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Bitcoins continue to be accepted by more businesses, but does subsequent conversion to USD show them to be a fad?

UPDATE 12/10/2013 7:50 a.m. (Tuesday)

As a reader points out there's been a twist in this story.  While the headline still appears accurate, details of the story have shifted.

According to Pietro Frigerio, general manager of Lamborghini Newport Beach, his dealership didn't actually accept bitcoins at an point in the transaction.  According to a clarification he issued in comments to Squawk on the Street, the customer did buy the vehicle with bitcoins, but he did the conversion to USD, not the dealership.  This seems to contradict/correct the earlier comments of a sales manager at the dealership.

"The transaction in our bank account, we received a wire in U.S. dollars.  So you could say that I didn't want bitcoins. And I never touched bitcoins," Mr. Frigerio explains.

So strike one business that accepts bitcoin; the dealership treated the bitcoins like foreign currency or gold bars, asking the customer to take care of the exchange to U.S. currency.  Still it's an intriguing tale that illustrates the rising value of the bitcoin.

=======================================================

In Orange County, Calif. suburb Costa Mesa a Lamborghini dealership is making headlines after it began to accept bitcoins -- a popular electronic cryptocurrency -- for purchases.

An anonymous buyer from the Orlando, Fla. area purchased a decked-out Tesla Motors Inc. (TSLA) Model S from the dealership last week for bitcoins (reportedly 91.4 bitcoins, which works out to about $103,000 USD at last week's exchange prices).  This believed to be the first time that a premium electric vehicle (EV) has been sold for bitcoins.  The car came with a tan leather interior and a glass sunroof.

Much like Tesla, a bit of scrutiny from the media and government hasn't hurt the bitcoin value.  In fact it appears to have driven it to fresh highs.  A year ago those bitcoins would have been worth $1280 USD, when the currency dipped to $14 USD, but thanks to a surge in value and interest, Bitcoins were trading at all time highs of over $1,000 last week.


Tesla Model S

Virgin Galactic also announced in recent weeks that it would accept bitcoins to book suborbital flights.  Founder Richard Branson is a bullish support of bitcoins.

Last week's Model S purchase worked out like this: the Orange County luxury vehicle dealership sent the man an invoice, received the payment in bitcoins, exchanged the coins for U.S. currency at an undisclosed exchange, and finalized the purchase.  General sales manager Nick Jones told The OC Register, "It’s just another method to sell cars.  [The buyer is] happy."

Bitcoin smaller
Bitcoins continue to be accepted by more and more businesses, although most promptly trade the digital currency for USD. [Image Source: Getty Images]

The Model S is arguably the most successful luxury electric vehicle, having won Motor Trend's and Automobile magazine's 2013 "Car of the Year".
 
In Q3 Tesla delivered 5,500 Model S sedans, including 1,000 to the European market.  Tesla is now producing over 550 Model S EVs per week.  Still the automaker posted a $38M USD loss on revenue of $431M USD, in the midst of production expansions.  The loss reversed a profitable Q2.  But the company is still pretty well positioned having paid off its $465M USD in low-interest U.S. federal government loans early via the cash from initial Model S sales.
 
Tesla is eyeing its first try at an affordable mass-market EV.  Tesla in May promised a sub-$40,000 USD EV in 3 to 4 years with a range identical to GM's proposed one -- 200 miles.

Model S dealership
A Tesla Store [Image Source: Electric Cars Report]

The company is also looking to navigate two key struggles -- a controversy over dealership sales and a string of incidents in which its battery packs caught fire after collisions.
 
U.S. National Highway Traffic Safety Administration (NHTSA) investigation determined that a trio of recent vehicle fires were due to collisions with large road debris (e.g. a trailer hitch in one case), which prevented the aluminum plate protecting the lithium ion battery pack.  The fires were black mark on a vehicle that had achieved extremely high safety ratings in crash tests.  Tesla responded by issuing a mid-November software update to raise the underbody of its cars (clearance) higher off the road when traveling at highway speeds.
 
Tesla also has been in high profile battles with a number of states, who after being lobbied by traditional automakers/dealerships passed or proposed passing bans on sales of automakers like Tesla who don't have physical dealerships in state.  Still Tesla has weathered these storms and seems to be finding no shortage of buyers for its Model S.

Sources: OC Register, CNN Money



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RE: Did it really happen?
By Mint on 12/9/2013 4:01:59 PM , Rating: 2
Exactly.

Until goods get fixed prices in bitcoins, and people producing those goods get fixed salaries in bitcoins, it will not be a real currency.

It's just a bunch of people passing real currency between each other, hoping to rip someone else off.


RE: Did it really happen?
By MrBlastman on 12/9/2013 4:26:09 PM , Rating: 2
National Currency, surprising to some, fluctuates all the time. Depending on the Nation and their goods/services they produce, their currency might be more or less volatile than other currencies in the world.

In fact, currencies fluctuate daily and in some cases, hourly or by the minute. Bitcoins aren't unique in this at all.

Global currencies also fluctuate depending on demand for that monetary unit, also. Take the Dollar--it grew in strength not only by our country's strong GDP (prior to 2000), but also due to its visibile nature and global recognition. As such, demand for it grew and this also contributed to it increasing in value respective to other currencies.


RE: Did it really happen?
By tanjali on 12/9/2013 5:03:01 PM , Rating: 2
If the currency is not covered with precious metals or hours of workers in productive work, (not workers in majority of services), any currency of world is only debt production and inflation trough incessantly printing of paper money. Doing that is only making periodic stock market crashes and devaluation of country economy. Someone is getting enormously wealthy in such a system and I don’t think Bill Gates or Lloyd Blankfein wealthy, trillions of $$$ wealthy while buying out countries economy discounted.


RE: Did it really happen?
By Mint on 12/9/2013 5:48:52 PM , Rating: 1
Metal based currencies are more volatile than debt-based currencies. Precious metals have value entirely based on faith rather than productive value.

Money IS debt. If you have a dollar, somebody owes you a dollar's worth of goods/labor in the future.

If we didn't have money, we'd be exchanging goods for asset shares. That's the equivalent of banks owning your house until you acquire the entire asset with labor that you're providing for the rest of society (which built that house in the first place).


RE: Did it really happen?
By tanjali on 12/9/2013 6:25:44 PM , Rating: 2
Actually precious metal currency have much less volatility. Their worth depends on production, offer and demand. There is nothing faith driven there, except if you place politics into faith then you are right there. You should have religious trust in politicians if you let them sell national gold to other countries for paper money and not goods.


RE: Did it really happen?
By yomamafor1 on 12/9/2013 8:53:13 PM , Rating: 1
Precious metal currency derive their value from demand and supply, and depending both, can be a lot more volatile than fiat based currency. Precious metals have to be produced, and the production of said metal resides in a handful of companies that can potentially collude to raise prices (case in point, OPEC). Furthermore, due to the natural scarcity and the relatively slow production cycle of those metals, it is not very conducive to a growing economy. Lastly, in the case of recessions, precious metal currency can significantly reduce the rebound rate due to its inherently restrictive nature.

This is the reason why overwhelming majority of economists in the world oppose precious metal based currency.

On the other hand, fiat currency is based on a nation's GDP, and is much more stable. The currency allows for monetary policies that can assist in a country's trading. We've grown out of precious metal based currency to a more advanced and stable platform. Adopting precious metal based currency would be to go back on the improvements we've made in the last century.


RE: Did it really happen?
By Keeir on 12/9/2013 9:30:15 PM , Rating: 2
quote:
Actually precious metal currency have much less volatility. Their worth depends on production, offer and demand.


Historically speaking, currencies based on "precious" metals have been extremely volatile and not a good basis for a stable economy. Stable economies lead to conditions that make the most happiness for the most number of members of a community, albiet at the expense of social/economic movement. In today's world, better information may reduce this historically experienced volatility, but I doubt it.

Fiat currencies, in contrast, create stable economies only in the event that the "Fiating" agency is precieved as stable. There are situations where a Fiat money is clearly an issue and a gold standard would be a better interim solution than a debt based system.


RE: Did it really happen?
By ebakke on 12/9/2013 11:26:53 PM , Rating: 2
quote:
Money IS debt. If you have a dollar, somebody owes you a dollar's worth of goods/labor in the future.
Fascinating. Elaborate, please.


RE: Did it really happen?
By Mint on 12/10/2013 12:53:48 PM , Rating: 2
The whole point of money is for there to be a common understanding of value through space and time. It is extremely important for market efficiency that this be as predictable as possible for all participants.

The only way that can happen is if a dollar's value is controlled through predictable inflation targeting. That basically means society is being told by the central bank that it must provide X(t) equivalent goods/labor for a dollar, with t being the time that this dollar is chosen to be spent.

That, for all intents and purposes, is debt.

Once you insert gold or bitcoins or whatever as an intermediary for transactions, the only reason that this notion of debt goes away is that we are abandoning the principle of purchase power predictability, replacing it with blind hope that we don't get chaotic hoarding/dumping cycles screwing up the economy. Just look at how much precious metals, oil, etc have fluctuated in value in the last decade.


RE: Did it really happen?
By TSS on 12/10/2013 6:23:32 PM , Rating: 2
very simple: if you put money in the bank, you're not putting it "in the bank", you're lending that bank your money.

Through something called "fractional reserve banking", the bank is only required to keep a fraction of your deposit "in the bank".

Say you deposit $100. Say the "tier 1 capital ratio" of the bank is 10% (the fraction). The bank is then required to only keep $10 for your $100 in the bank. The other $90 can then be loaned out to another person or business.

This $90 is then loaned out and another person or business eventually deposits it into another bank. The process repeats, requiring the other bank to keep $9 for the company "in the bank", allowing them to loan out another $81 to another person/business.

This process repeats until nearly $1000 of new money is made out of $100 of initial money. So if there's only $100 of money, there must be $900 in debt - money loaned out by the banks that, and here's the kicker, *has to be paid back to the banks*. Hence, debt.

That's the main reason why you'll hear people say money is debt though it goes beyond even that. That initial $100 was borrowed by the government from the federal reserve. The fed gets treasuries, the government gets money. Ofcourse that needs to be paid back to the fed, making even the initial $100 debt.

Here's the kicker to that story: Interest. The fed is the one conjuring money into existance but the government borrows that money from the fed at interest. So where does the interest come from?

This is why the US, or better said the dollar, recovering is an mathematical impossibility. There is and will always be more debt in existance then there are dollars. Pay down the debt - you'll run out of dollars while still remaining with the interest on the debt you just paid down.

That's the basics though. In practice it turns out the currency simply gets hyperinflated at some point and becomes worthless, solving the whole problem of paying down the debt (currency worthless -> debt worthless!). Ofcourse at the minor inconvenience of ruining your economy for atleast a decade or 2 in the process.

Which is where the US finds itself today - the $85 billion of QE a month by the fed is nothing more then hyperinflation. Except it's still moving at a slow enough pace where we still call it "inflation" (not in the least helped by the government's doctored inflation numbers). If they would stop though - markets will crash, leading to a credit crunch (Loans go bad -> written off the books off banks -> banks strapped for cash -> won't loan out more money AKA "credit crunch") which causes deflation.

Because the fed wants to avoid this, as the great depression was basically a deflationairy spiral as less money being loaned out equals less money available for spending and investments equals even more deflation which is the spiral, they will print out the difference in new money making that $85 billion a month look like chump change. This is basically what happened in 2008 and the reason why the federal reserve went from a $400 billion balance sheet to a $4 trillion balance sheet in 5 years.

Note: this has already happened in the last 5 years. The next one *will* be bigger and it *will* happen. Cut spending raise taxes doesn't matter one iota. It's a good bet then the dollar will lose it's world reserve currency status (AKA the currency everybody wants and everybody trades in) so if you think things are expensive now, hah, they will never ever be this cheap again. Atleast for the US.

I think that covers everything. Oh, except for one thing; can it be avoided? Awnser is simple: No. 40+ years of bad fiscal policy has already happened. The crash (hint:2008) has already happened. We're simply at a point in time where the front of the train has derailed, yet our wagon at the back simply hasn't passed the point of disaster yet.

My advice would be to jump off before it does.


RE: Did it really happen?
By Mint on 12/11/2013 4:11:27 PM , Rating: 2
You're misinterpreting what I'm saying. It's not merely our choice of fractional reserve banking that makes money debt.

It's the core concept of money: A transactional tool with commonly understood sense of value across a geographical region and predictable change over time.

That means every dollar is an IOU from society to give you a unit of goods. That's debt in my book.

If you back money with gold or any other commodity, you are giving up on the premise behind what money is, and instead just relying on blind faith that this commodity can approximate it. In an economy at the zero lower bound, that faith will be proven wrong, and we will indeed reach a deflationary spiral.

As for your doomsday scenario and advice, where exactly are all the holders of US dollars going to jump to?

The beauty of a country having its own currency is that it always balances out. If people buy gold, someone sold it for US dollars. If China wants to sell debt, then somebody else will buy it (since they're earning 0% anyway in the bank). If you exchange currency, then someone else is buying US dollars. If the US dollar gets too weak, exports go up and imports get replaced by domestic production. If the holders of US debt buy goods or invest, jobs are created and the economy improves. The Fed is already virtually printing money by buying treasuries, and nobody is under the illusion that the US gov't will ever clear its debt to zero. The gov't will keep offering more treasuries, and as long as the economy is in the dumps with nothing better to do with US dollars, the wealthy will keep buying them.

The only monetary danger to the US dollar is politically driven gov't default or the Fed going rogue and abandoning its inflation target. What happened to Greece/Spain cannot happen here.


RE: Did it really happen?
By Mint on 12/9/2013 5:34:50 PM , Rating: 2
Of course currencies fluctuate in value, but relative to the cost of goods produced in that country, they are extremely stable (at least for major currencies).

Bitcoins have 1000x more volatility.


RE: Did it really happen?
By tanjali on 12/9/2013 6:42:55 PM , Rating: 2
Explain relative?
Goods should be strongest currency one country has.


RE: Did it really happen?
By Mint on 12/10/2013 1:06:52 PM , Rating: 2
Of course goods are the strongest currency. That's precisely what inflation-targeted fiat currencies are based on, because inflation is determined based on the cost of goods inside the currency's borders.

Precious metals, on the other hand have almost no substitutive relation to the production of general goods. Basing a currency on them is almost as stupid as basing it on bitcoin.


RE: Did it really happen?
By Reclaimer77 on 12/9/2013 4:32:05 PM , Rating: 2
You're right, it's not a real currency.

Bitcoin is now a commodity.

quote:
It's just a bunch of people passing real currency between each other, hoping to rip someone else off.


Hmmm that sounds like the 'Fed lol.


RE: Did it really happen?
By Mint on 12/9/2013 5:32:20 PM , Rating: 2
The Fed keeps inflation at ~2% per year.

Bitcoins fluctuate in value 1000x as fast.


RE: Did it really happen?
By Reclaimer77 on 12/9/2013 5:50:03 PM , Rating: 2
quote:
Bitcoins fluctuate in value 1000x as fast.


Yes just like Gold, silver, or oil or any other volatile commodity.

Which is why it's not really regarded as a currency by economists.


RE: Did it really happen?
By tanjali on 12/9/2013 6:37:47 PM , Rating: 2
Explain, printing paper money as something of value?
I can’t figure out and trust, with what is that hidden value supported with.
Do you really trusting the feds after all this market fluctuations and socialistic bailouts?


RE: Did it really happen?
By Keeir on 12/9/2013 9:42:57 PM , Rating: 2
I've been fascinated by the Bitcoin issue. They seem to combine some of the worst aspects of fixed assest and fiat based currencies, yet are growing in popularity.

(IE, Bitcoins rely on a belief that they are unique, will remain unique, and the system that they are based on will not change.)

Personally, I think that if the world undergoes a prolonged/wide spread economic expansion, Bitcoins will fall in popularity significantly.... because they will quickly become very expensive and the downsides to a deflating currency will become too difficult to ignore.


RE: Did it really happen?
By TSS on 12/10/2013 7:39:51 PM , Rating: 2
I think it fails the currency test because it's not given out by any government. I know it was designed that way, but still. Meaning it doesn't have any taxpayers anywhere ready to pick up the tab if something goes wrong.

Also you can't use bitcoins for taxes. Generally in history something has become accepted as a currency once the government makes it's taxes payable in X commodity, including paper and ink.

By the way, gold/silver aren't volitile commodities. There's nothing volitile about the production or demand of gold or silver. A volitile commodity would be Aircraft, for which there is no need while a company's fleet remains servicable. After a while replacements are needed leading to multibillion dollar deals in one month while the previous and the next month saw no demand at all.

Only reason gold/silver are volitile at the moment is speculation. People speculate in gold and silver because they think it will appreciate in value faster then say cash, regardless of what happens to supply and demand for the actual metals. Doesn't change anything about the volitilaty of the commodity, just the price.

Bitcoin is a volitile commodity, but that's because the production of bitcoins is linked to the hashing power of the network. The more power, the difficulty goes up, the longer it takes to get a reward, the more power it costs to get the reward. If suddenly alot of other people start mining, your costs rise. Gold/silver don't have this problem because obviously, there aren't that many spots in the earth where the resource is located. Relative to the demand for gold, atleast.

However, the price fluctuations bitcoins are seeing are made worse by Hype, which you can consider hyper speculation. If speculation is a couple of cows thinking the grass is greener on the other side, then Hype is a stampede across the field. No matter if a few individuals figure the truth is different (AKA people preaching value instead of worth like me), or no matter a few get trampled (AKA those who bought at $1200 then panicked and sold at $500), the herd will continue to run in the same direction until they meet an immovable object. In bitcoin's case say the government outright banning bitcoin. Then the herd dies and the only ones who don't are the ones who got out of the herd early (AKA the government's buddies who got a heads up about incomming regulation).

It's a doozy telling it all apart in our world of high speed finance. But that's the gist of it ^^.


RE: Did it really happen?
By Mint on 12/12/2013 2:42:10 PM , Rating: 2
quote:
Only reason gold/silver are volitile at the moment is speculation. People speculate in gold and silver because they think it will appreciate in value faster then say cash, regardless of what happens to supply and demand for the actual metals. Doesn't change anything about the volitilaty of the commodity, just the price.


What kind of nonsense is this? Volatility is defined as change in price.

The demand for gold is almost entirely due to speculation, and always has been. We use a small fraction for jewelry (already a volatile industry due to frivolousness), even less for industy like electronics, and all other demand is based simply on faith that society will keep wanting to hoard it.


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