[tangential] The price of Bitcoin has been dropping significantly in the past few weeks, and dropped below $300 yesterday. I’ve read many theories as to how this can’t happen, but it is. What’s going on?
Its a bear market. The price moved from ~100 to ~1100 in the fall of 2013. The price action for the past 10 months is a correction of that move. After an 11x price increase, a retracement of 70% is perfectly normal market behavior. This is just the bitcoin boom and bust market cycle.
A larger holder did sell 30000 coins yesterday at $300 each. (And in fact, did so in a much less sophisticated way than normal—he simply stuck 30000 coins out there at a price of $300, and then just sat there. A more sophisticated trader selling in smaller increments could have gotten more money for them). This action did control the price of bitcoin for a number of hours. It was one small piece of the decline from $1100 in Dec 2013 to $300 now, but obviously it wasn’t the main driver.
There is nothing special about the decline in bitcoin from $1100 to $300. It is merely the result of the fact that the price previously rose from $100 to $1100 in a short time. This is how markets work. The price does not move smoothly in straight lines. It moves three steps forward and two back. It overshoots massively to the upside and to the downside.
It is very hard to tell exactly where the top and where the bottom are going to be. Back last november, it would have been hard to guess whether the top would be at $500, or $1100 as it was, or $2000. And its hard to guess the bottom now. You might have thought it was done falling when it was at $500. It might be done now. Or it might drop to $200 or lower. (You can make a pretty decent case for $275 on sunday morning having been the absolute low however, based on the fact that the volume of trading was enormous, and the extreme distance that the price moved away from the moving average. Of course, it is possible that even larger volume and an even more extreme drop could be coming. We will not be able to say for sure what the bottom was until well after the fact).
The entire market is based on speculation right now, as well as being small enough for a few big players to significantly move the needle. This is a combination that means that one or two people can cause a drop, which causes a mass sell off (the inverse can happen too). Of course, this is a “just so” story… the reality is more complicated.
Point being, you won’t be able to predict bitcoin prices until bitcoin as a payment network and store of value overcomes bitcoin as speculation.
I don’t know why someone would believe it couldn’t happen. The price of bitcoin is determined exactly like stock prices and subject to the same variations based on the same reasons.
The growth of the bitcoin market is below expectations so people sell their bitcoins to monetize their earnings so the price drops. That’s economics 101.
The price of bitcoin is determined exactly like stock prices
Stock prices are anchored to the expected discounted present value of firms’ profits. Bitcoins have no anchor. Think of it this way: If the market went crazy and valued Apple at zero you would do very well to buy the entire company for $1000. But if the market decided to value Bitcoins at zero, you would not want to buy them all up for $1000.
My understanding was that it started as a minor bubble in tulips, expanded into a massive bubble in tulip contracts, then collapsed massively. Is that different?
Stock prices are anchored to the expected discounted present value of firms’ profits.
By the same mechanism by which bitcoin price is anchored to the expected discounted present value of the goods and services you can buy with them. And since there are goods and services you can buy with bitcoin that value is no more nor less arbitrary than the profits generated by some company (maybe not Apple).
Nice try but this approach is consistent with bitcoin having many, many different possible prices including price=0. Think of it this way, if I create a company that does everything Apple does I’m a billionaire, but if I invent a cyber-currency that does everything Bitcoin does I have nothing of value.
I seriously don’t get it. If I have a company that makes products nobody wants, I also have nothing of value. Are you claiming that Apple products are inherently valuable? I don’t see that. Apple get’s money because people want their products and bitcoins have value because people want them. And the price of both Apple stock and bitcoin is determined by how many people want to buy and hold them in expectation of future profits.
If I have a company that makes products nobody wants, I also have nothing of value.
This is not true. Your company, presumably, has some assets—maybe a factory, maybe an office building, maybe some inventory, likely some cash in a bank account, etc. If you were to shut down the company which makes products nobody wants and sell its assets, you would end up with some sum of money. This is the company’s residual value or (assuming the accounting is broadly in line with economics and you’re not selling at firesale prices) its book value.
And some liabilities. Apple e.g. in 2013 had 8.71B cash + 1.76B inventories and 16.96B debt. So if suddenly nobody wanted Apple products anymore, guess what the shareholders would get.
According to Yahoo! Finance Apple’s total assets are about $200B and their total liabilities are about $80B. (Or were in late September 2013, the latest for which they give figures.)
(Curiously, the figures there match yours for inventory and debt, but they give a much larger figure for “cash and cash equivalents” than yours. But as the totals indicate, the numbers you mentioned are very far from telling the whole story.)
So, it looks as if Apple has about 6 billion shares, and their net assets minus liabilities are a bit over $100B. So if people suddenly stopped buying their products (in some way that didn’t change the value of their assets, which would be a bit hard but never mind) then each share would be worth about $17.
[EDITED to fix an idiotic factor-of-1000 error; oops. Thanks to Lumifer for pointing it out.]
Of course. It’s perfectly possible for a company to have zero or negative book value. Your Apple numbers are quite a bit off, though—look here for example.
The issue, however, is not what the price is determined by—for all tradeable goods in a more or less free market the price is determined by supply and demand and, yes, it is true for both bitcoin and AAPL shares, but it’s also true for tulip bulbs and old baseball cards. The issue is that you said that that bitcoin prices are “anchored” in the same way the equity share prices are anchored and I don’t think this is so.
That only puts an upper limit on the price of a bitcoin. The lower limit is set by what they are useful for, and how much more useful than the 500 or so other cryptocurrencies: transactions and contracts with security and anonymity properties that ordinary money does not provide.
I don’t understand what does “anchored to a cost” mean.
In crude terms, things have value and they have a cost to produce. If the value is above the cost, more things like that will be made. If the value is below the cost, no one will make these things. Nothing in that speaks to “anchoring”—the cost does not “anchor” the value.
Bitcoins certainly have a cost to produce (and it’s growing, by design), just like gold. If the value of bitcoins falls below that cost, no one will produce new bitcoins any more.
If there is a fixed cost to produce something, then if the value ever moves above the cost, more will be produced until the value falls to the cost. This means that the value is anchored to the cost. Bitcoins do not have a fixed cost. It would be more accurate to say that the cost of bitcoins is anchored to the value.
This means that the value is anchored to the cost.
Wouldn’t it be capped by the cost (+usual profit)? There is nothing about the cost of production that prevents the value from falling below the cost and all the way to zero.
Bitcoins do not have a fixed cost.
Why not? It’s not hard to calculate the cost of production (cost of hardware and electricity) for bitcoins. That cost changes with time, but that’s normal for most everything.
Wouldn’t it be capped by the cost (+usual profit)?
That probably would be a better term. I should add that I haven’t been educated much in economics, and if “anchor” is economic jargon, I don’t know it. I was just going by the normal use of the term and the context to guess what the OP was trying to say. Also, pointing out that it’s only anchored from above pokes a hole in the OP’s comment, but since someone else already addressed that I didn’t bother.
Why not?
Bitcoins are produced at a rate that halves every two years. It doesn’t matter how much effort you put into mining them. Putting more effort into bitcoin mining does not increase the amount of bitcoins, and thus does not decrease the price. The price is not dependant on the cost to produce. On the other hand, if the price doubles, then people will put twice as much effort into mining them, and the cost to produce will double. The cost to produce is completely dependant on the price.
No, I’m using words in standard meanings: “anchoring” means limited to the vicinity of a particular place or value, and “capped” means can go down but cannot go up above a certain limit.
The price is not dependant on the cost to produce.
Yes, under the assumption of many separate agents. However people can cooperate if there are sufficiently large incentives for that and there’s no anti-trust authority to stop them in the Bitcoin world. One mining pool already got over 50% of world capacity at one point—it quickly backed down for obvious reasons, but my first guess at an attractor point (equilibrium in econospeak) would be a duopoly where two mining pools control most of mining and they may or may not collude.
How are you suggesting they manipulate prices? While there are a number of security flaws, none of them allow counterfeiting. You can’t increase the supply beyond what it should be no matter what you do. You can destroy bitcoins by sending them to invalid accounts and cause deflation that way, although I have no idea why you’d want to. You could get over 50% of mining capacity and frequently use it for the 51% attack, causing people to lose trust in bitcoins and making the price fall, but again, it’s not going to help you.
Not prices, but the cost of production. With increased prices normally you would have increased mining efforts which, through competition, would make cost of production rise towards the price. If you control the amount of mining, you can avoid that and keep the mining effort at the same level. Your profit (price—cost) then stays high.
First, the cost to produce them is greatly influence by how many people engage in mining which is itself determined by the market price of bitcoins, meaning that by this metric there are multiple equilibria.
Second, for any fiat money there is always an equilibrium with price=0.
Second, for any fiat money there is always an equilibrium with price=0.
That’s not technically correct. If the athourity issueing the fiat money collects taxes than that creates demand for it up to the amount required to pay outstanding tax bills (ie 1% of land value in the case of a property tax). Since property doesn’t produce fiat money itself property owners need to sell goods or services to get money.
So there are low equilibria for fiat money, and unstable equilibria for fiat money, but zero is typically not a natural equilibria
No, that does not apply to gold. The cost to produce more gold is influenced by how much people have engaged in mining in the past, and thus extracted the low-cost gold. If everyone but you stopped mining gold, the cost for you, personally, to produce as much gold as was previously being produced would be approximately the same as the cost everyone shared before. If everyone but you stopped producing bitcoin, it would be much, much cheaper for you to produce just as much bitcoin as previously.
Gold is not bitcoin. There are differences obviously. But there are analogies too.
For one the effort to mine a bitcoin intentionally rises by how much people have engaged in mining in the past.
I’m pretty sure the effort (processing power) required to mine a bitcoin is independent of the history of mining, and depends exclusively on how much processing power is currently being spent trying to produce bitcoin. Unless I’ve drastically misunderstood the algorithm for difficulty, which I’m relatively sure I haven’t (thinking of this page specifically).
The consequences of this seem obvious to me; bitcoin is only difficult to acquire when it is perceived as worth acquiring, meaning that a loss of confidence that it has value leads directly to it being much easier to acquire even without having to purchase it from people who have lost confidence.
What you seem to mean is the cost due to competition: Multiple miners trying the same block and the first one succeeding making all the work of the other mineres on this block worthless.
I meant the increase in difficulty for later blocks inherent in the algorithm.
One could—though I agree that it stretches the analogy—compare the first to gold miners competing in the same physical location—as has happened during the gold rush. This causes competition not exactly for the same gold veins but for the physical space and other resources around.
The second (algorithmical) increase can be compared to mines becoming sparser and sparser—you have to dig deeper.
I’m pretty sure the effort (processing power) required to mine a bitcoin is independent of the history of mining
The bitcoin supply is limited by design and as you approach the last bitcoin which could be mined, the effort needed increases. That makes the effort needed dependent on the “history of mining”, or, more precisely, on how many bitcoins have already been mined.
The price of bitcoin is determined exactly like stock prices and subject to the same variations based on the same reasons.
No, not at all. Buying stock gives you a legally recognized claim on the company’s assets. Companies are rarely valued below their “book value”, just the price of everything they own (in cases where this happens it usually means that the market thinks the management will waste these assets before someone pries their hands off them). Bitcoin gives you a legally recognized claim on… nothing.
Even if you think of Bitcoin as a bona fide currency, foreign exchange rates are NOT determined “exactly like stock prices”. Thinking bitcoins are equity shares is a category error.
There are (or were) many, many Bitcoin advocates in the world who can’t see it being anything other than deflationary (as there is a limited supply), it does interesting things, etc. Then the world turns around and sends Bitcoins inflationary for this whole year. Empiricism beats praxeology (again).
There are (or were) many, many Bitcoin advocates in the world who can’t see it being anything other than deflationary
We can’t live in a world in which the market expects Bitcoins to steadily increase in value compared to the dollar because of the arbitrage opportunities this would create.
Yes we can, because of the relative opportunity costs of holding Bitcoins and dollars. You may as well say we can’t live in a world in which the market expects stocks to steadily increase in value compared to the dollar. Dollars are far more liquid than Bitcoins (or stocks) and, in equilibrium, you have to pay for that liquidity.
If the market expected the price of Bitcoins to steady increase people would buy Bitcoins today increasing Bitcoin’s price, until the price of Bitcoins was high enough so that people wouldn’t be confident that it would keep increasing.
Again, you are neglecting the cost of holding Bitcoins.
Suppose today a Bitcoin is worth $100, and everyone thinks that Bitcoins will be worth $102 in one year. Anyone could gain an expected $2 by a buy-and-hold strategy on Bitcoins, but that means they will have to hold their money in Bitcoins for the next year, which is not as useful as holding dollars, because it’s much easier to turn their dollars into other assets (or consumption). If people think that this liquidity cost of holding Bitcoins is at least $2, then they will not bid up Bitcoins now.
Moreover, buying-and-holding Bitcoins has an opportunity cost because it means you aren’t (for example) buying stocks, bonds, land, gold, or engaging in immediate consumption. So, if we suppose the market interest rate is 3%, then even though Bitcoins are expected to go up $2 over the next year, no-one is going to bid them up to $102 now, because they can get a $3 return elsewhere.
Implied by your logic:
There can never be expected appreciation (or depreciation) of any asset.
In particular, expected inflation must always be 0.
People value future consumption as highly as present consumption.
As a fraction of total world GDP it is true, relative to the efficient markets hypothesis, that expected inflation must always be 0 and there can never be expected appreciation (or depreciation) of any asset.
And measured in those terms, it is still true that “a world in which the market expects Bitcoins to steadily increase in value compared to the dollar” is impossible for the same reasons James_Miller cited.
Yes, there is a certain amount of appreciation that the world could expect; it could expect Bitcoin to keep up with inflation and the growth of market. But the expected growth of the market takes into account risk, and under a fairly weak analog of the EMH, actual expectations of better-than-market growth would make the price of Bitcoin jump until it reached the same price as other instruments that had that expectation.
As a fraction of total world GDP it is true, relative to the efficient markets hypothesis, that expected inflation must always be 0 and there can never be expected appreciation (or depreciation) of any asset.
No. Suppose we are in a zero-growth economy. If an asset is worth $98 today and is expected to be worth $100 in a year’s time, people will only bid it up to $100 today if they are indifferent between $100 of consumption today and $100 in a year’s time. But people are (rightly) not indifferent, they prefer to consume today—hence even in zero-growth economies, you see a positive real, risk-free rate of interest. And nothing about the liquidity cost depends on a growing economy either.
Evidence or speculation? I saw the $300 sell wall, but that does not account for the previous week’s dip, which is when the “bearwhale” speculation started. I did see plenty of speculation to this end … but humans, particularly bagholders in a bubble, will grasp for any explanation that is not “we were foolish”.
Really, everything is based on the assumption of conspiracy:
December—Just a small market correction after bubble, soon we go up!
February—Price dropped because Mark Karpeles is an incompetent thief. (This one I’ll give them.)
May—China dropped the price, now all Chinese is priced in, we go up!
August—Wall Street dropping the price because they want to enter cheap. Hold and we’ll go up!
October—The bearwhale dropped the price, cheap coins that will go up!
It’s a cliche for good reason that everything and its opposite is “great news for Bitcoin!”
The ridiculously inflated prices peaking in December 2013 are almost completely explained by Mt. Gox’s blatant fraud and the Willy and Marcus bots. A decline from that would be the expectation.
So what was the solid evidence for (and against) conspiracy, as opposed to the null hypothesis that this is just one week in a bubble on its way down?
So what was the solid evidence for (and against) conspiracy, as opposed to the null hypothesis that this is just one week in a bubble on its way down?
Neither of those are true (probably).
The price is the result of normal market forces, not a “conspiracy’ to decrease the price, or ‘manipulation’ upward last november due to bots. All of the ‘manipulation’ talk is complete bullshit. There is nothing at all unusual in the price movements of bitcoin. It is completely normal for an asset that is growing from essenitally no value, into the billions of dolalrs range, in five years.
If there was a startup company that went public with shares at its inception, until a point of it having a $10 billion market valuation, over a 5 year period, it would look a LOT like the bitcoin price chart. Huge, massive increases in value as it reached new milestones of adoption. Massive contractions as it looked like it might fail. But the thing is, you DONT see the valuation of startup companies like this, because they are owned by a small number of founders and venture capitalists and angel investors. So the bitcoin price looks unusual to most people.
So the first hypothesis: “there is a conspiracy to manipulate the price”, is complete BS. (There are tons of idiots on places like bitocintalk.org that beleive things like this, because they are clueless. But this is not a truth about reality. it is a rationalization made up after the fact by people for whom bitcoin is essentially a religion that you must take on faith, to explain why the price is now going down).
The second hypothesis “Bitcoin is a bubble on the way down”, is also probably not true. (Though the chance that it is true is a lot greater than the idiotic manipulation theory). The reason why this is unlikely is that the blockchain is a truly revolutionary technology, whose impact on the world is goign to be MUCH greater than a mere 10 billion dollar company. (If you look at bitcoin’s market cap as a valuation of a company, it peaked around $10 billion).
It might be true that the bitcoin blockchain is about to be surpassed by a competitor. That is, if you think of bitcoin as a startup, as the first startup to pioneer a technology, it is possible that now it is losing its place to a competing startup. If this were true, maybe bitcoin is going down because some altcoin is doing a much better job and is going to surpass it.
Even if bitcoin is going to be eclipsed by a competitor, it is much more likely that bitcoin would have another rise, but during that rise, its successor will greatly outperform it, and eventually surpass it.
To summarize:
Chance that the bitcoin price movements, in the long term, are due to a conspiracy: Close to 0%.
Chance that the blockchain technology will just die, and bitcoin and all altcoins will just die: Very Low.
Chance that bitcoin is currently going straight to $0 because a competitor blockchain technology is surpassing it right now: Low.
I do think that bitcoin is at risk of being surpassed by competing blockchains in the future, but not so imminently that it is going straight to zero right now. I think that in the end, both bitcoin and a few different other blockchains will survive. Most of those probably have not even been created yet.
In the same way that there is not only one surviving internet company today, and in fact there are many, in the future there will be many surviving blockchain technologies. This is true, even while the vast majority of the coins currently in existence will fail, just as most of the dot com bubble companies failed.
but humans, particularly bagholders in a bubble, will grasp for any explanation that is not “we were foolish”
Yes. The conspiracy theories are rationalizations that have been invented because reality contradicted their belief system. It is absolutely possible for the price to decline the way it did. It could go much lower. It could even go a lot lower and still recover, and go much higher in the future! It already did exactly that in 2011-2013.
Random fluctuations have moved the price that much on a daily basis. The fact that we are trending downward generally is certainly expected—it is exactly what has happened 5x earlier in bitcoin’s history, and numerous other times in speculative bubbles. It’s possible for the near-term trend to be down 90% of the time, and yet the overall long term trend to be up. Indeed, this is expected due to the typical behavior of whales. They moderate demand so that prices continue to gradually fall, all the while accumulating coins. Eventually the bottom is reached when they no longer are in control of demand. Then the bull market starts and you have a very quick run up to an all-new high.
This is a very common pattern. It happens in commodities, it happens in stock markets, it happens in real estate prices. It has repeated over and over in the history of bitcoin.
[tangential] The price of Bitcoin has been dropping significantly in the past few weeks, and dropped below $300 yesterday. I’ve read many theories as to how this can’t happen, but it is. What’s going on?
Its a bear market. The price moved from ~100 to ~1100 in the fall of 2013. The price action for the past 10 months is a correction of that move. After an 11x price increase, a retracement of 70% is perfectly normal market behavior. This is just the bitcoin boom and bust market cycle.
A larger holder did sell 30000 coins yesterday at $300 each. (And in fact, did so in a much less sophisticated way than normal—he simply stuck 30000 coins out there at a price of $300, and then just sat there. A more sophisticated trader selling in smaller increments could have gotten more money for them). This action did control the price of bitcoin for a number of hours. It was one small piece of the decline from $1100 in Dec 2013 to $300 now, but obviously it wasn’t the main driver.
There is nothing special about the decline in bitcoin from $1100 to $300. It is merely the result of the fact that the price previously rose from $100 to $1100 in a short time. This is how markets work. The price does not move smoothly in straight lines. It moves three steps forward and two back. It overshoots massively to the upside and to the downside.
It is very hard to tell exactly where the top and where the bottom are going to be. Back last november, it would have been hard to guess whether the top would be at $500, or $1100 as it was, or $2000. And its hard to guess the bottom now. You might have thought it was done falling when it was at $500. It might be done now. Or it might drop to $200 or lower. (You can make a pretty decent case for $275 on sunday morning having been the absolute low however, based on the fact that the volume of trading was enormous, and the extreme distance that the price moved away from the moving average. Of course, it is possible that even larger volume and an even more extreme drop could be coming. We will not be able to say for sure what the bottom was until well after the fact).
The entire market is based on speculation right now, as well as being small enough for a few big players to significantly move the needle. This is a combination that means that one or two people can cause a drop, which causes a mass sell off (the inverse can happen too). Of course, this is a “just so” story… the reality is more complicated.
Point being, you won’t be able to predict bitcoin prices until bitcoin as a payment network and store of value overcomes bitcoin as speculation.
I don’t know why someone would believe it couldn’t happen. The price of bitcoin is determined exactly like stock prices and subject to the same variations based on the same reasons.
The growth of the bitcoin market is below expectations so people sell their bitcoins to monetize their earnings so the price drops. That’s economics 101.
Stock prices are anchored to the expected discounted present value of firms’ profits. Bitcoins have no anchor. Think of it this way: If the market went crazy and valued Apple at zero you would do very well to buy the entire company for $1000. But if the market decided to value Bitcoins at zero, you would not want to buy them all up for $1000.
At least with tulip bulbs you can, like, grow tulips.
In five years the go-to example for speculative bubbles that popped might be bitcoins rather than tulip bulbs.
At least some recent research suggests that the Dutch tulip bubble was in fact a tulip contracts bubble, which expanded when legal changes converted commodity futures contracts to options and collapsed when authorities halted trading.
Is there an important difference between a tulip contracts bubble and a tulip bubble?
Sure, there’s the question of whether any actual tulip bulbs were exchanged.
My understanding was that it started as a minor bubble in tulips, expanded into a massive bubble in tulip contracts, then collapsed massively. Is that different?
By the same mechanism by which bitcoin price is anchored to the expected discounted present value of the goods and services you can buy with them. And since there are goods and services you can buy with bitcoin that value is no more nor less arbitrary than the profits generated by some company (maybe not Apple).
Nice try but this approach is consistent with bitcoin having many, many different possible prices including price=0. Think of it this way, if I create a company that does everything Apple does I’m a billionaire, but if I invent a cyber-currency that does everything Bitcoin does I have nothing of value.
I seriously don’t get it. If I have a company that makes products nobody wants, I also have nothing of value. Are you claiming that Apple products are inherently valuable? I don’t see that. Apple get’s money because people want their products and bitcoins have value because people want them. And the price of both Apple stock and bitcoin is determined by how many people want to buy and hold them in expectation of future profits.
This is not true. Your company, presumably, has some assets—maybe a factory, maybe an office building, maybe some inventory, likely some cash in a bank account, etc. If you were to shut down the company which makes products nobody wants and sell its assets, you would end up with some sum of money. This is the company’s residual value or (assuming the accounting is broadly in line with economics and you’re not selling at firesale prices) its book value.
And some liabilities. Apple e.g. in 2013 had 8.71B cash + 1.76B inventories and 16.96B debt. So if suddenly nobody wanted Apple products anymore, guess what the shareholders would get.
According to Yahoo! Finance Apple’s total assets are about $200B and their total liabilities are about $80B. (Or were in late September 2013, the latest for which they give figures.)
(Curiously, the figures there match yours for inventory and debt, but they give a much larger figure for “cash and cash equivalents” than yours. But as the totals indicate, the numbers you mentioned are very far from telling the whole story.)
So, it looks as if Apple has about 6 billion shares, and their net assets minus liabilities are a bit over $100B. So if people suddenly stopped buying their products (in some way that didn’t change the value of their assets, which would be a bit hard but never mind) then each share would be worth about $17.
[EDITED to fix an idiotic factor-of-1000 error; oops. Thanks to Lumifer for pointing it out.]
That’s billions (thousands of millions), not millions.
Apple’s book value per share is about $20.
Of course. It’s perfectly possible for a company to have zero or negative book value. Your Apple numbers are quite a bit off, though—look here for example.
The issue, however, is not what the price is determined by—for all tradeable goods in a more or less free market the price is determined by supply and demand and, yes, it is true for both bitcoin and AAPL shares, but it’s also true for tulip bulbs and old baseball cards. The issue is that you said that that bitcoin prices are “anchored” in the same way the equity share prices are anchored and I don’t think this is so.
Most of those goods that you can buy are pegged towards the dollar and not towards bitcoin. As a result they don’t provide for a floor for prices.
Bitcoins are achored to the cost to produce them. Same as with e.g. gold. E.g. a gold-rush means that for some time gold is ‘easy’ to come by.
That only puts an upper limit on the price of a bitcoin. The lower limit is set by what they are useful for, and how much more useful than the 500 or so other cryptocurrencies: transactions and contracts with security and anonymity properties that ordinary money does not provide.
Same as for e.g. gold (at least for those crypto-currencies that use proof-of-work).
They are produced at a set (and exponentially decreasing) rate. The cost to produce them is however much people put into it.
Same as for gold in a gold-rush.
In other words, bitcoins are not anchored to a cost. Same as with e.g. gold.
I don’t understand what does “anchored to a cost” mean.
In crude terms, things have value and they have a cost to produce. If the value is above the cost, more things like that will be made. If the value is below the cost, no one will make these things. Nothing in that speaks to “anchoring”—the cost does not “anchor” the value.
Bitcoins certainly have a cost to produce (and it’s growing, by design), just like gold. If the value of bitcoins falls below that cost, no one will produce new bitcoins any more.
If there is a fixed cost to produce something, then if the value ever moves above the cost, more will be produced until the value falls to the cost. This means that the value is anchored to the cost. Bitcoins do not have a fixed cost. It would be more accurate to say that the cost of bitcoins is anchored to the value.
Wouldn’t it be capped by the cost (+usual profit)? There is nothing about the cost of production that prevents the value from falling below the cost and all the way to zero.
Why not? It’s not hard to calculate the cost of production (cost of hardware and electricity) for bitcoins. That cost changes with time, but that’s normal for most everything.
That probably would be a better term. I should add that I haven’t been educated much in economics, and if “anchor” is economic jargon, I don’t know it. I was just going by the normal use of the term and the context to guess what the OP was trying to say. Also, pointing out that it’s only anchored from above pokes a hole in the OP’s comment, but since someone else already addressed that I didn’t bother.
Bitcoins are produced at a rate that halves every two years. It doesn’t matter how much effort you put into mining them. Putting more effort into bitcoin mining does not increase the amount of bitcoins, and thus does not decrease the price. The price is not dependant on the cost to produce. On the other hand, if the price doubles, then people will put twice as much effort into mining them, and the cost to produce will double. The cost to produce is completely dependant on the price.
No, I’m using words in standard meanings: “anchoring” means limited to the vicinity of a particular place or value, and “capped” means can go down but cannot go up above a certain limit.
Yes, under the assumption of many separate agents. However people can cooperate if there are sufficiently large incentives for that and there’s no anti-trust authority to stop them in the Bitcoin world. One mining pool already got over 50% of world capacity at one point—it quickly backed down for obvious reasons, but my first guess at an attractor point (equilibrium in econospeak) would be a duopoly where two mining pools control most of mining and they may or may not collude.
How are you suggesting they manipulate prices? While there are a number of security flaws, none of them allow counterfeiting. You can’t increase the supply beyond what it should be no matter what you do. You can destroy bitcoins by sending them to invalid accounts and cause deflation that way, although I have no idea why you’d want to. You could get over 50% of mining capacity and frequently use it for the 51% attack, causing people to lose trust in bitcoins and making the price fall, but again, it’s not going to help you.
Not prices, but the cost of production. With increased prices normally you would have increased mining efforts which, through competition, would make cost of production rise towards the price. If you control the amount of mining, you can avoid that and keep the mining effort at the same level. Your profit (price—cost) then stays high.
It changes with time, but only because the amount being produced changes over time.
First, the cost to produce them is greatly influence by how many people engage in mining which is itself determined by the market price of bitcoins, meaning that by this metric there are multiple equilibria.
Second, for any fiat money there is always an equilibrium with price=0.
That’s not technically correct. If the athourity issueing the fiat money collects taxes than that creates demand for it up to the amount required to pay outstanding tax bills (ie 1% of land value in the case of a property tax). Since property doesn’t produce fiat money itself property owners need to sell goods or services to get money.
So there are low equilibria for fiat money, and unstable equilibria for fiat money, but zero is typically not a natural equilibria
I agree with your qualification.
The first also applies to e.g. gold.
I do disagree with the second.
No, that does not apply to gold. The cost to produce more gold is influenced by how much people have engaged in mining in the past, and thus extracted the low-cost gold. If everyone but you stopped mining gold, the cost for you, personally, to produce as much gold as was previously being produced would be approximately the same as the cost everyone shared before. If everyone but you stopped producing bitcoin, it would be much, much cheaper for you to produce just as much bitcoin as previously.
Gold is not bitcoin. There are differences obviously. But there are analogies too. For one the effort to mine a bitcoin intentionally rises by how much people have engaged in mining in the past.
I’m not clear what you are driving at.
I’m pretty sure the effort (processing power) required to mine a bitcoin is independent of the history of mining, and depends exclusively on how much processing power is currently being spent trying to produce bitcoin. Unless I’ve drastically misunderstood the algorithm for difficulty, which I’m relatively sure I haven’t (thinking of this page specifically).
The consequences of this seem obvious to me; bitcoin is only difficult to acquire when it is perceived as worth acquiring, meaning that a loss of confidence that it has value leads directly to it being much easier to acquire even without having to purchase it from people who have lost confidence.
What you seem to mean is the cost due to competition: Multiple miners trying the same block and the first one succeeding making all the work of the other mineres on this block worthless.
I meant the increase in difficulty for later blocks inherent in the algorithm.
One could—though I agree that it stretches the analogy—compare the first to gold miners competing in the same physical location—as has happened during the gold rush. This causes competition not exactly for the same gold veins but for the physical space and other resources around.
The second (algorithmical) increase can be compared to mines becoming sparser and sparser—you have to dig deeper.
The bitcoin supply is limited by design and as you approach the last bitcoin which could be mined, the effort needed increases. That makes the effort needed dependent on the “history of mining”, or, more precisely, on how many bitcoins have already been mined.
Or more precisely the currant year.
No, not at all. Buying stock gives you a legally recognized claim on the company’s assets. Companies are rarely valued below their “book value”, just the price of everything they own (in cases where this happens it usually means that the market thinks the management will waste these assets before someone pries their hands off them). Bitcoin gives you a legally recognized claim on… nothing.
Even if you think of Bitcoin as a bona fide currency, foreign exchange rates are NOT determined “exactly like stock prices”. Thinking bitcoins are equity shares is a category error.
There are (or were) many, many Bitcoin advocates in the world who can’t see it being anything other than deflationary (as there is a limited supply), it does interesting things, etc. Then the world turns around and sends Bitcoins inflationary for this whole year. Empiricism beats praxeology (again).
We can’t live in a world in which the market expects Bitcoins to steadily increase in value compared to the dollar because of the arbitrage opportunities this would create.
Yes we can, because of the relative opportunity costs of holding Bitcoins and dollars. You may as well say we can’t live in a world in which the market expects stocks to steadily increase in value compared to the dollar. Dollars are far more liquid than Bitcoins (or stocks) and, in equilibrium, you have to pay for that liquidity.
If the market expected the price of Bitcoins to steady increase people would buy Bitcoins today increasing Bitcoin’s price, until the price of Bitcoins was high enough so that people wouldn’t be confident that it would keep increasing.
Again, you are neglecting the cost of holding Bitcoins.
Suppose today a Bitcoin is worth $100, and everyone thinks that Bitcoins will be worth $102 in one year. Anyone could gain an expected $2 by a buy-and-hold strategy on Bitcoins, but that means they will have to hold their money in Bitcoins for the next year, which is not as useful as holding dollars, because it’s much easier to turn their dollars into other assets (or consumption). If people think that this liquidity cost of holding Bitcoins is at least $2, then they will not bid up Bitcoins now.
Moreover, buying-and-holding Bitcoins has an opportunity cost because it means you aren’t (for example) buying stocks, bonds, land, gold, or engaging in immediate consumption. So, if we suppose the market interest rate is 3%, then even though Bitcoins are expected to go up $2 over the next year, no-one is going to bid them up to $102 now, because they can get a $3 return elsewhere.
Implied by your logic:
There can never be expected appreciation (or depreciation) of any asset.
In particular, expected inflation must always be 0.
People value future consumption as highly as present consumption.
Needless to say, none of these are the case.
As a fraction of total world GDP it is true, relative to the efficient markets hypothesis, that expected inflation must always be 0 and there can never be expected appreciation (or depreciation) of any asset.
And measured in those terms, it is still true that “a world in which the market expects Bitcoins to steadily increase in value compared to the dollar” is impossible for the same reasons James_Miller cited.
Yes, there is a certain amount of appreciation that the world could expect; it could expect Bitcoin to keep up with inflation and the growth of market. But the expected growth of the market takes into account risk, and under a fairly weak analog of the EMH, actual expectations of better-than-market growth would make the price of Bitcoin jump until it reached the same price as other instruments that had that expectation.
No. Suppose we are in a zero-growth economy. If an asset is worth $98 today and is expected to be worth $100 in a year’s time, people will only bid it up to $100 today if they are indifferent between $100 of consumption today and $100 in a year’s time. But people are (rightly) not indifferent, they prefer to consume today—hence even in zero-growth economies, you see a positive real, risk-free rate of interest. And nothing about the liquidity cost depends on a growing economy either.
There is substantial evidence that a giant whale dumped $9m worth of coins at $300. Now that the sell wall is gone, the price is back up.
Otherwise, just the typical accretion phase of a boom-bust cycle.
Evidence or speculation? I saw the $300 sell wall, but that does not account for the previous week’s dip, which is when the “bearwhale” speculation started. I did see plenty of speculation to this end … but humans, particularly bagholders in a bubble, will grasp for any explanation that is not “we were foolish”.
Really, everything is based on the assumption of conspiracy:
December—Just a small market correction after bubble, soon we go up!
February—Price dropped because Mark Karpeles is an incompetent thief. (This one I’ll give them.)
May—China dropped the price, now all Chinese is priced in, we go up!
August—Wall Street dropping the price because they want to enter cheap. Hold and we’ll go up!
October—The bearwhale dropped the price, cheap coins that will go up!
It’s a cliche for good reason that everything and its opposite is “great news for Bitcoin!”
The ridiculously inflated prices peaking in December 2013 are almost completely explained by Mt. Gox’s blatant fraud and the Willy and Marcus bots. A decline from that would be the expectation.
So what was the solid evidence for (and against) conspiracy, as opposed to the null hypothesis that this is just one week in a bubble on its way down?
Neither of those are true (probably).
The price is the result of normal market forces, not a “conspiracy’ to decrease the price, or ‘manipulation’ upward last november due to bots. All of the ‘manipulation’ talk is complete bullshit. There is nothing at all unusual in the price movements of bitcoin. It is completely normal for an asset that is growing from essenitally no value, into the billions of dolalrs range, in five years.
If there was a startup company that went public with shares at its inception, until a point of it having a $10 billion market valuation, over a 5 year period, it would look a LOT like the bitcoin price chart. Huge, massive increases in value as it reached new milestones of adoption. Massive contractions as it looked like it might fail. But the thing is, you DONT see the valuation of startup companies like this, because they are owned by a small number of founders and venture capitalists and angel investors. So the bitcoin price looks unusual to most people.
So the first hypothesis: “there is a conspiracy to manipulate the price”, is complete BS. (There are tons of idiots on places like bitocintalk.org that beleive things like this, because they are clueless. But this is not a truth about reality. it is a rationalization made up after the fact by people for whom bitcoin is essentially a religion that you must take on faith, to explain why the price is now going down).
The second hypothesis “Bitcoin is a bubble on the way down”, is also probably not true. (Though the chance that it is true is a lot greater than the idiotic manipulation theory). The reason why this is unlikely is that the blockchain is a truly revolutionary technology, whose impact on the world is goign to be MUCH greater than a mere 10 billion dollar company. (If you look at bitcoin’s market cap as a valuation of a company, it peaked around $10 billion).
It might be true that the bitcoin blockchain is about to be surpassed by a competitor. That is, if you think of bitcoin as a startup, as the first startup to pioneer a technology, it is possible that now it is losing its place to a competing startup. If this were true, maybe bitcoin is going down because some altcoin is doing a much better job and is going to surpass it.
Even if bitcoin is going to be eclipsed by a competitor, it is much more likely that bitcoin would have another rise, but during that rise, its successor will greatly outperform it, and eventually surpass it.
To summarize:
Chance that the bitcoin price movements, in the long term, are due to a conspiracy: Close to 0%. Chance that the blockchain technology will just die, and bitcoin and all altcoins will just die: Very Low. Chance that bitcoin is currently going straight to $0 because a competitor blockchain technology is surpassing it right now: Low.
I do think that bitcoin is at risk of being surpassed by competing blockchains in the future, but not so imminently that it is going straight to zero right now. I think that in the end, both bitcoin and a few different other blockchains will survive. Most of those probably have not even been created yet.
In the same way that there is not only one surviving internet company today, and in fact there are many, in the future there will be many surviving blockchain technologies. This is true, even while the vast majority of the coins currently in existence will fail, just as most of the dot com bubble companies failed.
Yes. The conspiracy theories are rationalizations that have been invented because reality contradicted their belief system. It is absolutely possible for the price to decline the way it did. It could go much lower. It could even go a lot lower and still recover, and go much higher in the future! It already did exactly that in 2011-2013.
Random fluctuations have moved the price that much on a daily basis. The fact that we are trending downward generally is certainly expected—it is exactly what has happened 5x earlier in bitcoin’s history, and numerous other times in speculative bubbles. It’s possible for the near-term trend to be down 90% of the time, and yet the overall long term trend to be up. Indeed, this is expected due to the typical behavior of whales. They moderate demand so that prices continue to gradually fall, all the while accumulating coins. Eventually the bottom is reached when they no longer are in control of demand. Then the bull market starts and you have a very quick run up to an all-new high.
This is a very common pattern. It happens in commodities, it happens in stock markets, it happens in real estate prices. It has repeated over and over in the history of bitcoin.
Yes, this exactly. Its normal market behavior.