Bitcoin’s Rise: What If It Is Not A Bubble?

http://statspotting.com/bitcoins-rise-what-if-it-is-not-a-bubble/

by npguy • 13 years ago

38 59 13 years ago

daeken6• 13 years ago

> We are convinced that nobody is buying Bitcoins right now to sell it for a profit before the music stops (in which case it would be a bubble).

I'm not sure where they got this impression. I've been buying BTC explicitly for this purpose for a bit now; just disappointed that I didn't buy more, given the insane increases I've seen. I know dozens of people buying BTC just to make money from it before the next crash/dip, and that cycle will continue for a while yet.

npguy• 13 years ago

That statement was based on the common sentiment that 'let me keep out of this stuff it might crash anytime', particularly since everyone has seen Bitcoin crash before.

Your data point proves that this assumption could be wrong. And there is no way we can find out if you are in the majority or not.

daeken6• 13 years ago

That sentiment may be common, but it's by no means universal. Even if I suspected a crash were coming (which I do -- end of this month or early next month, after it hits $200-225), that wouldn't affect the fact that I'm buying, simply the price I'd be willing to buy at. It's all just a matter of risk vs reward.

aneth43• 13 years ago

Unless the post was edited, the quote is:

> It is possible that most folks are not buying Bitcoins right now to sell it for a profit before the music stops (in which case it would be a bubble).

Certainly many are, if not most. Otherwise, why are they buying bitcoin? To store value? To buy drugs and passports? Not, I suspect, to buy electronics, for which fiat currency does just fine.

Also, look at the order volume. People are buying $10k chunks of bitcoin. If they are not buying for speculation, what value are they receiving?

daeken6• 13 years ago

The post was indeed edited; the original quote is in my parent comment.

> Certainly many are, if not most. Otherwise, why are they buying bitcoin? To store value? To buy drugs and passports? Not, I suspect, to buy electronics, for which fiat currency does just fine.

I know many people buying BTC based on a belief that they will be dramatically more valuable in the future, if BTC takes off in a serious way. Not too many uses for it outside of that and short-term speculation, though, right now.

Nursie2• 13 years ago

If it's not a bubble?

Well then by all means everyone pile in now and let's make it one!

Helianthus• 13 years ago

... exactly.

There are 9000 people waiting in line to be qualified to trade at mtgox. When they're let in--if they're even let in before the crash--they'll truly make the growth untenable.

wtvanhest4• 13 years ago

While I believe it is a bubble, I have very little evidence that it is and I fully recognize that it may not be.

As an outside observer, I'm comfortable not profiting from it, and I'm even more comfortable not taking a loss on it. That being said, proclaiming bubbles is the newest trend ever since the housing bubble. It is the easy place to argue on the side of emotion.

I remember 6 months ago there being a VC bubble and an engineering bubble, neither of which have materialized. If you have to wait 5 more years for them to materialize, you were wrong for too long.

hhw2• 13 years ago

You can have a bubble without it bursting right away. You just can't confirm that it is a bubble until that happens. So long as when the bubble does burst, prices drop well below the point at which you were calling a bubble, you would be proven right in the end. A bubble does not have to be at the very peak in order to be a bubble.

wtvanhest4• 13 years ago

By your logic you can call every asset price a bubble.

"The stock market is currently a bubble!" If it takes 10 years for it to fall 30% in one month, you are right it is a bubble, just really, really early. If it falls next week you are right.

In either case, you calling it a bubble added no value.

If you are going to say we are in a bubble, then there must actually be a real bubble at the time, not at some future hypothetical time.

george88b• 13 years ago

Am I correct in assuming that the introduction of ASIC systems will cause a drop in bitcoin price (at least temporarily) due to a sudden surge in mining ability and thus a surge in bitcoins introduced to the market?

If so, would this trigger a crash?

hooo• 13 years ago

Every couple weeks the mining difficulty adjusts to keep the rate of bitcoin generation relatively constant.

pjbrunet2• 13 years ago

I think people new to Bitcoin could be confused by this. Mining difficulty is not "adjusted" by anyone. Only 21 million Bitcoins can ever be found. It's like hunting for Easter eggs. The last egg is hardest to find.

Lots of math but looks like you can calculate the difficulty yourself with an algorithm here:

https://en.bitcoin.it/wiki/Difficulty

daeken6• 13 years ago

ASIC miners won't make it out into the world fast enough to drop the average time between blocks dramatically. At least, it seems very unlikely to me; the difficulty will just slowly go up to go along with the new mining power. (For those who don't know, there's a difficulty value across the network that keeps the average mining time between blocks (currently 25BTC, or $3325 at time of writing) at an average of 10 minutes, to ensure a continuous release of bitcoins.)

Nursie2• 13 years ago

Mining difficulty is adjusted by the network to keep things nice and smooth. If the ASICs all came online at once and managed to really, massively increase the hashing ability for a while then it might do something. But most likely whoever holds the ASICs wants to avoid this situation, and ramp up in such a way that nothing is disrupted. That way they can quietly corner a good percentage of the mining without screwing the price.

dragontamer• 13 years ago

Bitcoin's utility as a proxy-USD will remain as long as a USD / BTC exchange exists. Whether it is or isn't a buble doesn't really matter if you're only using it as a proxy. If it isn't a bubble, then hoarders will profit strongly from BTC. If it is a bubble, then hoarders will be punished.

If you don't want to take that risk, just exchange the BTC into USD at the end of every day through MT. Gox.

freehunter• 13 years ago

Forex trading is common to every currency. How else are you supposed to get the currency? If I go to Japan, I can't spend my USD in every shop, I have to find a USD/Yen exchange. That doesn't mean USD is a proxy for Yen.

trotsky• 13 years ago

The key is the word that traditionally comes before bubble, speculative. When price action is more or less entirely driven by speculative forces as soon as you get a shock everyone runs for the exits.

wodow• 13 years ago

> You cannot short Bitcoins...

Surely it's possible to short any instrument? Just derive me some futures.

http://www.businessinsider.com/how-to-short-bitcoins-if-you-...

itistoday2• 13 years ago

Yeah I really didn't understand this part. Pretty sure you can short them, just borrow some coins, sell them, and then buy them back... that's shorting.

drcode• 13 years ago

The hard part with bitcoin is borrowing in a way that gives a guarantee to the opposing party.

scotty79• 13 years ago

Why can't you short bitcoins?

From what I understand shorting is just borrowing some bitcoins from someone, selling them now, buying them back and giving them back at the date agreed when borrowing them. If bitcoins are cheaper at that date you earned a profit. If they are more expensive you suffer a loss.

The only problem I see is that I wouldn't trust my bitcoins to anyone. But if I had some sort of insurance that I'll get my bitcoins back (also the fee) then I'd gladly borrow them to someone since I don't like the risk of selling them myself because I'm afraid they might never get cheaper and I won't be able to buy them back.

mootothemax• 13 years ago

Why can't you short bitcoins?

Part of me suspects it's because a lot of people intend to sell their bitcoins as soon as the market shows a significant downturn, and so they don't want to lend their bitcoins in the first place.

Although given how large the percentage swings are right now, I have no idea what such a "significant downturn" would have to look like.

T-hawk2• 13 years ago

> But if I had some sort of insurance that I'll get my bitcoins back

That's the problem. That insurance is not possible within Bitcoin. In equities markets, shorting is possible because the broker can force the borrower to cover and return the borrowed security. The broker can in turn resort to another layer of force in legal recourse if the borrower doesn't have sufficient cash deposited with the broker.

In Bitcoin, no entity can ever compel another to spend bitcoins (to the protocol, anything like asset seizure or any other method of surrendering a bitcoin is spending.) So the short-seller can walk away and never cover a short position that went badly, and the lender never receives back his bitcoins. For Bitcoin shorting to exist requires a broker with some way of enforcing non-Bitcoin power over the short-seller, perhaps a deposit in a fiat currency or some other kind of collateral. It is possible for this to exist but not at all simple.

biot• 13 years ago

  > That's the problem. That insurance is not possible within Bitcoin.

Sure it is. Berkshire Hathaway and others insure satellite launches. If the launch vehicle explodes on takeoff there is zero recourse because, much like a Bitcoin trade gone bad, everything is lost and the insurance payout covers a rebuild plus an entirely new launch.

The solution involves the insurance companies understanding the risks involved, forcing Bitcoin companies to implement specific security measures designed to mitigate risk, and accepting the fact that they will have to pay out a certain percentage of trades. The premium charged for the insurance plus the deductible cost to make a claim reflects the risk of fraud + expected profit. This is a solved problem in the insurance industry already.

The only remaining question is which insurance company will put sufficient effort into understanding the risks so that they can issue a product to meet whatever market demand exists?

bubbleRefuge• 13 years ago

Its sure sounds like a bubble. What drives demand for BTC? The ability to transact anonymously? What drives the value of the USD? The US government imposes a tax liability which is only payable in USD. Not gold, silver, euro's, or BTC's.

vosper• 13 years ago

I'm amazed at that a lot of the discussion around Bitcoin ignores one crucial fact - you can (relatively) safely buy illegal drugs with them. This makes it attractive to a lot of people who would like to buy drugs but don't know how to get them, or are scared of being personally involved with dealers and possibly gangs, and of going to jail.

I have never done this (nor even owned Bitcoins) but for the people I know who're talking about Bitcoins this is the main motivation for having them. Indeed, to many of them Bitcoin = Silk Road.

talkingquickly• 13 years ago

To counter your anecdotal evidence with my own, I know a fair few people who have bitcoins and not one of them has any interest in the fact they can be used to buy drugs.

Of the people I know It's roughly an equal split between speculation on its value and longer term interest in its potential as a low friction, decentralised currency.

Not to say it's not some peoples motivation but I think that they're probably in the minority. There was a piece which was on the front page of HN a while back (can't find the link right now) which estimated the total revenue going through silk road and it was a fairly small fraction of the total bitcoin transaction volume if I remember rightly.

miles2• 13 years ago

BitPay Processes $5 Million in March, Eclipses Silk Road http://bitcoinmagazine.com/bitpay-processes-5-million-in-mar...

FTA: "From a public relations standpoint, this is a positive sign for Bitcoin: the legal Bitcoin economy is now almost certainly larger than the illegal one, especially when one takes other merchant services like WalletBit/BIPS and Coinbase into consideration, and is growing at a much faster rate."

jeremyjh• 13 years ago

Either it is a bubble or will become one. The only thing to argue about is what the peak and reset price will be.

jack_trades• 13 years ago

What is the opposite of FUD?

Everything surrounding bitcoin screams pump and dump. Exponential growth curve. Seeding and pumping of bitcoin stories and comments...

Cash your paper wins now folks. That's the fat lady singing the coda. It'll be August before they play this song again.

stcredzero• 13 years ago

> Historically, the ability to short-sell a commodity has never been a requirement for efficient price discovery

Can someone clarify or refute this?

rrrrtttt• 13 years ago

Banning short selling removes the profit motive from price discovery. So maybe the price will eventually reach the equilibrium point, but it would be much slower.

ttrreeww• 13 years ago

If it is not a bubble, then you just got left behind!

illuminate2• 13 years ago

This sounds like MLM spiel.

TrevorJ• 13 years ago

The thing about bitcoin is that I feel it is fairly vulnerable to legislative intervention if/when it becomes extremely popular, or attracts too much attention for being the defacto currency for illegal items.

SeanDav• 13 years ago

There is an interesting quote that goes something like this:

"when your hairdresser starts talking about the market, it is time to get out of the market".

Now I doubt your hairdress will be talking about bitcoins any time soon, they are too technical for the average non-tech person (but if he does, sell out and run for the hills, stat), but the lesson is, once a market becomes common knowledge, it is time to get out of that market.

Unless you can think of strong, fundamental reasons why bitcoins should be at the levels they are (and no, the bigger fool theory is not a strong, fundamental reason), then I would consider getting out at these levels.

oleganza• 13 years ago

It may be true for any speculation-only asset like AAPL shares or some Ponzi thing, but in case of Bitcoin, it's a good thing when hairdressers know about it. Because the whole point is to accept them as a payment and pay your bills.

It's true, the price is rising now, so people are mostly holding and not paying, but when the demand will be close to saturation, price will grow much slower and people will use BTC to pay for anything, not only USD. That's the crucial difference with the stock market. This will give Bitcoin value outside of speculation on USD price. AAPL is not really valuable if it does not grow (and dividends are almost zero), but non-growing BTC is super-useful to pay anyone around the world with no questions asked.

jellicle• 13 years ago

This Time Is Different: Eight Centuries of Financial Folly

"Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters."

http://www.amazon.com/This-Time-Different-Centuries-Financia...

In paperback, get yours today.

illuminate2• 13 years ago

http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions... is still a horrifyingly accurate portrayal of human behavior.

SkyMarshal• 13 years ago

Or the original academic paper, for free [1]. Anything else Rogoff and Rheinhart have collaborated on [2] is related and interesting too.

[1] http://scholar.harvard.edu/files/rogoff/files/this_time_is_d...

[2] http://scholar.harvard.edu/rogoff/publications

stevedekorte• 13 years ago

Isn't that what people say about the US dollar when you mention the long history of collapsed fiat currencies?

brador• 13 years ago

If you thought Bitcoins price would be higher tomorrow, why would you ever spend them? For this reason, it's a speculative instrument.

teebs2• 13 years ago

What I haven't seen anyone say these past two months of growth is that the value of Bitcoins must necessarily increase before it becomes a real currency. In order for people to use and exchange Bitcoins, they must buy them. This will increase the value. If, at some point, Bitcoin becomes a mainstream currency, this kind of extreme growth must happen. In fact, we should expect that Bitcoins will be worth orders of magnitude more than they are now if they come to represent any significant fraction of the world economy. Today, Bitcoins are only worth about $1.3 billion, which is tiny. This particular price hike might be a bubble, but it could also be the start of a real Bitcoin economy.

MaysonL• 13 years ago

Currencies (at least useful ones) are stable. Bitcoin will never be stable, therefore never a currency: merely a speculative commodity.

teebs2• 13 years ago

Bitcoin could be stable. I think it will have a hard time being stable because of the deflationary pressures, but it could theoretically be a stable currency someday when there's a significant economy of people using Bitcoins.

marssaxman• 13 years ago

Who cares? What's interesting about Bitcoin is not that it can be used as yet another currency, but that it can be used as a distributed replacement for Paypal.

Bitcoin’s Rise: What If It Is Not A Bubble?

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