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People who grow interested in participating in the bitcoin market because of this or other articles about the currency should be aware that at its heart it is a

by trotsky 16y ago

People who grow interested in participating in the bitcoin market because of this or other articles about the currency should be aware that at its heart it is a very speculative market. The price of a bitcoin in USD has risen dramatically through most of its life while lacking economic fundamentals for why it should. Indeed, the money supply in the bitcoin market increases steadily over time, this should be inflationary, causing the value of BTC to fall. The fact that it doesn't speaks to how thinly traded the BTC markets are, and that there are simply more buyers than sellers interested in BTC - primarily due to articles about bitcoin that drum up interest, and due to speculators participating in the market. Bitcoin values are very loosely coupled to fundamentals - you can't buy food, energy or commodities with it. In general you need to transfer it back to a fiat currency to do anything classically useful with it. Currencies that either rapidly appreciate or rapidly depreciate are both ill suited for any kind of real commerce - people need relatively stable pricing to conduct any kind of direct business in fiat money. While there are certainly examples where fiat currency runs away in either inflationary or deflationary ways, central banks, charged with protecting their currencies often take dramatic steps at times to prevent moves either way. In these ways bitcoin currently resembles either a pump and dump scheme the tulip bubble. Which it is depends on whether you believe the people driving the rises in pricing are intentionally exploiting the press and thin nature of the market, or if most of the participants are simply along for the speculative ride. Of course, it is in the rational best interests of anyone who holds bitcoin to disagree with this assessment. That said, I do genuinely welcome any kind of informed debate on the issue.

kiba 16y ago
"More goods and services" is practically the catchphrase of the community. We are well aware of this fact. How can I help bitcoin out? Sell something on the market!
- trotsky 16y ago
  To be clear, I don't have a fundamental issue with the concept of bitcoin or the technical implementation. I just see a lot of people who grow interested in obtaining it without knowing what they'll do with except for selling it to someone else. If people want to trade their USD/EUR/GBP/JPY for it as is often suggested by the bitcoin community, or decide that they want to consume electricity in order to obtain it well more power to them. I just think it's good for them to understand what a thin, speculative market it is. Rationally, people not wanting to speculate in the currency should hold off obtaining any until there is something they want to purchase with it right then.
  - kiba 16y ago
    It is still difficult to acquire bitcoin for the foreseeable future, so more exchanges will become online to make it easier. There's source code for open source exchanges floating around, so the barrier of entry is getting lower and lower over time. On the other hand, we have to be patient about goods and services coming online. The community grown a lot in the past few months but it takes a while for people to develop their goods and services and find their niche within the economy. The economy is small, so it's harder to make money as well. For example, I am just starting to gain back my investment on a niche magazine I made for bitcoin. After the website development is finished, I will be moving on to an ambitious video game project. Just to be clear, the bitcoin economy is very tiny. It's only about 4.4 million USD economy at best and the real value is probably much smaller.
yummyfajitas 16y ago
Of course, it is in the rational best interests of anyone who holds bitcoin to disagree with this assessment. No, it is in the rational best interests of anyone holding bitcoins to have the most accurate assessment possible of their future value. If that assessment suggests the future value will go down, it is in their rational best interests to sell bitcoins.
- trotsky 16y ago
  Good point. I didn't mean to say it is in the rational best interests of anyone holding bitcoins to not understand the market forces involved. You make a good argument that it is in their interests to understand what they hold. However, if you buy my argument that the BTC market is nearly wholly speculative at this point, it is probably not in the interests of speculators holding BTC to have it publicly understood as this would seem to lead to an evaporation of upward pressure on the market.
firethief 16y ago
This sounds like a well-thought out reply; that's bad, because it is wrong. > Indeed, the money supply in the bitcoin market increases steadily over time, This is partially correct - the money supply increases asymptotically; the deflation eventually resulting from this may become a problem in the future. > this should be inflationary, causing the value of BTC to fall. I have a couple of issues with this statement: 1. the value of a currency is usually most meaningful relative to another currency; BTC is not unique in having a money supply that increases over time. The current annual rate of increase of the BTC money supply is about 7.57%. The rate of increase of the USD M0 money supply is around 4.50% (I am having trouble finding the exact value). 2. money supply alone does not determine the true value of a currency - the size of the economy (amount of goods and services purchasable with that currency) is also a factor, among other things. It seems to me a reasonable assumption that, given how green BTC is (created in 2009), the size of the BTC economy is increasing substantially faster than the size of the USD. If this is the case, BTC's increasing market size is probably greater than its increasing money supply, relative to the USD - quite possibly enough to justify its increase in value, by my estimates. EDIT: the Bitcoin M0 increase rate is currently 50%, not 7.57% - this is an important difference, and it supports your statement that the value of Bitcoins is quite speculative. However, I stand by my reasoning that it is less speculative than you claim.

by trotsky 16y ago

kiba 16y ago

"More goods and services" is practically the catchphrase of the community. We are well aware of this fact. How can I help bitcoin out? Sell something on the market!

trotsky 16y ago
To be clear, I don't have a fundamental issue with the concept of bitcoin or the technical implementation. I just see a lot of people who grow interested in obtaining it without knowing what they'll do with except for selling it to someone else. If people want to trade their USD/EUR/GBP/JPY for it as is often suggested by the bitcoin community, or decide that they want to consume electricity in order to obtain it well more power to them. I just think it's good for them to understand what a thin, speculative market it is. Rationally, people not wanting to speculate in the currency should hold off obtaining any until there is something they want to purchase with it right then.
- kiba 16y ago
  It is still difficult to acquire bitcoin for the foreseeable future, so more exchanges will become online to make it easier. There's source code for open source exchanges floating around, so the barrier of entry is getting lower and lower over time. On the other hand, we have to be patient about goods and services coming online. The community grown a lot in the past few months but it takes a while for people to develop their goods and services and find their niche within the economy. The economy is small, so it's harder to make money as well. For example, I am just starting to gain back my investment on a niche magazine I made for bitcoin. After the website development is finished, I will be moving on to an ambitious video game project. Just to be clear, the bitcoin economy is very tiny. It's only about 4.4 million USD economy at best and the real value is probably much smaller.

yummyfajitas 16y ago

Of course, it is in the rational best interests of anyone who holds bitcoin to disagree with this assessment. No, it is in the rational best interests of anyone holding bitcoins to have the most accurate assessment possible of their future value. If that assessment suggests the future value will go down, it is in their rational best interests to sell bitcoins.

trotsky 16y ago
Good point. I didn't mean to say it is in the rational best interests of anyone holding bitcoins to not understand the market forces involved. You make a good argument that it is in their interests to understand what they hold. However, if you buy my argument that the BTC market is nearly wholly speculative at this point, it is probably not in the interests of speculators holding BTC to have it publicly understood as this would seem to lead to an evaporation of upward pressure on the market.

firethief 16y ago

This sounds like a well-thought out reply; that's bad, because it is wrong. > Indeed, the money supply in the bitcoin market increases steadily over time, This is partially correct - the money supply increases asymptotically; the deflation eventually resulting from this may become a problem in the future. > this should be inflationary, causing the value of BTC to fall. I have a couple of issues with this statement: 1. the value of a currency is usually most meaningful relative to another currency; BTC is not unique in having a money supply that increases over time. The current annual rate of increase of the BTC money supply is about 7.57%. The rate of increase of the USD M0 money supply is around 4.50% (I am having trouble finding the exact value). 2. money supply alone does not determine the true value of a currency - the size of the economy (amount of goods and services purchasable with that currency) is also a factor, among other things. It seems to me a reasonable assumption that, given how green BTC is (created in 2009), the size of the BTC economy is increasing substantially faster than the size of the USD. If this is the case, BTC's increasing market size is probably greater than its increasing money supply, relative to the USD - quite possibly enough to justify its increase in value, by my estimates. EDIT: the Bitcoin M0 increase rate is currently 50%, not 7.57% - this is an important difference, and it supports your statement that the value of Bitcoins is quite speculative. However, I stand by my reasoning that it is less speculative than you claim.