MONEY Bitcoin

Why Bitcoin Fans Don’t Believe in Bad News

People attend a Bitcoin conference on at the Javits Center April 7, 2014 in New York City.
Andrew Burton—Getty Images

Bitcoin might be doing poorly, but for the currency's online proponents, it's always time to buy. Here's the reason behind their optimism.

Updated—Friday, October 10

Last weekend, Bitcoin crashed. The dollar value of a single Bitcoin began to decline on electronic markets starting on Friday and by Sunday afternoon had fallen 14%, to $290.

It recovered a bit in the days that followed, but the slide appears to part of a broader trend: At the Thursday price of about $350, the digital currency has lost almost 70% of its value since its all-time high of $1,147 in December 2013. At the New York Times, Paul Krugman used the roller coaster weekend as an occasion to once again call Bitcoin a long con.

But among the Bitcoin faithful, the sun never stopped shining. On Reddit’s Bitcoin discussion board, for example, home to almost 140,000 enthusiasts of the electronic currency, the price drop was framed as good news. “The good old days are back! Massive walls, manipulation and a true financial wild west – I love it” chirped one of Monday’s most popular posts.

“Who else is enjoying the firesale?” asked another popular participant who claimed to be “picking up tons of cheap bit coin.”

How to explain the eternal optimism? Is it possible that Bitcoin’s most dedicated fans are simply more tuned in to the currency’s long-term potential than the broader market and therefore have a more favorable view of its true value?

Sure, it’s possible — but Meir Statman, a professor at Santa Clara University specializing in behavioral finance, has a more plausible explanation for the findings: Confirmation bias. In short, he says, Bitcoin communities tend to be echo chambers of optimism, giving their members a false impression of the currency’s true value. “What you hear, really, is what you want to hear; what is easy for you to believe: That bitcoin is going to take over and banks are a thing of the past,” explains Statman. “And when you have people who reinforce it, people are not looking for the truth, they are looking for views that are going to support their prior beliefs driven by ideology and self interest and so-on.”

This explanation would seem to be supported by a recent study of Bitcoin users by researchers at the University of Illinois, who found that those who participated in online Bitcoin communities were far more bullish about the currency’s future price than other Bitcoin holders. When asked about the long term value of Bitcoin (which the survey defined as the coin’s price in early 2019), users who talked about Bitcoin on various online platforms produced estimates 68% higher than those who did not.

Screen Shot 2014-10-08 at 10.11.02 AM
An r/Bitcoin user asks (and receives) reassurance following a December, 2013 price crash.

Of course, that’s not a phenomenon unique to Bitcoin or online forums. “There is a similar finding about communities where people describe their investment success more generally, because people tend to brag about their success and not brag about their losses” the professor warns. “If you are not careful, all you hear is that people are making tons of money.”

Statman suggests yet another psychological explanation for the behavior of the Bitcoin community, noting that many people who invest in Bitcoin — and other alternative assets like gold — do so in part because it fits their broader global outlook and ideology. “It is fair to say that lots of the people who invest in gold invest in a view of the world: That the United States is going down, bad things are going to happen, inflation is going to rise,” Statman says.

That makes hard truths particularly difficult to accept, he says. After all, divesting from a stock is easy. Divesting from a world view, well, that’s a lot more painful.

Statman advises investors of all types to avoid confirmation bias and “ideological” investing by talking to people with different perspectives. For example, he jokes, Bitcoin buyers should have asked his opinion of the currency before last weekend. His take: “I think it’s a scam.”

After being contacted by Bitcoin advocates, Statman clarified his position to MONEY. “My initial thought when I heard about Bitcoin from my students is that is a scam. I know now that the technology of Bitcoin might prove useful but I am puzzled by the rush to it.”

TIME Innovation

Five Best Ideas of the Day: October 8

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

1. Quotas can cause lasting change. Rwanda’s new parliament is more than 60% female.

By Eleanor Whitehead in This Is Africa

2. With open communication and smart procedures, we can contain Ebola.

By Atul Gawande in The New Yorker

3. A simple plan to begin saving for college at kindergarten helps families thrive.

By Andrea Levere in the New York Times

4. Teach For America is sewing seeds for education reform in unlikely places – by design.

By Jackie Mader in Next City

5. How Bitcoin could save journalism and the arts.

By Walter Isaacson in Time

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

MONEY Bitcoin

Bitcoin’s Price Plummeted Over the Weekend

A woman buys bitcoins at one of Southern California's first two bitcoin-to-cash ATMs.
Lucy Nicholson—Reuters

The price of Bitcoin dropped almost 20% over the weekend, hitting a low of $290 before rebounding.

Bitcoin enthusiasts had a scare this weekend, as the price of the currency plummeted from $356 on Saturday to a low of $290 on Sunday—a drop of more than 18%, percent according to CoinDesk’s Bitcoin Price Index. The virtual currency has since rebounded to a price of roughly $330 at press time Monday, down about 13% over the last seven days.

Despite the price drop, Reddit’s r/Bitcoin, a popular gathering place for the currency’s supporters, was largely optimistic. “Who else is enjoying the firesale? Who else is picking up tons of cheap bitcoin?” asked one poster. But not everyone was confident that the price would recover. The New York Times quoted one worried user asking fellow Bitcoin fans for support. “As the price is going down, some of us are under immense psychological stress,” the post read. “Please share how you cope with it.”

Sunday’s crash was hardly Bitcoin’s first price panic, or even its most significant drop. In 2013, the currency lost almost 40% of its value between December 4 and December 7, when the price dropped from its all-time high of $1,147 to $694 in less than a week. After partially regaining those losses, Bitcoin fell 40% again from December 15 to 18, going from $879 to $522. Since the beginning of this year, Bitcoin’s price has been relatively more stable, but the descent has continued. From January through October 6 of this year, the currency has lost more than 40% of its value.

Exactly why the price cratered is subject to debate. Some have cited upcoming regulations, such as those proposed by New York’s Department of Financial Services, that will curtail the free-wheeling nature of the currency. Others have suggested that Bitcoin’s recent increase in popularity among retailers may have actually hurt its value. Paul Vigna at the Wall Street Journal theorized that because more merchants are using a service that instantly converts Bitcoin payments into dollars, all those Bitcoin sales may be driving down the price. However, as Vigna notes, such a long-term trend can’t directly explain this weekend’s sudden crash.

Bitcoin detractors have used this latest price fluctuation as a chance to take something of a victory lap. On Sunday, Paul Krugman, a longtime cryptocurrency critic, likened Bitcoin to a number of get-rich-quick schemes, from Glenn Beck’s “buy gold” ads to direct mail scams. “Bitcoin may be sold as a technical marvel, and it does indeed solve an interesting information problem,” acknowledged Krugman, but “it’s not at all clear whether solving that problem has any economic value.”

Other Bitcoin watchers say the hiccups may only be temporary. Rafael Corrales, a partner at Charles River Ventures, argued in the Times that recent Bitcoin price fluctuations are the result of its “transition stage” between between speculative vehicle and actual currency: “When Bitcoin becomes a currency, it realizes its potential.”

TIME cybersecurity

Nearly 5 Million Google Passwords Leaked on Russian Site

Google Reports Quarterly Earnings
A sign is posted outside of Google headquarters on Jan. 30, 2014, in Mountain View, Calif. Justin Sullivan—Getty Images

The usernames and passwords of 4.93 million users were posted in a Russian Bitcoin security forum

Almost 5 million usernames and passwords purportedly for Google accounts were uploaded to a Russian online forum by hackers late Tuesday.

The International Business Times reports that data for 4.93 million Google accounts of English-, Spanish- and Russian-speaking users was leaked and published on a Russian-language Bitcoin security online forum. The posters said about 60% of the accounts were active.

In a statement sent to TIME, Google said it had “no evidence that our systems have been compromised.”

“The security of our users’ information is a top priority for us,” the statement reads. The company said that whenever it is alerted that accounts may have been compromised, “we take steps to help those users secure their accounts.” Email users are encouraged to utilize two-step verification when logging into accounts, as well as to create strong passwords.

According to Russian news service RIA Novosti, this leak followed another large hack of Russian email accounts. Several million accounts of Russia-based email services were also posted in a Bitcoin security forum.

MONEY Odd Spending

WATCH: We Try Out NYC’s First Bitcoin ATM

The Bitcoin crypto-currency may be the wave of the future, but MONEY's Jacob Davidson finds that using it to buy lunch can be a hassle right now.

MONEY Bitcoin

Uber, Airbnb, and Others May Soon Accept Bitcoin

Bitcoin
Lucy Nicholson—Reuters

Customers may soon be able to use bitcoin for a variety of web services if a new deal involving an Ebay-owned payment processor goes through.

Bitcoin fans, rejoice. A new deal between a Paypal subsidiary and digital currency companies may soon allow customers to pay for Uber, Airbnb, Opentable, and other services with digital currency.

The Wall Street Journal reports that Braintree, a payment processor Ebay acquired last year, is in negotiations with businesses like Coinbase that allow consumers to store, buy, and send bitcoin, a digital currency that can be either “mined” using computing power or purchased with dollars. Braintree is currently part of Ebay’s Paypal unit. If these negotiations are successful, Braintree’s clients would be able to accept bitcoin payments.

If Braintree does enable clients to start taking bitcoin, they would not be the first to do so. Overstock.com was the first large company to accept bitocoin payments; and Dell, technology retailer Newegg, and satellite TV provider Dish Network, have all followed suit. Most of these services have also partnered with Coinbase.

While the currency has seen increased adoption, not all developments have been positive. In July, New York’s Department of Financial Services proposed new rules for virtual currency businesses that sought to reduce illegal activity—which bitcoin has previously facilitated—and increase consumer protections for the currency’s users. While some have lauded the rules as an important first step toward making bitcoin a viable currency, other bitcoin advocates slammed the regulations for eliminating bitcoin’s anonymity and their arduous requirements on certain businesses.

Bitcoin has also not fared well in terms of price. After the value of one bitcoin (BTC) peaked at over $1,100 in late 2013, its price has come crashing back to earth. As of today, one BTC is worth $512; down from $747 at the beginning of this year.

TIME Virtual Currency

How Bitcoins Could Put Your Finances at Risk

Virtual currencies could cause you to lose "real" money, according to a new report

The Consumer Finance Protection Bureau released a report Monday concluding that virtual currencies, such as Bitcoin, offer less protection than regular currencies and can be vulnerable to outrageous mark-ups, online scams and hackers.

In addition to publishing the report, the bureau has also added a virtual currency section to their complaint page where people who have run into problems with Bitcoin or other similar currencies can register their issues.

According to Bitcoin.com, there are more than 13 million units of virtual currency around the world.

TIME digital currency

You Can Now Donate to Wikipedia in Bitcoin

Bitcoin
Thomas Trutschel—Photothek/Getty Images

"We accept 13 different payment methods enabling donations from nearly every country in the world, and today, we’re adding one more."

The Wikimedia Foundation, the non-profit responsible for Wikipedia, said Wednesday that it will accept donations of the digital currency Bitcoin.

“It has always been important to the Foundation to make sure donating is as simple and inclusive as possible,” Lisa Seitz Gruwell, the chief revenue officer, said in a statement. “Currently, we accept 13 different payment methods enabling donations from nearly every country in the world, and today, we’re adding one more: Bitcoin.”

The foundation, which runs one of the most visited websites on the Internet, depends almost exclusively on user donations to cover its annual budget of roughly $50 million. Its decision to accept the digital currency comes as a growing list of corporations, including satellite television operator Dish Network, add Bitcoin as a payment method.

Seitz Gruwell said the foundation will use the Bitcoin exchange Coinbase to accept Bitcoin and will convert the currency into U.S. dollars.

“Since we now also have guidance on how to account for Bitcoin, there is a clear understanding of how to legally manage it,” she said.

 

MONEY alternative assets

New York Proposes Bitcoin Regulations

Bitcoin (virtual currency) coins
Benoit Tessier—Reuters

New regulations may make Bitcoin safer. But some people think they will also ruin what made virtual currencies attractive.

Bitcoin may have just taken a huge step toward entering the financial mainstream.

On Thursday, Benjamin Lawsky, superintendent for New York’s Department of Financial Services, proposed new rules for virtual currency businesses. The “BitLicense” plan, which if approved would apply to all companies that store, control, buy, sell, transfer, or exchange Bitcoins (or other cryptocurrency), makes New York the first state to attempt virtual currency regulation.

“In developing this regulatory framework, we have sought to strike an appropriate balance that helps protect consumers and root out illegal activity—without stifling beneficial innovation,” wrote Lawsky in a post on Reddit.com’s Bitcoin discussion board, a popular gathering places for the currency’s advocates.

“These regulations include provisions to help safeguard customer assets, protect against cyber hacking, and prevent the abuse of virtual currencies for illegal activity, such as money laundering.”

The proposed rules won’t take effect yet. First is a public comment period of 45 days, starting on July 23rd. After that, the department will revise the proposal and release it for another round of review.

Regulation represents a turning point in Bitcoin’s history. The currency is perhaps best known for not being subject to government oversight and has been championed (and vilified) for its freedom from official scrutiny. Bitcoin transactions are anonymous, providing a new level of privacy to online commerce. Unfortunately, this feature has also proven attractive to criminals. Detractors frequently cite the currency’s widely publicized use as a means to sell drugs, launder money, and allegedly fund murder-for-hire.

The failure of Mt. Gox, one of Bitcoin’s largest exchanges, following the theft of more than $450 million in virtual currency, also drew attention to Bitcoin’s lack of consumer protections. In his Reddit post, Lawsky specifically referenced Mt. Gox as a reason why “setting up common sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets.”

New York’s proposed regulations require digital currency companies operating within the state to record the identity of their customers, including their name and physical address. All Bitcoin transactions must be recorded, and companies would be required to inform regulators if they observe any activity involving Bitcoins worth $10,000 or more.

The proposal also places a strong emphasis on protecting legitimate users of virtual currency. New York is seeking to require that Bitcoin businesses explain “all material risks” associated with Bitcoin use to their customers, as well as provide strong cybersecurity to shield their virtual vaults from hackers. In order to ensure companies remain solvent, Bitcoin licensees would have to hold as much Bitcoin as they owe in some combination of virtual currency and actual dollars.

Cameron and Tyler Winklevoss, two of Bitcoin’s largest investors, endorsed the new proposal. “We are pleased that Superintendent Lawsky and the Department of Financial Services have embraced bitcoin and digital assets and created a regulatory framework that protects consumers,” Cameron Winklevoss said in an email to the Wall Street Journal. “We look forward to New York State becoming the hub of this exciting new technology.”

Gil Luria, an analyst at Wedbush Securities, also saw the regulations as beneficial for companies built around virtual currency. “Bitcoin businesses in the U.S. have been looking forward to being regulated,” Luria told the New York Times. “This is a very big important first step, but it’s not the ultimate step.”

However, this excitement was not universally shared by the internet Bitcoin community. Soon after posting a statement on Reddit, Lawsky was inundated with comments calling his proposal everything from misguided to fascist. “These rules and regulations are so totalitarian it’s almost hilarious,” wrote one user. Others suggested New York’s proposal would increase the value of Bitcoins not tied to a known identity or push major Bitcoin operations outside the United States.

One particularly controversial aspect of the law appears to ban the creation of any new cryptocurrency by an unlicensed entity. This would not only put a stop to virtual currency innovation (other Bitcoin-like monies include Litecoin, Peercoin, and the mostly satirical Dogecoin) but could theoretically put Bitcoin’s anonymous creator, known by the name Satoshi Nakamoto, in danger of prosecution if he failed to apply for a BitLicense.

One major issue not yet settled is whether other states, or the federal government, will use this proposal as a model for their own regulations. Until some form of regulation is widely adopted, New York’s effort will have a limited effect on Bitcoin business. “I think ultimately, these rules are going to be good for the industry,” Lawsky told the Times. “The question is if this will spread further.”

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