. It doesn't disprove Stef's either, and partially for the exact same reason. A single point on a graph cannot indicate a trend. You need at least two points and the more points you have, the more accurate the trend is. Plus, I pointed out that this was a first time occurrence. People panicked because they didn't know what to expect. The population of the largest country seemed to drop off the landscape. In fact, that's not even what happened. What did happen is measures to subvert the ban.

 

Just as with currency that has backing, speculation is involved. This happening for the first time ever in the largest way possible would cause a huge spike in speculation. Saying that what came next is what will always come is unfounded.

 

Finally, I wanted to point out that the difference in market value now vs then isn't the whole picture either. Then was after a significantly large surge in value as a result of the Fed saying they were not going to attack Bitcoin. In other words, the value at the time China said no hadn't normalized. I don't think this is controversial considering that most people who wish to speak ill of Bitcoin will cite its speculative nature as a currency.

[weenie]

It's much more than a currency even in the ways it's used as currency. You can't just ignore these characteristics. Cosmin says it could land somebody in jail even though being anonymous, it couldn't realistically even be tied to somebody. Assuming this is true, would the risk of getting caught be valued different if it meant the difference between incurring $50,000 in transaction costs vs a few cents? The frictionlessness alone makes it highly valuable even in the event of a ban. The fact that its security and anonymity significantly reduce the chance of getting caught almost nonexistent, you can't just ignore these characteristics.

This has nothing to do with my theory. I'm not trying to disprove the usefulness of bitcoin, I'm saying that the relationship between the price of bitcoin and govenment interference is inversely proportional. 

 

Your original claim was that it proves your point. It doesn't disprove Stef's either, and partially for the exact same reason. A single point on a graph cannot indicate a trend. You need at least two points and the more points you have, the more accurate the trend is. Plus, I pointed out that this was a first time occurrence. People panicked because they didn't know what to expect. The population of the largest country seemed to drop off the landscape. In fact, that's not even what happened. What did happen is measures to subvert the ban.

 

Just as with currency that has backing, speculation is involved. This happening for the first time ever in the largest way possible would cause a huge spike in speculation. Saying that what came next is what will always come is unfounded.

 

Finally, I wanted to point out that the difference in market value now vs then isn't the whole picture either. Then was after a significantly large surge in value as a result of the Fed saying they were not going to attack Bitcoin. In other words, the value at the time China said no hadn't normalized. I don't think this is controversial considering that most people who wish to speak ill of Bitcoin will cite its speculative nature as a currency.

True, I exagerated when I said that the one empiric point proves my theory. My claim that it disproves Stef's theory might hold though. If you have a theory that says something must always happen after a condition is met and it doesn't, your theory is wrong or incomplete. Usingempirical proof for macroeconomics might be a bad idea though, as Mises pointed out, so maybe it's better to just leave it alone. I think my initial logical argument makes sense, if the market price of a commodity is indeed determined by supply and demand.

[dsayers]

You might be right. Something to keep in mind though is that Stef was speaking of a generality and he did this accurately. One occurrence isn't a disproof of a generality. Maybe Bitcoin will lose value every time a country bans it because it's not a tangible thing. Maybe they'll go up because they're not a tangible thing. Nobody's banned numbers or algorithms before. I think it's too soon to speak in absolutes one way or the other.

[st434u]

Weenie, your argument was great, but the claim that the evidence presented disproves Stef's theory is only a suggestion at best. Economic theory can't be used to predict short-term fluctuations in price with accuracy, and likewise, short-term fluctuations in price can't accurately prove or disprove the validness of an economic theory. Especially with something that fluctuates as wildly as Bitcoin.

[Josh F]

Stef had a calling show, where he said that the price of bitcoin would rise if governments would ban them. I think he's completely wrong, and would like to get my argument reviewed by others, so Stef can correct himself if I'm right.My argument: The price of heroin soared under prohibition, because heroin is a consumer good. That means its final intention is for users to consume it, so the government can't really alter the demand, because it rests solely on the wish of heroin users to get high. Bitcoin, on the other hand, is a currency, and its price can be negatively influenced by prohibition. If bitcoin gets banned, fewer merchants will accept it, and being traded for other goods is the only purpose of currency. That means demand will fall, without a decrease in supply, and the value of bitcoin will therefore decrease.The empiric proof for my argument can be found in the slump of the price of BTC, after China banned banks from using it. If Stef was right, the price should have soared, but it didn't, because the supply remained constant, but the demand decreased.What do you guys think?

 

 

Heroin is not something merchants can sell, either.  With bitcoin being illegal, mining pools with dry up, as will legal services, making it more scarce.  It is still incredibly useful for black markets, but with its illegality comes an increase in scarcity, unlike with china's slight ban on bankers buying it. 

 

This is the same for money.  Money laundered is worth MORE than money that can be tracked or traced.  That is to say, if I have a million illegally acquired drug dollars, I would have to pay that million to a money launderer for LESS THAN a million clean dollars.  I couldn't say the exact cut, but it is likely over 10%, maybe as high as 50% depending.

 

Money Laundering isn't a consumer good.

 

Bitcoin reduces the risk of laundering money significantly. 

 

Now, lets say day 1 after the US bans bitcoin, will the price drop?  Oh yes, very fast.  Much like the stock value of a whiskey company right before prohibition.  This didn't ultimately decrease the cost of alcohol. 

Lets play out the logic.  US bans bitcoin.  Bitcoin price drops.  Legal companies based on providing bitcoin services will collapse.  The value drop will make mining less profitable.  This will reduce mining, significantly. Consumer demand will decrease.  With less bitcoins being produced, the supply goes down with the depreciation in the demand. 

 

So the price goes down to less than a penny.  Suddenly, to use bitcoin, you need to be transferring massive amounts of bitcoin.  If it takes a billion bitcoin to launder a million dollars, but it becomes increasingly harder to acquire the billion bitcoin, then the price will start to increase.  Suddenly, the only bitcoins you'll be able to get are being held illegally, and are extremely hard to buy and sell.  Without massive exchanges like mtgox, the ability to buy and sell bitcoins becomes harder.  This increases the scarcity.  Additionally, holding, mining, or trading bitcoin is illegal, and thusly is now more expensive because it is higher risk. 

 

Finding someone to buy bitcoins from, or finding someone looking to buy bitcoins will mirror the drug market.  We all understand that if Walmart sold heroin, the price would go down.  Heroin is expensive because the entire supply chain has to remain discrete, which increases the distribution costs.

 

It could come to be that you need to find a shady bitcoin dealer who will buy or sell you bitcoins. 

[st434u]

Heroin is not something merchants can sell, either.  With bitcoin being illegal, mining pools with dry up, as will legal services, making it more scarce.  It is still incredibly useful for black markets, but with its illegality comes an increase in scarcity, unlike with china's slight ban on bankers buying it.

I'm not following this. Why would the mining pools dry up? 

This is the same for money.  Money laundered is worth MORE than money that can be tracked or traced.  That is to say, if I have a million illegally acquired drug dollars, I would have to pay that million to a money launderer for LESS THAN a million clean dollars.  I couldn't say the exact cut, but it is likely over 10%, maybe as high as 50% depending. Money Laundering isn't a consumer good.

Money laundering in this sense is a consumer service. How does this relate to the example of BTC being made illegal? 

Now, lets say day 1 after the US bans bitcoin, will the price drop?  Oh yes, very fast.  Much like the stock value of a whiskey company right before prohibition.  This didn't ultimately decrease the cost of alcohol.

But you're confusing the producer with the product. When prohibition kicked in, whiskey company stocks collapsed, but the price of whiskey did not collapse. In fact the price of whiskey went through the roof! 

Lets play out the logic.  US bans bitcoin.  Bitcoin price drops.  Legal companies based on providing bitcoin services will collapse.  The value drop will make mining less profitable.  This will reduce mining, significantly. Consumer demand will decrease.  With less bitcoins being produced, the supply goes down with the depreciation in the demand.  So the price goes down to less than a penny.  Suddenly, to use bitcoin, you need to be transferring massive amounts of bitcoin.  If it takes a billion bitcoin to launder a million dollars, but it becomes increasingly harder to acquire the billion bitcoin, then the price will start to increase.

Ok, so you're saying that the price will collapse to near zero and then slowly come back up? But how does that justify that at the end of this adjustment, the Bitcoins will be worth more because of the ban? 

Suddenly, the only bitcoins you'll be able to get are being held illegally, and are extremely hard to buy and sell.  Without massive exchanges like mtgox, the ability to buy and sell bitcoins becomes harder.  This increases the scarcity.

This doesn't necessarily create scarcity. It will create a larger spread between the buy and sell price for BTC (whether expressed in other forms of money or in goods or services), but the same amount of BTC will be available. 

Additionally, holding, mining, or trading bitcoin is illegal, and thusly is now more expensive because it is higher risk.

But holding, mining and trading all have very different effects on the market value of bitcoin. Holding and mining clearly have the opposite effect in their relationship to price. The less mining there is, the more the value goes up, but the less holding there is, the more the value goes down. 

Finding someone to buy bitcoins from, or finding someone looking to buy bitcoins will mirror the drug market.  We all understand that if Walmart sold heroin, the price would go down.  Heroin is expensive because the entire supply chain has to remain discrete, which increases the distribution costs.

But with heroin, all the heroin that is produced, distributed and sold is consumed. The heroin users aren't just acquiring the heroin so they can trade it for other things. Also, if the State cracks down on a heroin dealer, they will work their way up the production line until they find the producers, and shut them down. They're unlikely to be shutting down bitcoin miners. And even if they did, over half of the bitcoins that will ever be created, have already been created, so the most they could do is reduce the total supply by the few percentage points that it grows every year.However, there could be another way to reduce the supply, and that's by expropriating Bitcoins and destroying them. But I don't know if they would do that. They might find they have a lot more to gain by dumping them on the market to make the value go down.

[Josh F]

I'm not following this. Why would the mining pools dry up? 

The cost in equipment and electricity used to solve the hash now would not be worth the effort spent if the price dropped.

Money laundering in this sense is a consumer service. How does this relate to the example of BTC being made illegal?I guess this just came from a presumption that bitcoin will always remain the most competitive way to launder money, even if it became illegal.

But you're confusing the producer with the product. When prohibition kicked in, whiskey company stocks collapsed, but the price of whiskey did not collapse. In fact the price of whiskey went through the roof!That is a good point, and raises a really interesting question about bitcoin.  Is it a producer of currency, or is it a technological product.  If you think of it like currency, I understand that it appears like a producer making a product.  However, as an encrypted technology, it is the most advanced decentralized encycption on the planet.  Other "producers" which use the same protocol are not even close to the same level of encryption.  And regardless, these "producers" would all be illegal, the entire product (cryptocurrency) will be banned.  Like banning alochol or other products.  Banning cryptocurrencies will leave behind a skeleton of highly encrypted technology for laundering money, the most secure of which is bitcoin. 

Ok, so you're saying that the price will collapse to near zero and then slowly come back up? But how does that justify that at the end of this adjustment, the Bitcoins will be worth more because of the ban?

The price on mtgox will collapse, and all other legal trading platforms.  When it reemerges in the black market it will be much harder to buy and sell.  Finding someone interested in your illegal bitcoins will be costly.  Those people using the product for black market purposes will find it more scarce. 

This doesn't necessarily create scarcity. It will create a larger spread between the buy and sell price for BTC (whether expressed in other forms of money or in goods or services), but the same amount of BTC will be available.

A certain percentage of the owners of bitcoins would be unwilling to risk selling them illegally, so I don't know if the same number of BTC will remain in circulation.  Keep in mind, there is no world ban on the currency, so the entire market won't be lost, either.  The price will drop as some people try to offload their BTC into other currencies, but at some point those currencies and bitcoin will find relative equilibrium.  Then acquiring bitcoin with US dollars becomes MORE expensive. 

But holding, mining and trading all have very different effects on the market value of bitcoin. Holding and mining clearly have the opposite effect in their relationship to price. The less mining there is, the more the value goes up, but the less holding there is, the more the value goes down. 

Well, I think it is more complicated than that, to be honest.  The cost of mining may increase the cost of bitcoin.  The amount of holding relative to the amount of demand.  Fundamentally when more bitcoin is being bought, more bitcoin is also being sold. 

But with heroin, all the heroin that is produced, distributed and sold is consumed. The heroin users aren't just acquiring the heroin so they can trade it for other things. Also, if the State cracks down on a heroin dealer, they will work their way up the production line until they find the producers, and shut them down. They're unlikely to be shutting down bitcoin miners. And even if they did, over half of the bitcoins that will ever be created, have already been created, so the most they could do is reduce the total supply by the few percentage points that it grows every year.

 

The entire supply chain from farmer to street dealer is buying Heroin for the purpose of trading it for other things, namely money and I'm sure the occasional sexual favor.

However, there could be another way to reduce the supply, and that's by expropriating Bitcoins and destroying them. But I don't know if they would do that. They might find they have a lot more to gain by dumping them on the market to make the value go down.

 

Would you like to see that happen?

The most important thing for me though is really trying to understand your personal motivation.  This topic is something you care greatly about. Your activism against bitcoin is so inconceivable for me, it routinely frustrates and baffles me.  When it comes to the potentially devastation of bitcoin, is it worse than people losing a bet on gambling?  Without explaining any more about WHY it will fail, Can you please provide some personal insight into what you feel is dangerous about bitcoin?  I really really want to understand what the bigger issue with bitcoin is for you!

[weenie]

Josh F, what ST said, but I also wish to correct you on the mining of bitcoin. See, the production of bitcoin remains constant, no matter how many people mine them, because the difficulty level adjusts to the strength of the mining pool. That's why so many bitcoins were produced in the beginning, because it took a lot less effort to bring them into existence. Now that mining is fairly widespread, generating 1 BTC takes a lot more effort. So if the price drops, people will stop mining until so few miners remain, that it becomes profitable again.

[NumberSix]

Great topic.  Right now there isn't much adoption of Bitcoin, so if all use went to illicit goods, the market capitalization might not go down.  The black market is huge, if Bitcoin became currency of choice for illicit goods, it may be larger market than current legal use.  Bitcoin being illegal is certainly not a problem for scoring my heroine fix.  In terms of outlawing it, how effective could a government be?  The main problem now is exchanging Bitcoin for fiat.  A government can shut down exchanges and stop websites from accepting Bitcoins.  But what else can they do?  Outside of developed world most governments are pretty weak, so Bitcoin might be safe in those places.

I've read about viruses that convert computers into mining slaves, so I guess mining can't be stopped.

http://www.zerohedge.com/news/2014-01-08/yahoo-virus-converts-millions-computers-bitcoin-mining-slaves

[st434u]

The most important thing for me though is really trying to understand your personal motivation.  This topic is something you care greatly about. Your activism against bitcoin is so inconceivable for me, it routinely frustrates and baffles me.

I already explained to you and others in the other thread, why I'm concerned with Bitcoin, it actually baffles me that you can't understand my motivations or that you wouldn't share them if you shared my views on the future inevitable collapse of Bitcoin. In any case, this thread isn't about that, it's just about figuring out how a particular form of money is affected by being made illegal by the State.For the purposes of this thread, it makes no difference if the item we're talking about is Bitcoin, gold, or something else. Gold hasn't gone up in value since it has been made illegal to use it for transfers, in fact it has gone down in real value. You can claim that this is because it's easier to control gold than something like bitcoin, but then you're really just talking about a matter of degree. To expect that bitcoin will be affected in the opposite way that gold was affected by the same State intrusions is not reasonable, and you will see that in this I'm in total agreement with weenie, who is a supporter of bitcoin. This thread is about enhancing the understanding of monetary theory.

[Josh F]

Yeah, you're very unwilling to respond to that question, and I think you'd be served by exploring it a bit better.

 

I was actually thinking about you the other day, there is a new altcoin coming out called Etherium.  The currency includes this counter, and long story short the money is directly correlated to running a computer process.  So for example, you can spend your Etherium to host files in the cloud, or run files in the cloud, basically pegging the currency to the processing speed and memory. Not pegging the value, but it does add that "intrinsic value" quality you keep looking for, because now the currency can be used as something other than a currency (though this already existed on TOP of the bitcoin structure, but I dn't think you understand how that works).  Does this satisfy your demands for these currencies?

 

To explain in more detail, etherium is basically bitcoin, but each coin can come with a code, and the transfer of the coin includes running the code.  Thusly it embeds hosting, emails, file transfers, and any other computer function to the coin.. and this can be used fluidly to create simple smart contracts and other arbitration tools for free. 

[st434u]

Josh, please post this in the other thread so I can reply there (the one I linked to in this thread already), as this is really off-topic here, plus I already made a post addressing this in the other thread, but I'll be happy to expand on it.

[NumberSix]

Perhaps making Bitcoin illegal will be the best thing for it. 

 

The Mexican drug cartels have a problem laundering their huge amounts of cash.  Bitcoin seems like a perfect fit.  If the Cartels use Bitcoin to store their wealth it will take a large amount of BTC off the market and its value will increase due to less supply available to meet demand.  Cartels are organized, wealthy, well armed, and used to operating out of governments reach.  If the cartels use Bitcoin and the Mexican government tries to crack down on Bitcoin; I think the government officials would die in a violent and painful manner.  While the average pig wouldn't think twice about pulling you over and giving you the Rodney King treatment, they wouldn't go any wear near a drug cartel, because the drug dealers are armed and dangerous.  So this might make it fairly safe for the average Mexican to use.