Why Bitcoin is Volatile aka I Told You So

http://evolvingtrends.wordpress.com/2013/12/01/why-bitcoin-is-volatile/

by marcfawzi • 13 years ago

30 46 13 years ago

evolvingtrends.wordpress.com

ashray5• 13 years ago

The article makes decent points but these things are known to most people who understand anything about money, whether that money is Bitcoin or USD.

I have to say though that the opening line of the article is absolutely terrible:

    Bitcoin is based on the idea that money gets its intrinsic value from its scarcity..

That is a terrible thing to say. Bitcoin is not based on that. Bitcoin is currently overvalued due to speculation. It's current value far surpasses it's utility (because we don't need $15 Billion transactions in BTC right now..). This is due to speculation, and yes, that is helped along due to it's scarcity.

But even with greater speculation, if the value starts going up, it becomes much harder to swing the market. Studying history is important. Bitcoin went from $30 to $2, then from $266 to $70. $1200 to $600 isn't even close. (there is of course the chance that it will go lower, much lower, but we'll see if/when it does..)

Volatility decreases with adoption. Adoption may decrease with volatility but so far, the crazy volatility has favored adoption and awareness. Volatility will truly become a problem if mainstream adoption takes place and it continues. However, it's harder to swing a bigger market, mainstream adoption is what will protect bitcoin from volatility (speculative, or otherwse). It's much easier for a person or a group of people to swing a $1MM market, vs. a $15 Billion, vs. a $1 Trillion market.

So far, every huge volatility event has helped bitcoin become less volatile and gain value/adoption/mindshare.

I can see how someone who just found out about bitcoin is going to focus on it's volatility. This has been true of every single media agency on the planet in the last few weeks. However, anyone who has been in this long enough or has studied it will recognize that volatility is actually decreasing as the market expands (an expected result). Somehow the other HN post about people not liking creativity/alternate solutions seems to come to mind [1]. (not an attack on the author but on the general sentiment, "BITCOIN WILL FAIL EVEN THOUGH I HAVEN'T STUDIED IT AND KNOW NOTHING ABOUT IT!!!! IT'S PONZI, OR ILLEGAL, OR DRUGS, OR SOMETHING!")

TLDR; Bitcoin is way less volatile than it used to be. Bigger numbers ($1000 vs $10) don't mean more volatility.

[1] http://www.slate.com/articles/health_and_science/science/201...

drawkbox2• 13 years ago

Bitcoin is maturing from a small stock to a growth stock then a value stock. But in comparison with other currencies, simply retaining its value is better than some fiat currency holdings and it is a wonderful hedge against it as long as it can hold its value. It could even go down but at a slower rate than nation currencies and still be useful as a hedge.

Some people are treating it as a stock currently expecting huge upsides, adoption will bring that but eventually it will calm down and if it just retains value over time it will beat out most fiat currencies.

There is obvious value to fiat currencies and inflation for fueling investment (I need to grow my shrinking dollars) but it is always nice to hedge in case.

JamesArgo• 13 years ago

It's far too early for I-told-you-sos.

fragsworth• 13 years ago

Every bitcoin badmouther is using the price crash to tell everyone how right they were. Not really unexpected.

Speculative price swings are largely irrelevant, and bitcoin has value as a service regardless of the current price.

afterburner• 13 years ago

Bitcoin is more like gold than the dollar, except even less useful.

wsxcde4• 13 years ago

Here's something I've never seen addressed by bitcoin apologists. Tell me why I should "adopt" BTC if I'm not:

(a) speculating (b) interesting in buying drugs or circumventing regulations around international money transfers.

I see no utility in paying for software or coffee in BTC. Getting hold of bitcoin is not a straightforward process, and even once you acquire them, your coins are fluctuating in value all the time. What am I gaining in return for all this trouble? It simply doesn't make any sense to me.

21echoes2• 13 years ago

currently, sending money over the internet without getting charged fees is non-trivial. with the number of players in the payment space, i don't expect that to be the case for very much longer, and i don't think it will be bitcoin that solves this problem.

marcell• 13 years ago

Curious--how/who will solve this problem?

ashray5• 13 years ago

Unfortunately the barrier to this has been counterparty risk management. The players in the payment space are limited by their contracts with Visa/Mastercard/etc. and therefore have to manage risk accordingly. This is what increases the fees. (chargebacks almost always honored, etc. etc.)

Paypal offers micropayments and their rates are by far the most competitive. You know what happens ? I get paid $2 per subscription and Paypal pays me $1.83. That's an 8.5% commission! It's the best rate in the industry! (right now..)

It's just that the more middle men you add, the more fees you're going to need. The current financial system is a truckload of middlemen and yes, they do have their utility and run immensely large networks (visa/mastercard/etc.). The only way to lower fees is to cut them out, whether that's going to be bitcoin or someone else is anyone's guess. But bitcoin is definitely a viable prototype.

ashray5• 13 years ago

You're doing well with your credit card because your bank allows you to do so.

Just a few days ago my debit card was blocked because I was traveling internationally and the bank suspected that it was stolen. That's great, they're trying to protect me. But then, the only way to get it unblocked was to visit the bank in person.. but I was 10,000 miles away! I tried to reason with them over the phone but they wouldn't listen. So here I was, far away from home, without access to my money because my bank was trying to protect me but had a retarded system in place for that. Eventually, I spent a few hours on the phone, got someone to pull some local stunts in my city (went to speak to the manager in person, etc.) and then got my card unblocked. You see the problem ? I don't own my money. I can't pay for my coffee with my debit card unless my bank lets me. I couldn't pay for anything, I had to apologize to my hotel and ask them to wait until this got sorted out.

I run a website that is sustained by online advertising. I usually have two options to get paid by advertisers. Paypal or Bank Wire. Paypal charges huge fees, so I opt for wire. Bank Wires take 5 days to clear (2 if I'm lucky..) and due to multiple different advertisers I end up paying over $200 in wire fees each month. I think of that as the 'cost of doing business' but really, it shouldn't be.

I used to live in Dubai two years ago and send money back home. Every time I transferred money, I would get hit with huge fees. This is a reality for immigrant workers all over the world. Western Union caters to this audience right now.

Yes, banks are good at what they do - to a certain extent. We all know them and use them. But that doesn't mean that I want to be at their mercy all the time. Things are always fine, until they are not. That's what happens to me with banks all the time.

Volatility isn't a feature of bitcoin, it's a market reality - for now. You don't have to pay for your coffee using bitcoin right now, you are right, bitcoin isn't ready for that yet.

But when it is, you'll be able to pay for your coffee, and no single 3rd party in the world (bank, western union, visa, mastercard, federal reserve, etc.) will have a say in it. Not a single entity in the world will stand between you and that delicious brew.

drakaal• 13 years ago

Not a single entity in the world will stand between you and that delicious brew.

Except the exchange rate. Your 1/300th of a coin might buy you coffee if it is a good day, but the next day it might cost 1/100th of a coin.

I just bought in because I'm hoping that what I can buy with 1/100th of a coin will only cost 1/300th by Christmas.

Bitcoin is having a bad day and I hope to capitalize on it. Having bought at $650 I will be sad if it turns out that the new price is $500, and happy if BAML was right and we are off to $1300.

But All of your arguments fall down in that you are either using an exchange to get from currency to BTC. Or you are keeping coins in a wallet and they could swing 50% in value in a day.

wsxcde4• 13 years ago

Just a few days ago my debit card was blocked

If this is all there is to it, I'm not sure I see the utility. I travel internationally somewhat often, not only has my credit card never been blocked, I also usually carry some amount of cash in the local currency so I wouldn't be screwed even if it were.

Transferring money internationally is a bit of pain, you're right about this. But it's also a regulatory minefield. I simply don't want to risk - (a) the IRS coming after me and (b) all the problems associated with bitcoin purchase and sale - just because I'm trying to save a few bucks in transfer charges.

This is the most interesting part of your comment.

I usually have two options to get paid by advertisers. Paypal or Bank Wire. Paypal charges huge fees, so I opt for wire.

Now, paypal are enormously profitable and they don't give a shit about small businesses which is probably why you end up getting screwed. Maybe bitcoin can help you there, but it's probably better if you could get dollars instead of bitcoin through a bitcoin like protocol. I think it's important to distinguish between the bitcoin protocol and the currency itself. I think the former has some good ideas which will almost surely make in to many many other protocols and applications. The latter, I suspect, is best avoided by "normal" people.

alwillis6• 13 years ago

Getting hold of bitcoin is not a straightforward process

Actually, it's pretty straightforward these days: http://howtobuybitcoins.info.

By now, everyone should know the advantages of bitcoin:

* low or no fees

* transactions are nearly instant; confirmations take a few minutes

* payments are irrevocable - no chargeback issues

* you can pay anyone anywhere at anytime - no bank holidays, no paying Western Union fees to send money oversees and have it still take days

* pseudo anonymous - you don't have to provide personal information to a financial organization to make payments

* many vendors give a discounts for users willing to pay in bitcoin vs. dollars

wsxcde4• 13 years ago

It's about 5 business days for coinbase to enable your account, not to mention the risk of giving a vendor access to your bank out. And I think each buy/sell transaction also takes a few days to apply?

transactions are nearly instant; confirmations take a few minutes

This is true for my credit card too.

payments are irrevocable - no chargeback issues

As a customer, I prefer the ability to make a chargeback.

you can pay anyone anywhere at anytime - no bank holidays, no paying Western Union fees to send money oversees and have it still take days

I specifically excluded international transfers in my question. Anyway, these are heavily regulated and risk and volatility of bitcoin simply aren't worthwhile in comparison to the few dollars I would save.

pseudo anonymous - you don't have to provide personal information to a financial organization to make payments

Could possibly be an advantage but isn't really true because coinbase would know all about me and all my transactions could be traced back to them by just traversing the block chain.

many vendors give a discounts for users willing to pay in bitcoin vs. dollars

I would think about using bitcoin for this reason if I could convert USD -> BTC and quickly buy whatever I needed using BTC. But again this is something that takes days and who knows what the USD->BTC rate would be when I eventually do get my bitcoin. It's simply not worth it.

nl• 13 years ago

I put some money into Bitcoin recently. I'm speculating.

bdcravens• 13 years ago

There's some value in press/notoriety, if you think you'd be reaching eyes and ears for those who care about that sort of thing.

warfangle2• 13 years ago

You can send a single satoshi* to an address that cannot spend said satoshi with the cryptographic signature of a document as the notation on it. Once the transaction is validated in the blockchain, you can prove mathematically that the document (while keeping secret the contents of the document) was published (created) on a given datetime.

*1 satoshi = 5.8e-6 USD @ current coinbase exchange, Sat Dec 07 2013 02:59:12 GMT-0500

GeneralMayhem• 13 years ago

Your (b) sounds suspiciously similar to "if you've got nothing to hide, then why do you want privacy?" Having control over your money is valuable on its own merits for a lot of people.

wsxcde4• 13 years ago

Actually that is a perfectly good argument except the people who make it are always being dishonest.

When Apple, Facebook, Google, Microsoft or the NSA say "why do you want privacy?", they specifically mean us and not them. It's not like we can look into Apple's servers and make sure they aren't abusing all the the private data they store about us. It's not like we're allowed to analyze the NSA's hitlist to determine if there's racial profiling going on there. These companies won't let us look at their source code to see if there are backdoors in supposedly secure products. And we're never going to be able determine exactly where a politician's campaign funding is coming from.

I would buy the argument "if you've got nothing to hide, then why do you want privacy?" if people making that argument were willing to apply those standards to themselves. They never want to do that, so I'm forced to conclude it's just a rhetorical device used to trick the naive into giving up their information for free.

drawkbox2• 13 years ago

Bitcoin is a hedge on currencies, where you can turn it into other currencies there is value in it. Currencies always move in different directions and there will always be demand there. The generation is also created by the bitcoin network so there will always be activity for some time.

When you can't trade it for the USD then it is over. In fact maybe it will evolve nation currencies. I love what it is shaking up.

But just like currencies of countries there will be currencies now not bound to countries, that live well beyond the country maybe. It actually prevents gaming a country's currency too much (no artificially low currencies).

It is like gold in that you can't take a coin of gold down to the store but it has more chance to be a mainstream currency because it is digital. All money is digital, it can fit in much nicer than gold as well as having gold like properties. Bitcoin is actually better placed for hedging currencies and everyday usage than gold.

warfangle2• 13 years ago

Bitcoin only gets its value from scarcity if you look at it from the context of a traditional currency.

It's volatile because there is a lot of speculation going on; there is a lot of speculation going on because nobody has figured out how to value it against a traditional currency yet (in other words: speculation transactions outweigh productive transactions e.g. the proverbial alpaca sock).

While there is scarcity - and said scarcity is driving speculation - the intrinsic value of btc derives from the cryptographic trust in the validation of the Bitcoin blockchain, and the promise that a btc will always be accepted as a bounty on the validation of a btc transaction.

It's fundamentally different than the promise inherent in traditional currency: that a unit of currency must be accepted for the repayment of debt. Instead, a unit of currency must be accepted as a bounty on the cryptographic assurance that a transaction is not fraudulent.

What defines trust in a system, and when does that come in to play in the valuation a system?

With a satoshi sent to an address that cannot spend its balance along with the cryptographic signature of a document, you can execute a proof of existence. Distributed, mathematically validated notary.

It can also be used as a decentralized, trust-based escrow system.

The value inherent in a single btc is more abstract than a brick of gold, and has more to do with Bitcoin itself.

adamnemecek• 13 years ago

Well, you sure showed me. I'll think twice before contradicting you ever again.

vectorpush• 13 years ago

Damn, can we get a break in this infinite loop of blog posts where the author confidently sets us straight about the inevitable fate of bitcoin? Bitcoin market activity is a Rorschach test for your own personal biases, be you an economist or a cryptographer, you're just going to rationalize the current state of the market with your own future expectations.

The rumor of a butteryfly fart can send shockwaves through the bitcoin markets, everybody knows this, we're not getting any new information by exclaiming how volatile the market is every time the price shifts as if it's somehow surprising.

kanzure• 13 years ago

Marc, are you aware that Satoshi referenced you by name? I always found that unexpected and hilarious.

http://diyhpl.us/~bryan/irc/bitcoin-satoshi/email-p2presearc...

marcfawzi• 13 years ago

Thanks for letting me know Bryan. How have you been? Still hatin' on me after all these years? :) I always found you fascinating.

So is the mailing list p2presearch@listcultures.org?

dnautics3• 13 years ago

I correctly called the peak at 1200 (although I did not think it would peak there twice), and I'm calling the bottom at 300. This article has a very poor opening:

Bitcoin is based on the idea that money gets its intrinsic value from its scarcity, which is a misconception since money gets its intrinsic value from the volume of transactions involving goods and services that use it

No, bitcoin is based on the idea that money gets its intrinsic value from its trust model. That's why it has advanced crypto-mathematics to establish verifability, and so forth. Now. Bitcoin promoters think that the scarcity can drive the value up to the point where it becomes widely adopted. Criticism of this model to spur adoption may be totally fair.

simonswords82• 13 years ago

Can you shed any light on why you think it'll bottom out at 300?

dnautics3• 13 years ago

it just looks like it by eye. I'll probably buy in at 450 (or lower; whatever it happens to be when I bother looking) anyways, because it's incredibly difficult to get bitcoin timing correct or not taking into account a growth factor.

A full disclosure of my bitcoin history: I bought in at 150 and cashed out at 300 because I got cold feet and I needed the money - I'd have held on if I didn't need the money. I forgot that I had an autodraw, which kept buying at the 300-ish mark, which I sold off at 900, again because I got cold feet about my 1200 mark and I needed the money. This hasn't been entirely speculative work, I have used bitcoin in 'actual bitcoin' transaction. But not silk road.

The nonprofit that I am launching on tuesday will be accepting bitcoin donations starting on friday.

hmsimha• 13 years ago

Are you predicting it will bottom at 300 before launching into another growth phase, or that it will remain closer to 300 thereafter?

I think the latter is naive. I think bitcoin is the first currency whose perpetual deflation is ensured by the contract that defines it.

dnautics3• 13 years ago

it is entirely possible that the bitcoin proprietors will change the protocol to no longer be deflationary; although that would cause some large-scale flight. I am not convinced of the keynsian model that inflation is exactly supply divided by velocity; nor of the 'crude austrian' model that inflation is function of supply only... If the demand goes to zero, so will the value.

While I think that bitcoin will recover, perpetual deflation is not guaranteed. Indeed, in general deflation of bitcoin depends on an increase in demand that outstrips the increase in supply.

bonbon• 13 years ago

First they ignore you, then they laugh at you, then they fight you, then you win..-Mahatma Gandhi (China fights bitcoin..)

erikpukinskis• 13 years ago

If you and your whole family live in the U.S. and you have a couple credit cards, a debit card, and a bank account, Bitcoin is going to seem pretty useless. For you, the US dollar does just fine.

But the rest of the world isn't like the U.S. I visited Latvia recently, and my bank refused to let me withdraw money. Florida is full of Cuban Americans who want to send money to Cuba. Many people are imprisoned. The world is full of borders that make moving money difficult.

Bitcoin's market cap is moving towards where it needs to be to float all of those transactions. Even if no one uses it to store value, and no one uses it to buy groceries, it is still immensely valuable just as a means to move value from one location to another. Even if no one holds Bitcoin for more than two weeks, it will still have a market cap far north of a billion dollars.

psn• 13 years ago

I'm cautious about your Latvia story - its sounds to me like the bike was worried about fraud. Thats pretty common - about half the times I go to the US, I have to ring up the bank and get the card unblocked.

That being said, there are countries attempting to control the flow of money. Argentina wants to enforce its price for the dollar. Cyprus wants to prevent everyone taking their money and running. and so on. However, most of these countries see attempts to circumvent their controls as illegal. I feel its unwise to get my hopes up about bitcoin for this sort of transaction for that reason.

Why Bitcoin is Volatile aka I Told You So

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