BitCoins are a hybrid of two currency models, namely the current world standard of fiat currency (I.E. BitCoins only have value because other people will accept them in exchange for goods and services) and the traditional gold standard due to the availability being limited. Combined with the other properties such as transaction anonymity (within reason), no central system regulating transactions and worldwide reach BitCoins have all the features it needs to be a great vehicle for the transfer of wealth. Long time readers will know that there are some issues that plague the BitCoin ecosystem, mostly due to its relatively low transaction volume and misclassification as an investment vehicle by some, but these are things that can be solved with time and more investments.
One thing that always gets to me though is any time that BitCoins start to trend upward nearly every news outlet looking for a story will herald it as a second coming of BitCoin after the devastation wrought by the speculative bubble last year. I’ve made the case several times over that an increase in price is no indication of health within the BitCoin economy and in fact any sharp uptick in price is actually quite hurtful as it signals that BitCoins are better left unspent as it makes no sense to spend them when simply waiting will give you a discount. This hoarding mentality is what led to the speculative bubble last year as supply dried up and prices went through the roof. It didn’t last long however and the price came crashing back down to reality (and then some).
I don’t discount that all growth within the BitCoin economy is a bad thing however, just the volatility. Indeed there was a good period of 6 months this year when BitCoin’s price was relatively stable and that’s what it needs to be in order for commerce to take the currency seriously. Taking this idea further there has to be a price equilibrium where the exchange rate is truly representative of all the wealth contained with BitCoins and this is the point where the market should aim towards. Figuring out that particular price isn’t easy though and I can only really give a semi-education guess as an answer.
The longest time that BitCoin spent in relative stability was around the $5 mark from around May this year. Since then there have been another 1.2 million BitCoins added into circulation, an approximate 13% increase. In a completely stable exchange this would have put a downward pressure on the exchange rate which would have decreased the real value by a similar percentage. To keep the value “ideal” then, I.E. the real purchasing power the same, the exchange rate should go up by that rate instead giving us a new price of $5.65.
Of course this completely ignores the amount of potential wealth that could be contained within the BitCoin economy. A country’s currency is usually a reflection of the health of its underlying economy and BitCoin is no exception to this but we don’t have other metrics like GDP in which to get a good idea for how much wealth is backing it. Transactions volumes, exchange rates and total coins in circulation are only rough metrics and we’ve seen in the past how these things aren’t great indicators for the health of BitCoin.
Realistically the best exchange rate for BitCoins will be the one that it ultimately settles on once transaction volumes ramp up again and the investor market segment starts to become more and more irrelevant. Whether this is above or below the current rate is really anyone’s guess however we should still abstain from saying that the rising price of a BitCoin is a sign of market health as it’s simply not. Whilst the price rise is no where near as rapid as it was last year it’s still light years ahead of any other currency on the planet and as history has shown that kind of growth just isn’t sustainable. The next 6 months will be very telling for the BitCoin economy as we’ll see if this growth levels out into a new stable equilibrium or if it’s just the beginning of another speculative bubble.
Engineers are special people when it comes to normal everyday things in life. Pretty much anything that’s brought before them is instantly seen as a system that can be worked out or a problem that can be solved. Everything from relationships to politics to anything that needs to be installed or can be modified you can guarantee that your engineering pal will dive in head first and try to work out how they can complete something even if it doesn’t need to be done. Last weekend I realised that this was more true than ever when it comes to everything in my life.
The first part of my weekend was spent fumbling around with the Aion client trying to get it working on Windows 7. I had read numerous posts that said people had got it working so I thought that if there was at least one other person out there I could get it going. After my first attempt I ran into the error 114 issue which told me to turn off my firewall. Funnily enough I had already done that but after a while of fiddling around I managed to change the error I was getting to the error 170 problem, which had me deleting the folder. It seemed every time I tried something different I would get one or more of these errors and that’s when I resided to reinstall vista so I could play the darn thing. I wasn’t going to get stuck in a sunk cost fallacy for a game I could only play for the weekend.
After gleefully playing through the first few hours of Aion I was greeted by my beautiful fiancee who looked like she’d just got in trouble for something. Cautiously I asked what the problem was and the reply was something I wasn’t really expecting:
I broke the toilet.
We’ve had problems with our loo before and I knew that the last solution I had was a hack job involving some cable ties and a little hope and I thought that it had just all come apart. The first thing I do is rush in there and rip the top of the cistern to see what could be done. Unfortunately my first inspection showed that I’d have to replace the whole mechanism, as a critical part had completely snapped.
Que a trip to our local hardware supply store where I seek out the parts I need. I was hoping that I could just replace the flushing bits inside the cistern but as it turns out it’s cheaper buy a whole new one (thank you throw away society). So what I thought was an hour or so job turned out to be 4 hours of grunting, pulling and leaking taps and fittings. This wasn’t my first foray into plumbing either, as I had similar “fun” installing our dishwasher. In the end I managed to chase away all the leaks and get our new cistern working, but it got me thinking: why did I even attempt to do this in the first place?
I guess the first part is simple male pride. Whilst I’m a big believer in that a professional is always worth the money when you can’t do something yourself if I think I’m even slightly capable of completing a task I’ll have a crack at it myself first. This has lead to a few times when I’ve tried, failed and then called a professional to come in. I don’t usually admit that I tried to do something first, but I’m sure they knew. Especially considering I’m a big fan of duct tape and cable ties. 😉
The second part I believe comes down to the analytical ideals that are drilled into engineers from the first day they step into university: if a problem is too big break it down into smaller tasks until they can be completed (usually by a single person). I remember many of my university assignments and projects were given to us right at the start of the semester, long before we had been taught the skills needed to solve them. Our lecturers did this so that we’d begin to look at the problem from day one and identify what we could and could not do and work out strategies to tackle them. Once you get into the habit of breaking problems down into their simplest forms it becomes hard not to apply it everywhere else. This is becomes especially true with things that are in essence just abstract representations of whatever engineering discipline you studied (pipes and water flows are used extensively as an analogies when introducing budding engineers to electronics).
This is what constitutes the engineers folly; the idea that everything is merely a system of inputs and outputs that can be solved if broken down far enough. We engineers are passionate about problem solving and it is that which drives us to do things that most times would be better left to the professionals. Sometimes people mistake this for us being arrogant because we say something is simple, but that’s far from the point. It just looks simple to us since we’ve broken it down into 1000 simple pieces.
I’d better stop here before I get stuck in a recursion loop looking at myself.
(For a bit of fun type recursion into Google, it seems the engineers there have a sense of humour :D)