6 ms·

Making it easier to speculate should in theory decrease volatility and make market manipulation harder, since having more speculators should mean that the price

by shawnz 6y ago

Making it easier to speculate should in theory decrease volatility and make market manipulation harder, since having more speculators should mean that the price is driven to its fair value more quickly.

WJW 6y ago
This gets back to the "gambling vs investing" debate we had on the front page yesterday. What is the fair value of bitcoin? It will never provide dividends or other types of future cashflows, so that aspect of its fair value is zero. The remaining part is purely speculative in that it is based on what other people will pay for it. It is not at all clear to me that having more (relatively uninformed) speculators will lead to less volatility for such an instrument.
- shawnz 6y ago
  Bitcoin isn't a stock. Most kinds of assets don't provide dividends or other cashflows -- that is certainly not the only determiner of the value of an asset. It would indeed be a bad idea to construct an investment portfolio out of only Bitcoins and no stocks, but that doesn't mean it is without value (for example, as a monetary technology or an inflation hedge) > It is not at all clear to me that having more (relatively uninformed) speculators will lead to less volatility for such an instrument. I am not sure how we can judge the informedness of the speculators or what we are comparing them against. But, each additional speculator improves the informedness of the market overall.
  - WJW 6y ago
    > each additional speculator improves the informedness of the market overall I don't think that can be true. Leaving bitcoin aside for a moment, if a new speculator comes into the stock market who truly believes (perhaps due to misleading marketing) that "stocks only go up". This is clearly not the case from an objective standpoint. How would the entrance of such a speculator improve the informedness of the market as a whole?
  - bitdizzy 6y ago
    Garbage in garbage out applies to markets too.
  - mcguire 6y ago
    Assets similar to bitcoin are somewhat rare on the ground. Art, antiquities, maybe a few other things. (Precious metals are typically useful for other things.) Few people regard those assets as useful investments, in anything other than a diversification sense. No one regards them as economically productive.
    - shawnz 6y ago
      I completely agree with these statements, except I think the intrinsic value of precious metals is exaggerated and Bitcoin also has functional value as a monetary technology (not generally in an important way for most first-worlders though).
      - imtringued 6y ago
        Gold derives its store of value property from being an elemental shelling point. It's the best element to be used as a store of value. That property will not disappear in the future since it's based on the laws of physics. However, the exact price is obviously not guaranteed. Merely the ability to keep exchanging it in the future.
        shawnz 6y ago
        Agreed, I only mean to say that the intrinsic value (i.e. for jewellery or electronics) is exaggerated. Gold has obvious usefulness as a store of value and an inflation hedge, although I think Bitcoin or a similar technology has the potential to be even better/more guaranteed/more convenient.
  - tootie 6y ago
    Commodities are not stocks but they have intrinsic value. The value of oil or chickens is based on demand for their consumption.
- iso1210 6y ago
  > What is the fair value of bitcoin? It will never provide dividends or other types of future cashflows, so that aspect of its fair value is zero. The remaining part is purely speculative in that it is based on what other people will pay for it. Do Swiss Franks pay dividends or other types of cashflows? If I have 50,000 CHF in a box in my cupboard, what value is it beyond a small amount of fuel to burn? At some point I will hope someone (perhaps someone in Switzerland) will exchange something I want for those pieces of paper. On the other hand the Swiss Government could decide to make the money almost worthless, practically overnight (India did this with Rupees), by removing the main purpose of having the notes.
  - albntomat0 6y ago
    > Do Swiss Franks pay dividends or other types of cashflows? There is consistent demand by the Swiss government, in the form of tax collection.
  - dmitriid 6y ago
    > If I have 50,000 CHF in a box in my cupboard, what value is it beyond a small amount of fuel to burn? You are so close to understanding the true value of bitcoin.
    - deleted 6y ago
      [deleted]
    - andresp 6y ago
      A sub optimal way of producing thermal energy (at least in for the miners)?
  - betterunix2 6y ago
    Actually the ultimate reason why a note has value is that it can be used to settle tax bills and other debts, so you do not have to "hope" that someone out there will take it -- the government behind the money will take it from anyone who owes taxes, which is almost everyone who lives or does business in the country.
- BurningFrog 6y ago
  > The remaining part is purely speculative in that it is based on what other people will pay for it. This is of course true, but it's also true for oil, buildings, pork bellies, and any other kind of property.
- tiku 6y ago
  One of the values of bitcoin is the price miners get for it. If they lose money on selling their newly minted bitcoins they won't sell. So it's related to power prices, the difficulty of mining a new coin.
  - betterunix2 6y ago
    That sounds like a restatement of the "labor theory of value" which makes no real sense, as it assumes that "someone" is always willing to buy. Why should anyone be motivated to buy Bitcoin, beyond the classic "great fool theory" trap?
  - imtringued 6y ago
    This might be a source of price stickiness, however, how many miners are actually unprepared and unaware of the price movements of Bitcoin?
- imtringued 6y ago
  If one were to assume that Bitcoin is a currency and its supply is fixed then the correction assumption is that the value of Bitcoin doesn't change. The expectation is that the dollar is losing value and thus you can exchange your Bitcoin for more dollars. However, this is missing that the maximum return would merely track inflation and thus Bitcoin is massively over performing which indicates immaturity of the asset or a bubble. Bitcoin has had so many bubbles it would be surprising if what we are currently experiencing is not a bubble.
totalZero 6y ago
That might make sense if bitcoin were a commodity, but it's not. Speculation helps in markets where there are cross-market arbitrages available -- the stat-arb speculators can front-run the true arbitrageurs and keep markets in line with one another -- but that's not really the case with bitcoin.
ta988 6y ago
That's assuming that 1) there is a fair value for bitcoin 2) the market is able to assess and direct bitcoin to that fair value (through the actions of its participants). I tend to believe that this economical " theory" is much more a belief/mantra than anything proved scientifically...
sjy 6y ago
According to what theory? This sounds like the law of large numbers, which depends on the assumption that the averaged random variables are independent and identically distributed. The history of speculative bubbles contradicts the idea that speculators act independently.

by shawnz 6y ago

WJW 6y ago

This gets back to the "gambling vs investing" debate we had on the front page yesterday. What is the fair value of bitcoin? It will never provide dividends or other types of future cashflows, so that aspect of its fair value is zero. The remaining part is purely speculative in that it is based on what other people will pay for it. It is not at all clear to me that having more (relatively uninformed) speculators will lead to less volatility for such an instrument.

shawnz 6y ago
Bitcoin isn't a stock. Most kinds of assets don't provide dividends or other cashflows -- that is certainly not the only determiner of the value of an asset. It would indeed be a bad idea to construct an investment portfolio out of only Bitcoins and no stocks, but that doesn't mean it is without value (for example, as a monetary technology or an inflation hedge) > It is not at all clear to me that having more (relatively uninformed) speculators will lead to less volatility for such an instrument. I am not sure how we can judge the informedness of the speculators or what we are comparing them against. But, each additional speculator improves the informedness of the market overall.
- WJW 6y ago
  > each additional speculator improves the informedness of the market overall I don't think that can be true. Leaving bitcoin aside for a moment, if a new speculator comes into the stock market who truly believes (perhaps due to misleading marketing) that "stocks only go up". This is clearly not the case from an objective standpoint. How would the entrance of such a speculator improve the informedness of the market as a whole?
- bitdizzy 6y ago
  Garbage in garbage out applies to markets too.
- mcguire 6y ago
  Assets similar to bitcoin are somewhat rare on the ground. Art, antiquities, maybe a few other things. (Precious metals are typically useful for other things.) Few people regard those assets as useful investments, in anything other than a diversification sense. No one regards them as economically productive.
  - shawnz 6y ago
    I completely agree with these statements, except I think the intrinsic value of precious metals is exaggerated and Bitcoin also has functional value as a monetary technology (not generally in an important way for most first-worlders though).
    - imtringued 6y ago
      Gold derives its store of value property from being an elemental shelling point. It's the best element to be used as a store of value. That property will not disappear in the future since it's based on the laws of physics. However, the exact price is obviously not guaranteed. Merely the ability to keep exchanging it in the future.
      - shawnz 6y ago
        Agreed, I only mean to say that the intrinsic value (i.e. for jewellery or electronics) is exaggerated. Gold has obvious usefulness as a store of value and an inflation hedge, although I think Bitcoin or a similar technology has the potential to be even better/more guaranteed/more convenient.
- tootie 6y ago
  Commodities are not stocks but they have intrinsic value. The value of oil or chickens is based on demand for their consumption.
iso1210 6y ago
> What is the fair value of bitcoin? It will never provide dividends or other types of future cashflows, so that aspect of its fair value is zero. The remaining part is purely speculative in that it is based on what other people will pay for it. Do Swiss Franks pay dividends or other types of cashflows? If I have 50,000 CHF in a box in my cupboard, what value is it beyond a small amount of fuel to burn? At some point I will hope someone (perhaps someone in Switzerland) will exchange something I want for those pieces of paper. On the other hand the Swiss Government could decide to make the money almost worthless, practically overnight (India did this with Rupees), by removing the main purpose of having the notes.
- albntomat0 6y ago
  > Do Swiss Franks pay dividends or other types of cashflows? There is consistent demand by the Swiss government, in the form of tax collection.
- dmitriid 6y ago
  > If I have 50,000 CHF in a box in my cupboard, what value is it beyond a small amount of fuel to burn? You are so close to understanding the true value of bitcoin.
  - deleted 6y ago
    [deleted]
  - andresp 6y ago
    A sub optimal way of producing thermal energy (at least in for the miners)?
- betterunix2 6y ago
  Actually the ultimate reason why a note has value is that it can be used to settle tax bills and other debts, so you do not have to "hope" that someone out there will take it -- the government behind the money will take it from anyone who owes taxes, which is almost everyone who lives or does business in the country.
BurningFrog 6y ago
> The remaining part is purely speculative in that it is based on what other people will pay for it. This is of course true, but it's also true for oil, buildings, pork bellies, and any other kind of property.
tiku 6y ago
One of the values of bitcoin is the price miners get for it. If they lose money on selling their newly minted bitcoins they won't sell. So it's related to power prices, the difficulty of mining a new coin.
- betterunix2 6y ago
  That sounds like a restatement of the "labor theory of value" which makes no real sense, as it assumes that "someone" is always willing to buy. Why should anyone be motivated to buy Bitcoin, beyond the classic "great fool theory" trap?
- imtringued 6y ago
  This might be a source of price stickiness, however, how many miners are actually unprepared and unaware of the price movements of Bitcoin?
imtringued 6y ago
If one were to assume that Bitcoin is a currency and its supply is fixed then the correction assumption is that the value of Bitcoin doesn't change. The expectation is that the dollar is losing value and thus you can exchange your Bitcoin for more dollars. However, this is missing that the maximum return would merely track inflation and thus Bitcoin is massively over performing which indicates immaturity of the asset or a bubble. Bitcoin has had so many bubbles it would be surprising if what we are currently experiencing is not a bubble.

totalZero 6y ago

That might make sense if bitcoin were a commodity, but it's not. Speculation helps in markets where there are cross-market arbitrages available -- the stat-arb speculators can front-run the true arbitrageurs and keep markets in line with one another -- but that's not really the case with bitcoin.

ta988 6y ago

That's assuming that 1) there is a fair value for bitcoin 2) the market is able to assess and direct bitcoin to that fair value (through the actions of its participants). I tend to believe that this economical " theory" is much more a belief/mantra than anything proved scientifically...

sjy 6y ago

According to what theory? This sounds like the law of large numbers, which depends on the assumption that the averaged random variables are independent and identically distributed. The history of speculative bubbles contradicts the idea that speculators act independently.