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The volatility in the bitcoin price just demonstrates how the majority of the people trading it have no conception of how to value the underlying asset (i.e. de

The volatility in the bitcoin price just demonstrates how the majority of the people trading it have no conception of how to value the underlying asset (i.e. demand for a low cost transaction system) and thus it is speculators leading speculators a la the blind leading the blind. The current sharp price decrease is because people are worried that whoever wins this auction (and the subsequent auction of DPR's coins) will want to exit that position. Thus their will be an oversupply in the market and cause the price to decrease. Expecting this, people are taking that into account and trying to get out before the oversupply, causing a self fulfilling prophecy based on bad underlying analysis. Why would someone go long bitcoins (i.e. buy them and in such quantity) through such a difficult process as dealing with the US gov't to so quickly exit their position? My hypothesis is that it will be either rich institutional investors, hedge funds, or similar large investors who see this as an opportunity to acquire bitcoins at an undermarket price. I think many of those groups would sit on their position (and not sell them). Further, if they were to sell them, they would want to do so in a way that didn't dramatically affect the price (thus over many days, weeks, or months). Given that 30K bitcoins is far less than the total bought/sold on exchanges every day, it should be presumed that they can exit this position over a sufficient timeline in order to not cause negative pressure on the price (if the auction winners even want to sell -- which as I analyzed above, I don't think they would).

polshaw 12y ago
It has very limited use as a serious transaction system while there is so much volatility. Prices are therefore pegged to local currencies, and if you want to keep that then it's no longer low cost because conversion to/from local currency costs just as much. The speculation and (eventually) deflationary nature of BTC significantly hinders the chances of it ever stabilising, and therefore a true 'bitcoin economy' emerging (ie. where people do not need to peg to or convert to local currencies). Then there is the fact that it is not a limited good-- someone could quite easily come along with a BetterCoin making BTC almost useless-- there are various things that could be improved, eg privacy, or the slow confirmation times. E: also, there will be an 'oversupply'-- Whoever buys these bitcoins won't be buying other BTC because of it -- it's irrational to think that the auction is creating a significant new demand that wouldn't have existed otherwise! Selling over weeks/months would still affect the price, although more in the normal supply/demand manner than causing a crash/panic. But that could be happening before any of these BTC are sold anyway!
- ryan_j_naughton 12y ago
  All very good points. The volatility is the greatest hindrance to it being a viable transaction system. I'm hopeful that well functioning derivatives (futures, options, etc) will help to stabilize the price (as is the purpose of a futures market); however, that would rely on the traders having effective forecasts on supply and demand which I view as unlikely. Related to that, I thought of an idea a while ago for a non-profit to create a new cryptocurrency that is by design pegged to the USD. Whenever anyone wants a unit of this currency, they can buy one from the non-profit for $1 and the non-profit will mint a new coin. Similarly, if you want to sell the currency, the non-profit will always buy it for $1. The non-profit must keep the appropriate reserves (ideally, they would keep 100% of the US dollars bought or have always sufficient credit lines). With this design, the proposed cryptocurrency will always maintain a $1 peg, removing the insane amounts of volatility. I know that is will be hated by all those in the btc community as it brings in a centralized monetary authority who controls minting coins; however, there is a huge value to an extremely low cost transaction system that is decentralized and pseudo-anonymous (which this would still be). The central authority would not be capable of destroying coins or changing blockchain history, only minting new coins (and as per their charter, only when they are provided $1USD for the coin). People would not have any obligation to use this monetary authority to exchange coins, and surely other exchanges which were more user friendly would appear. Simply, by an entity existing which will always buy at a given price or sell at a given price, it will cause the intended effect without having to have any central role in the decentralized transaction system.
  - dllthomas 12y ago
    I had some ideas for mechanisms to peg without centralization. I stalled out at the question of what to peg to...
    - logicallee 12y ago
      a basket of currencies (real-world ones backed by governments, e.g. http://en.wikipedia.org/wiki/Currency_basket http://en.wikipedia.org/wiki/Currency_basket , where the US dollar, pound sterling, etc, etc, all have a weighted percentage.) but what on earth did you have in mind for a mechanism to do a peg without centralization?
conanbatt 12y ago
That is not an irrational consideration: a dump of such a large amount would definitely drop the price of bitcoin. So if the bidder for the coins can get a 20% discount on 16 million dollars, and then drop them of on the market gradually, he might make a 5% of the initial investment. If eh discount is larger, so would the profits. What the market is doing definitely affects the decision to do a bulk purchase and dump. Addition: I once read that off-shore accounts and hidden illegal USD dollars are estimated in the trillions of dollars. If such amount of money were input into the system immediately, it would definitely tank the dollar in comparison to the EURO. Even worse, it would have way more side effects, like inflation and such ,that bitcoin doesnt have because its not a primary "currency". It just takes a lot less to tank bitcoin than the dollar.
- PeterisP 12y ago
  It does seem an irrational consideration - why is 30k BTC (less than $20m) labeled "such a large amount" instead of "irrelevantly small amount" ? Even for BTC scale, this amount shouldn't be a big deal by itself. $20m or 30k BTC simply is not big in the financial market sense - it's a big amount for an individual or a single small company; but that's not a significant amount at all for supply/demand of any currency with supposedly millions of BTC in circulation. If reality matches the published BTC market data, then 30k BTC should be a drop in a bucket with no meaningful change to the market. And if that kind of money actually does mean "a dump of a large amount", then the currently popularized BTC market estimates, capitalization, etc are exaggerating reality thousandfold.
  - conanbatt 12y ago
    Market capitalization is not the same as volume. For example, bitstamp traded 16 million dollars in the last 24hs. The sale would mean as much as an entire daily trade! http://markets.blockchain.info/ http://markets.blockchain.info/ To put it in perspective, Apple stock trades 71 million avg daily volume. At 90 dollars, its 6 billion dollars a day. If someone were to sell 6 billion dollars of apple stock in one day, remain assured that the price would tank quickly as well, regardless of apple sales or cashflow or any of its "intrinsic" value. http://www.dailyfinance.com/quote/nasdaq/apple/aapl http://www.dailyfinance.com/quote/nasdaq/apple/aapl
Ologn 12y ago
> no conception of how to value the underlying asset They have no conception of how to value the underlying asset because the underlying asset has absolutely no value. Bitcoin is one of the purest scams that has ever been conceived. Even subprime real estate, pets.com stock, dutch Tulip Bulbs etc. had some value. You're buying and selling a hash - a number. It's absolutely worthless. That people are being suckered into buying these, ASICs costing tens of thousands and backordered to make them etc. is a real close-up seat to how a bubble works, how a scam works, and how the luminaries in the tech field can be lined up in a row to endorse the scam. Is there a tech bubble? "Bitcoin" is the word that can answer that question as easily as "pets.com" and "Webvan" did 15 years ago. At least those companies actually performed a valuable service, Bitcoins are worthless.
- knz42 12y ago
  In all fairness, the paper on which $100 bills are printed is quite worthless as well. I think ever since people have stopped using gold and silver bullion (after arrowheads and knives) as currency items, there has been this consensus that money has the value that people give to it, not the value of its material (or, in BTC's case, immaterial) representations.
  - maerF0x0 12y ago
    Further to your point: BTC at least has the property that someone cannot arbitrarily create a new unit (without doing the requisite, increasingly difficult, work). What exists with BTC is 21 million or so unique valid hashes and no others can be created. With money, say USD, there exist trillions and no guarantee that some party (the government) will not create massive amounts of additional units.
    - tkinom 12y ago
      What if, one day, someone equips with quantum computer + smart can figure out the private hashes in anyone's wallet base on the public BTC record? Would the BTC become completely worthless immediately?
mtdewcmu 12y ago
>>The volatility in the bitcoin price just demonstrates how the majority of the people trading it have no conception of how to value the underlying asset (i.e. demand for a low cost transaction system) and thus it is speculators leading speculators a la the blind leading the blind. True, but discovering prices for things that otherwise have no price is something markets do routinely every day. >>The current sharp price decrease is because people are worried that whoever wins this auction (and the subsequent auction of DPR's coins) will want to exit that position. Thus their will be an oversupply in the market and cause the price to decrease. Expecting this, people are taking that into account and trying to get out before the oversupply, causing a self fulfilling prophecy based on bad underlying analysis. There's nothing unique about this situation from the standpoint of how markets work; the only unique thing is nature of the asset itself. Even so, bitcoins are not fundamentally different from a precious metal like gold. The price of gold isn't based on the value of the products you could make from it; very little gold gets put to any actual use. Gold is valuable primarily as a result of it's being scarce and the fact that people have given it value arbitrarily, just like bitcoin. What I read in to the price shock is that the U.S. Marshalls probably should have anticipated this result of dumping the entire quantity at once, and they probably should have released it gradually to smooth out the effect on prices. The Marshalls may not have had the right backgrounds and somebody at the top failed to see it coming.
dusklight 12y ago
Can you please disclose how many bitcoins you own and if you have any vested interests in keeping the bitcoin exchange rate high. Thanks.

polshaw 12y ago

It has very limited use as a serious transaction system while there is so much volatility. Prices are therefore pegged to local currencies, and if you want to keep that then it's no longer low cost because conversion to/from local currency costs just as much. The speculation and (eventually) deflationary nature of BTC significantly hinders the chances of it ever stabilising, and therefore a true 'bitcoin economy' emerging (ie. where people do not need to peg to or convert to local currencies). Then there is the fact that it is not a limited good-- someone could quite easily come along with a BetterCoin making BTC almost useless-- there are various things that could be improved, eg privacy, or the slow confirmation times. E: also, there will be an 'oversupply'-- Whoever buys these bitcoins won't be buying other BTC because of it -- it's irrational to think that the auction is creating a significant new demand that wouldn't have existed otherwise! Selling over weeks/months would still affect the price, although more in the normal supply/demand manner than causing a crash/panic. But that could be happening before any of these BTC are sold anyway!

ryan_j_naughton 12y ago
All very good points. The volatility is the greatest hindrance to it being a viable transaction system. I'm hopeful that well functioning derivatives (futures, options, etc) will help to stabilize the price (as is the purpose of a futures market); however, that would rely on the traders having effective forecasts on supply and demand which I view as unlikely. Related to that, I thought of an idea a while ago for a non-profit to create a new cryptocurrency that is by design pegged to the USD. Whenever anyone wants a unit of this currency, they can buy one from the non-profit for $1 and the non-profit will mint a new coin. Similarly, if you want to sell the currency, the non-profit will always buy it for $1. The non-profit must keep the appropriate reserves (ideally, they would keep 100% of the US dollars bought or have always sufficient credit lines). With this design, the proposed cryptocurrency will always maintain a $1 peg, removing the insane amounts of volatility. I know that is will be hated by all those in the btc community as it brings in a centralized monetary authority who controls minting coins; however, there is a huge value to an extremely low cost transaction system that is decentralized and pseudo-anonymous (which this would still be). The central authority would not be capable of destroying coins or changing blockchain history, only minting new coins (and as per their charter, only when they are provided $1USD for the coin). People would not have any obligation to use this monetary authority to exchange coins, and surely other exchanges which were more user friendly would appear. Simply, by an entity existing which will always buy at a given price or sell at a given price, it will cause the intended effect without having to have any central role in the decentralized transaction system.
- dllthomas 12y ago
  I had some ideas for mechanisms to peg without centralization. I stalled out at the question of what to peg to...
  - logicallee 12y ago
    a basket of currencies (real-world ones backed by governments, e.g. http://en.wikipedia.org/wiki/Currency_basket http://en.wikipedia.org/wiki/Currency_basket , where the US dollar, pound sterling, etc, etc, all have a weighted percentage.) but what on earth did you have in mind for a mechanism to do a peg without centralization?

conanbatt 12y ago

That is not an irrational consideration: a dump of such a large amount would definitely drop the price of bitcoin. So if the bidder for the coins can get a 20% discount on 16 million dollars, and then drop them of on the market gradually, he might make a 5% of the initial investment. If eh discount is larger, so would the profits. What the market is doing definitely affects the decision to do a bulk purchase and dump. Addition: I once read that off-shore accounts and hidden illegal USD dollars are estimated in the trillions of dollars. If such amount of money were input into the system immediately, it would definitely tank the dollar in comparison to the EURO. Even worse, it would have way more side effects, like inflation and such ,that bitcoin doesnt have because its not a primary "currency". It just takes a lot less to tank bitcoin than the dollar.

PeterisP 12y ago
It does seem an irrational consideration - why is 30k BTC (less than $20m) labeled "such a large amount" instead of "irrelevantly small amount" ? Even for BTC scale, this amount shouldn't be a big deal by itself. $20m or 30k BTC simply is not big in the financial market sense - it's a big amount for an individual or a single small company; but that's not a significant amount at all for supply/demand of any currency with supposedly millions of BTC in circulation. If reality matches the published BTC market data, then 30k BTC should be a drop in a bucket with no meaningful change to the market. And if that kind of money actually does mean "a dump of a large amount", then the currently popularized BTC market estimates, capitalization, etc are exaggerating reality thousandfold.
- conanbatt 12y ago
  Market capitalization is not the same as volume. For example, bitstamp traded 16 million dollars in the last 24hs. The sale would mean as much as an entire daily trade! http://markets.blockchain.info/ http://markets.blockchain.info/ To put it in perspective, Apple stock trades 71 million avg daily volume. At 90 dollars, its 6 billion dollars a day. If someone were to sell 6 billion dollars of apple stock in one day, remain assured that the price would tank quickly as well, regardless of apple sales or cashflow or any of its "intrinsic" value. http://www.dailyfinance.com/quote/nasdaq/apple/aapl http://www.dailyfinance.com/quote/nasdaq/apple/aapl

Ologn 12y ago

> no conception of how to value the underlying asset They have no conception of how to value the underlying asset because the underlying asset has absolutely no value. Bitcoin is one of the purest scams that has ever been conceived. Even subprime real estate, pets.com stock, dutch Tulip Bulbs etc. had some value. You're buying and selling a hash - a number. It's absolutely worthless. That people are being suckered into buying these, ASICs costing tens of thousands and backordered to make them etc. is a real close-up seat to how a bubble works, how a scam works, and how the luminaries in the tech field can be lined up in a row to endorse the scam. Is there a tech bubble? "Bitcoin" is the word that can answer that question as easily as "pets.com" and "Webvan" did 15 years ago. At least those companies actually performed a valuable service, Bitcoins are worthless.

knz42 12y ago
In all fairness, the paper on which $100 bills are printed is quite worthless as well. I think ever since people have stopped using gold and silver bullion (after arrowheads and knives) as currency items, there has been this consensus that money has the value that people give to it, not the value of its material (or, in BTC's case, immaterial) representations.
- maerF0x0 12y ago
  Further to your point: BTC at least has the property that someone cannot arbitrarily create a new unit (without doing the requisite, increasingly difficult, work). What exists with BTC is 21 million or so unique valid hashes and no others can be created. With money, say USD, there exist trillions and no guarantee that some party (the government) will not create massive amounts of additional units.
  - tkinom 12y ago
    What if, one day, someone equips with quantum computer + smart can figure out the private hashes in anyone's wallet base on the public BTC record? Would the BTC become completely worthless immediately?

mtdewcmu 12y ago

>>The volatility in the bitcoin price just demonstrates how the majority of the people trading it have no conception of how to value the underlying asset (i.e. demand for a low cost transaction system) and thus it is speculators leading speculators a la the blind leading the blind. True, but discovering prices for things that otherwise have no price is something markets do routinely every day. >>The current sharp price decrease is because people are worried that whoever wins this auction (and the subsequent auction of DPR's coins) will want to exit that position. Thus their will be an oversupply in the market and cause the price to decrease. Expecting this, people are taking that into account and trying to get out before the oversupply, causing a self fulfilling prophecy based on bad underlying analysis. There's nothing unique about this situation from the standpoint of how markets work; the only unique thing is nature of the asset itself. Even so, bitcoins are not fundamentally different from a precious metal like gold. The price of gold isn't based on the value of the products you could make from it; very little gold gets put to any actual use. Gold is valuable primarily as a result of it's being scarce and the fact that people have given it value arbitrarily, just like bitcoin. What I read in to the price shock is that the U.S. Marshalls probably should have anticipated this result of dumping the entire quantity at once, and they probably should have released it gradually to smooth out the effect on prices. The Marshalls may not have had the right backgrounds and somebody at the top failed to see it coming.

dusklight 12y ago

Can you please disclose how many bitcoins you own and if you have any vested interests in keeping the bitcoin exchange rate high. Thanks.