There is one theory that no one here has mentioned yet: that Mt. Gox was responsible for Bitcoin's meteroic rise in price, and now that Mt. Gox has fallen, the price has been deflating.
There is speculation that Mt. Gox had been fractional for at least 6 months, and that Karpeles tried to buy back his losses and wound up igniting the $100-to-$1200 spike.
It's interesting that the price has fallen since then, and continues to fall. Either everyone is simultaneously becoming wary of Bitcoin, or there are other forces at work.
The other possibility is that since coin is concentrated into the hands of a few, those few can tank the price if they feel like bailing out.
Also, it's probably a good thing that the price has been correcting itself. It's still dangerous to its users, so until the fundamental problems are fixed, it probably shouldn't be priced too highly. I've written about why it's dangerous to its users here: https://news.ycombinator.com/item?id=7521906
>There is speculation that Mt. Gox had been fractional for at least 6 months, and that Karpeles tried to buy back his losses and wound up igniting the $100-to-$1200
This is one of those moments when I feel like I'm missing something obvious (or a key piece of info), but wouldn't the fact that Mt Gox had gone fractional mean that they had created a lot of artificial supply that should have put downward pressure on the price? Further, wouldn't that pressure be somewhat proportional to the upward pressure he created with the buy activity, given that he was trying to make those fractions whole again?
Edit: It just seems that there had to be some outside demand that subsequently dried up. Otherwise, we would expect to see at least a gradual, steady decline in price as he created more and more artificial supply. I suppose that could have then been folllwed by the dramatic rise if he was in too big a hurry in his recovery buying, but again, there seems to be some actual demand that went missing at some point.
>Further, wouldn't that pressure be somewhat proportional to the upward pressure he created with the buy activity, given that he was trying to make those fractions whole again?
Yeah, it would be, if all players in the market knew how many bitcoins (including the marginal bitcoins "created" by gox) were in circulation. /and/ if the value of all bitcoin was fixed over the time period.
I don't follow it closely like you but I'd look at the chart relative to the US IRS ruling. Prior to that BitCoin had a lot of potential as a currency and financial asset. That ruling really knee capped the currency potential and thus limited the upside.
I don't really think the IRS ruling had anything to do with it. Whether it's legally property or currency, people will be able to continue using bitcoin as they always have. The only thing that changes is what they report on their tax forms at the end of the year.
I really don't think speculators were thinking that far ahead -- herd mentality is a way more believable explanation, there are hundreds of examples going back to http://en.wikipedia.org/wiki/Tulip_mania
As a group, speculators still need to have some underlying theory for why the vehicle they're speculating on is valuable. Almost by definition, a bubble popping is when speculators collectively recognize that theory didn't pan out.
For BTC, probably the most likely theory is, "Bitcoin will become valuable as a currency." The world's biggest economies officially deciding that it is not a currency under their laws dealt a crippling blow to that theory.
IMO, what makes it a 'bubble' is that the speculators don't care about the underlying theory, they're just jumping on the bandwagon because it keeps going up. Which is why it crashes so suddenly as soon as forward momentum slows down.
As someone who holds Bitcoin this is the one thing that has concerned me the most. Mt. Gox has seemed incredible shady. What if they have been manipulating the market all along?
There's been a lot of speculation that they have been manipulating it, all the way since the rise from $10-something to $250+ last year. If you watched the public trading, it seemed like Mt. Gox was intentionally blocking 'sell' orders, refusing to sell bitcoins at market price and instead waiting until someone placed an order for slightly more money.
I forget what the other 'evidences' were but it seemed like they were trying very hard to drive the price up. And they would frequently shut down altogether if the price started to dive.
Most people who were paying attention considered Mt. Gox toxic and avoided them as much as possible since the $250 peak-then-crash of last year. It wasn't just the can't-really-prove-it suspicions, but also things like a trading engine lag of 4 hours.
Recently, a lot of the price fluctuation seems attributable to what Mt. Gox has been doing. When the price at Mt. Gox fell to $100, imagine how easy it would be for Mt. Gox admins to buy btc from their customers and then sell at bitstamp/coinbase for a giant return. Rinse and repeat. Only Mt. Gox should have been affected, but all of bitcoin tanked, suggesting that maybe Mt. Gox was actually doing a lot of selling.
None of this is proof. I have no proof more solid than what I stated. But I'm fairly convinced that Mt. Gox has intentionally and successfully tampered with the price of Bitcoin for the past year or more.
Mt. Gox was "fractional" (as in actual holdings versus expected holdings), but you are correct that it is not accurate to describe it as a "fractional reserve" banking operation.
Is anyone tracking how much money miners are pulling out of bitcoin on a daily basis? I assume they have to sell some fraction of their earnings in order to pay for hardware and power. This should create a constant downward pressure on the price, since there always has to be new money flowing into the system, but very few people "need" to buy bitcoin in the way that miners "need" to sell (most buying is for speculative purposes).
This is almost the opposite of public companies, which rarely issue new shares, and have a constant buy pressure coming from 401k plans and other automatic investment vehicles.
If the market were efficient, it would already price in the dilution from newly minted coins, as it does for share dilution in the stock market (which is actually quite common due to employee stock options). However, every indication is that the bitcoin market is not at all efficient. It is largely driven by speculators playing a greater fool game, not investors who are betting on intrinsic value per bitcoin based on a future estimate of coins outstanding. The result has been a series of manias and panics, which will continue until real buyers enter the market.
An alternative view: if BTC as a major currency is worth $100,000, and BTC that isn't a major currency is worth $0, the market price will be roughly $1,000 if BTC has a 99% chance of failure (ignoring the risk premium). As in reality the odds that BTC will become a major currency are difficult to estimate, volatile, and likely to be affected by the price of BTC itself, volatile prices for BTC, which we wrongly interpret as "manias" and "panics," actually tell us very little about the efficiency or inefficiency of the market.
It's more than manias and panics (though they played a large part). The legal and institutional framework surrounding it is still in constant flux, and its future value will depend heavily upon that.
Right now the institutional news all looks negative -- e.g. the failure of mt gox and the unfavorable tax treatment in Japan (and now the US).
3600 coins are currently added to the system per day. There are currently ~12.6M coins in circulation.
So that's an increase of .02% per day.
This doesn't come close to accounting for the price swings we've seen in the last 6 months. There are much larger forces at work. What these forces are exactly is...difficult to determine.
Percentage of total coins isn't the correct comparison, it's the percentage of total volume. We're on a pretty high volume day right now and the 24hr volume is at 150k. Some days it's a fraction of that, there have been multiple < 20k days recently. Depending on the day the mined coins are a significant percentage of the total being exchanged (not that all mined coins would be exchanged, but it's a fairly high number otherwise most people wouldn't have any BTC unless they mined it).
Regarding price, percentage of volume is the important metric. It is not relevant that ~12M bitcoins exist, if only, say, 1% of these are for sale on exchanges. Only coins for sale on exchanges help stabilize the price.
>> There are much larger forces at work. What these forces are exactly is...difficult to determine.
How about: "lots of people who bought at the top of the BTC hype are now abandoning the BTC market because they lost faith in their get-rich-quick scheme?"
The meteoric rise and slow but steady deflation in the BTC price you see now has all the properties of a classic, media-fueled bubble. At one point people who were never interested in monetary systems or cryptocurrencies at all, were asking me how they could buy BTC because they heard on the news it went from $100 to $500 in a few weeks. These are not idealists or miners, but just hoped to ride the hype train up and make a few quick bucks without actually having to work for it.
I don't think it's 'difficult to determine' why it's fading now. Maybe if you completely live in a kind of echo-chamber that HN appears to be on topics like this, but looking from the outside it all makes perfect sense.
Ya, I mostly agree with you. The devil is in the details though. Why is it fading at the rate it is? Why did it drop to ~350 but then bump back up to ~425? It's seemingly pretty random (at least to me).
The short answer is that miners are hoarders, and this is based on a few things:
1. In theory difficulty and hash rate should follow the bitcoin price, but they don't. You'd think that as price decreases difficulty re-adjusts as miners pull out but difficulty and hash rate continue to increase and are completely disconnected from the price. Charts:
Because of the disconnect, you can conclude that most mining business models are based on the future price of bitcoin. The miners are either true believers in the future potential, or they are effectively stuck because they have sunk upfront real USD but are currently mining at a loss and have no choice.
2. Most mining at the moment is being done at a loss. This continues from point 1, but if you look at a mining calculator your can work backwards and calculate at which electricity price point mining is currently profitable at.
As an input for our calculation, lets assume all miners are running the equivalent of a KnC Neptune, a new 20nm-based board that hasn't been released yet but it due out in a month or two (hah!):
Your gear is generating $32 per TH per day, so $96. To pay off only your hardware would take 104 days, this is with 0 electricity cost. You'd need to find electricity
at a few cents per kw to break even[0]. The sums aren't good.
[0] This is possible in only a couple of places, mostly scandinavian nations with geothermal electricity supply or nations where electricity is subsidized like China and India. Even at a low 8c/kw your hardware (which is being delivered) is paying itself off in 118 days at todays difficulty rates (which won't hold).
3. A big problem with mining is that your investment decision is inelastic (not sure if that is the right term). You decide to invest at todays difficulty and bitcoin rate but outside of cloud-based mining you don't actually get started mining after placing your order for at least a month, often 5-6 months. So that means when there are little openings in the window for mining profitability everybody piles on, and you find when you get up and running that your mining estimates are an order of magnitude off because a lot of other people had the same bright idea.
The hashrate and difficulty charts show that with their increases. If you plotted the announcements of new generation mining gear against those charts in the same way Google News does you'd likely find that each big spike is equal to in time as new_mining_gear_announcement_date + new_mining_grear_delivery_date
4. Newly mined coins can't be transferred for at least 100 confirmations. This was an impromptu patch applied by the bitcoin project and a number of markets to defeat some sort of bug, but I can't recall or can't seem to find the details at the moment and can't recall what it was fixing or if the 100 number is correct. If anybody knows the details of this, i'd be interested in finding it again.
So when looking at the blockchain for newly minted coins, you'll never see them move immediately, there would be an at least 100 transaction delay (which isn't long in real time terms).
5. On non-volatile days the markets combined trade around 15M coins. On highly volatile days like today the combined volume exceeds 120M coins. 3,600 new coins are mined per day, so their input ranges from 0.01% of coins traded to 0.002%.
Note that this is traded volume, rather than percentage of coins, and the low trading days are often only a few million transactions per day.
6. You can follow the newly mined coins on the Blockchain. Ghash.io is anywhere from 35-50% of the total hash rate (which in itself is controversial) and their newly generated coins go to this address:
You can see that most of the coins remain unspent, and GHash.io is a unique case where you'd expect more of the coins would be spent, which i'll explain in my next point.
7. The hash rate and return itself has now become commoditized and can be traded like a derivative. cex.io was a pioneer here and they have an active market for buying and selling GH/s mining. Their pool is the GHash.io pool mentioned above.
Their current price for a GH/s of mining hashrate is 0.01058690 BTC, or around $4.03 USD. If you compare to the yet unreleased Neptune above, it is $4030 per TH/s vs the Neptunes $3,333 per TH with no electricity costs - and you can move in/out as you wish.
I have previously profitably traded on cex.io using an automated trading bot. It hasn't been active in a long time because I haven't updated it to suit the new conditions.
Here is my referral link to signup to cex.io, I get 10% of whatever you purchase:
I'll likely bump the version currently there with my new strategy interface in the next few weeks since I believe there are new opportunities in GH trading again on CEX. If you're interested in trading strategies, get in touch. The most basic mechanism in that bot will take your mining return and pour it back into purchasing GH/s so that your returns are compounded.
A lot of the return you get in CEX is from the other coins that are mined alongside Bitcoin when you purchase GH/s.
Note that nothing in the bitcoin world really makes sense, so the rules from normal public stock markets or strategies that might work there don't apply in the bitcoin world. You can see from the disconnect between hashrate, difficulty and price that a large part of Bitcoin price and market movement is speculation and emotion driven. You can still take advantage of this, though - as a lot of the price is driven by news events and emotional reactions to them.
Since it is so easy to move in/out of mining on CEX, you'd assume their mined coins are more liquid than the miners who setup long-term projects and are looking for a return based on future bitcoin price, but even at the CEX.io address you see only a small number of coins being moved.
8. In theory it would be possible to go back through the blockchain and measure/quantify what percentage of newly mined coins in a certain time period are being spent. Anecdotally i'd estimate the percentage is very low, and that most coins in circulation are greater than a year old (eg. i'd estimate 99.5% of traded coins were mined +1 year ago).
tl;dr: the current mining business model is based on future bitcoin price, most newly mined coins are held.
The hole in your theory is that a rational miner may think the price will multiply by 100 (for example), so buying $1000 mining equipment will be profitable because it will yield $700 worth of BTC (70% figure estimated from nothing and is really an arbitrary number as long as it is less than 100%), which will eventually be $70,000. The problem is that buying $1000 worth of bitcoins would yeild $100,000 in a $1000 investment rather than $70,000 in a $1000 investment.
The real reasons people continue to mine are one or more of these:
-It is fun
-It secures the network
-They wrongly think they will make a profit
That's not rational though. There's been no rational reason to think bitcoin can yield those returns. You're talking about a 10000% return on investment.
There is no investment in human history that works like that.
ummm, well bitcoin has done that. At one point you could get a thousand bitcoins for a $1 then it was 1 bitcoin for a $1000. So a return like that is possible and it has been possible in the last 4 years.
I am not saying it is rational I am just saying you are wrong :)
Bitcoin has gone up 1000% every year, and 10,000% last year.
Also, every successful startup ever has had those kinds of returns at some point. So I suspect you are only considering traditional or stable investments, like post IPO stock or whatever.
You are using the wrong units units for power and energy. Neither "kw/h" or "$ per kw" make any sense in the places you put them. I think you mean "kw" and "$ per kwh" respectively.
kw=kilowatt, a unit of power;
kwh=kilowatt-hour, a unit of energy
A masterful analysis - I learned more about the starte of the Bitcoin universe from this than I have from last 100 or so articles I've read. If you're not doing professional investor analysis, you should be.
Unfortunately, the claim that "Most mining at the moment is being done at a loss." is unsubstantiated and highly debatable. It's nearly impossible to establish the efficiency and USD-production-cost of mining technology being operated in secret - say, coincidentally nearby a 14nm Intel fab.
I really don't get why you would invest in mining equipment. If your "mining business model is based on future bitcoin price", it makes a lot more sense to just buy some [BTC] and hold on to them ?
> 1. In theory difficulty and hash rate should follow the bitcoin price, but they don't.
This ignores efficiency increases in mining hardware. We've basically seen an increase in efficiency of at least 10,000 times, over the past years, from CPU mining (~5000W/GH) to ASIC mining (~0.2W/GH). This completely disconnects the Bitcoin price from mining, and this will continue to happen, as developing more efficient mining chips won't stop, although the rate of efficiency increases will decrease.
So difficulty and price will never correlate, because mining keeps getting more and more efficient.
the other issue i keep thinking about related to miners are the people who sank millions into mining rigs. if you look at the hash rate / difficulty of finding new blocks, compared with the cost of the equipment and time required, seems like the incentive for mining is going to drop pretty significantly.
so perhaps they hold onto their supply, instead of selling at what they think is an artificially low price. but perhaps they panic and decide to unload - prices falls further. either way, the calculation that got them started is much less attractive.
plus, if the incentive to mine drops, the processing power of the network drops, could eventually increase the likelihood of a hack.
Pretty humorous how monetary cranks rant nonstop about the fed printing money being theft and about how we're turning into Zimbabwe and then goddarn it Paul Krugman was right and there's no hyperinflation and to top it all off your Ayn Rand bucks start suffering "downward pressure" due to all the Ayn Rand buck printing...
Krugman was right, but I remember during the Bush years, he was predicting inflation caused by the deficits that Bush created. He's a really smart guy but can be pretty partisan.
That said, at least he adjusted his opinion in the face of evidence -- Econ 101 says we should be seeing inflation and instead we're seeing near-deflation while the Fed is literally printing as much money as they can politically get away with. The monetary cranks keep telling us we're going to see it 'any minute now', because they can't abandon their theories in the face of evidence -- and yes, eventually some inflation will happen at some point, but it's hard to say that'll have made the cranks correct.
I will say that deficits increasing interest rates in a time of expansion and deficits and QE not increasing interest rates during a recession when the taylor rule is at -5% or so[1] are not exactly the same thing.
That's exactly the column I was thinking of, I specifically remember the mortgage reference. Thanks.
And I agree on your distinction there, and the historical record bears it out, with inflation rising from 2003-2007 and then near-deflation from 2008 onwards. Thank god we didn't listen to the fiscal hawks in 2009, most of whom were just trying to score political points and make things harder for Obama anyways. Could have been a deflationary spiral similar to what happened to 2000s Japan or 1930s US.
Hm, I think I just bumped Krugman up another notch in my head -- that 2003 article looks a lot less partisan if you look at it in the context of 2003-2008 rather than 2008-2014.
The reason is much more Machiavellian, namely if you keep the price of entry high and you loose money to mine for 80% of the time then the 20% of the time that it's extremely profitable you have a bigger multiple since the competition is weaker then it would've been otherwise.
Absolutely. A fixed reward (25 BTC) is rewarded each time a block is mined. Each block is based on the prior blocks in the chain, so when one miner mines a block, all the other miners must start over. Blocks are mined on average once every ten minutes, so basically, a random miner is selected approximately once every ten minutes to receive a reward.
Saying they have to start over is implying that you're somehow making progress. The only progress your are making is just ruling out a few inputs from a massive search space. You don't really lose any work when it resets because the work you've done is useless.
There's also the question of how much of the electricity is paid for. E.g. how many miners are mining on "free" electricity at their parents house, or have access to rack space with "free" electricity (our racks at work come with a certain amount of power, for example; someone putting a Bitcoin mining rig in there would not increase our costs as long as the power doesn't exceed certain limits), or has a miner in a quiet corner at work or similar?
Or any number of other ways of getting free / outright stealing electricity.
They will earn more coins by paying the electricity and using the already bought mining gear, than if they stop paying for the electricity and use that money to buy coins.
that would require a $500 dollar cost of electricity per coin, however in reality the $500 is made up of the investment in the hardware and electricity. You could not just switch off the machine and have $500 to spend on coins, you would need to sell the hardware. of course in most cases selling the hardware for USD and spedning it on BTC will generate more BTC than the hardware will mine.
Currently, mining is still profitable so it wouldn't make sense for them to stop yet. Once Bitcoin dips below a certain value (around $100 I believe?) then we will have to watch for the drop off.
I believe that at this point the amount of bitcoin being mined is so small in comparison to the amount that is out there, that this should be a negligible effect.
Nopes. Bitcoin's yearly inflation is about 1 million BTC for this year and next few years. So to keep the current price stable, almost 350 million (as of this writing) of new money has to move in BTC.
It assumes they will be for sale eventually, which is true. At that time supply will increase and price will therefore decrease unless ongoing growth is experienced.
He said "to keep the current price stable". Stable implies not changing over time starting from present day right? Or did you mean starting "eventually" that much money will need to enter the market to keep the price "eventually" stable? If so, I don't know what the relevance is of how many coins are being mined this year or next. If you're just talking about eventualities with no timeframe, then you're not saying anything quantifiable at all.
Someone please correct me if I'm wrong, but looking at hardware prices, might also support the case that "miners are hoarders".
(Please excuse the sketchy math in the following post. these figures are just based on searches on Ebay/Google. Most of all I don't know who's doing the majority of the mining and at what scale.)*
(Low End) ($490 investment in mining)
At the current level of mining difficulty a machine that has a hash rate in the 200/g/. Returns about $6.00 worth of BTC a day.
http://www.alloscomp.com/bitcoin/calculator.
I searched "200 gh/s" in a site that crawls Ebay, The machines for sale at this hash-rate costs about 490. You would recoup the cost of the machine in 81 days.
If it takes 81 days to break even on your investment, even if bitcoin doubles in that time frame you basically made the price of the machine as profit ($490 in 81 days). (meh)
(High End) (18k investment in mining)
Machines in the single digit tera-hash realm come in at under 20k, they peak at 15-20K per machine. Let's average the price at 18k. They make $90 a day according to the calculator. This would mean you would need 200 days to recuperate the cost of the machine.
In this case it takes 200 days to break even on your investment. If bitcoin doubles in that time frame you made 18k in 200 days. (the online calculator said power costs in this time frame are around $70.)
I'm assuming individuals in both these positions are have long-term holding in mind. My rationale is: getting substantially richer in either case requires the price per coin becomes drastically higher. You're also not hemorrhaging money in either case (power costs seem reasonable). It makes more sense for miners to hold as much of what they mine as possible. Both positions seem to hedged on a BTC being priced a lot more higher, in this sense hard to imagine miners to be selling in great quantities.
I also feel that people DIRECTLY buying and selling bitcoin would dwarf the selling pressure of the majority of miners. The barriers of entry for this also seem much lower than setting up the hardware.
personally I have been mining Litecoins for 6 months and am just about ready to turn off my rig. Electricity cost vs. difficulty level isn't make it worth it anymore. For the record, I have not sold and don't plan on selling any of my LTC. I will be holding onto them until virtual currency becomes as mainstream as is portrayed on "Almost Human".
Not that different from how paper currencies like the US dollar work in terms of money supply though.
Of course, Bitcoin is not issued by a QUANGO whose chair appointing government has 10 aircraft carriers, over 5000 nuclear missiles and so forth. Anyone can start up a Bitcoin like currency (Litecoin, Dogecoin etc.)
People overestimate the monetary value of military hardware. The Russians had a pretty powerful military when the Ruble collapsed. When people lose faith in the dollar no amount of firepower will save it.
All of this talk, all of these comments, the charts in the TechCrunch article, etc. All of this is talking about Bitcoin the Speculative Investment. Bitcoin the Get-Rich-Quick Opportunity. Bitcoin the Penny Stock. Bitcoin the Internet Stock. Bitcoin the Tulip Bulb.
Bitcoin the Currency doesn't have a chance of taking off until all of the above go away. When they do (if they do?), THEN we can have a real conversation about the future of money. Until then, however, this is going to be the same pattern we've seen over and over again for thousands of years. I hope for the sake of the folks that have invested $millions (VCs, etc.) that this time it's really different.
Indeed, I've used Bitcoin since 2011 and never for speculating. I buy servers with it primarily and now use it to easily transfer money. Wait until the ETFs start trading, speculation into the stratosphere but at least it might eliminate crashes from incompetent exchange operators.
For money transfer, I freq hire foreign employees for a variety of things like scouting large markets in Lagos to see what kinds of apps can be made for it, a survey on local Pakistani payment methods and currency exchange storefronts, translations in various countries ect. Paying by using existing remittance methods like western union and others had me flagged immediately and all my outgoing transactions were seized for "proof of income" and all sorts of other nonsense, even for small amounts like $150 transfer to Sri Lanka. It doesn't matter if I do this completely transparently, and operate through a business once you start moving money to the developing world and they aren't family members problems arise.
I now send them bitcoins and direct them to whoever is cashing it out on localbitcoins.com.
In every case, they made more money than what I sent them since supply of bitcoins in those countries is scarce so worth much more than the price I paid(1). Argentina localbitcoins is paying almost 2x what I buy them here for.
(1)Of course I've also lucked out, there hasn't been a massive price drop between sending the coins and cashing them like there was the other day when it fell almost $200
Edit: Another bonus of bitcoin is 3rd party payment. I can pay somebody local here cash at a cafe a block away and they directly load the bitcoin address of my contractor, so I don't even pay micro transfer fees, or even need to handle coins myself. Usually it goes straight to their localbitcoin.com account and within 20mins they can sell the coins, reducing price fluctuation risk.
In addition to the bitcoin wiki there's also plenty of ads on bitcointalk.org and #bitcoin-otc IRC I've negotiated for shell accounts, rack space, and even AWS instances.
Thanks to services like Bitpay most hosts accept Bitcoin now and if they don't email them with Bitpay's (or competitors) rate page showing no monthly fees, and next day bank deposit, and they'll go for it. What's to lose, Bitpay guarantees you will receive the price you ask for, provides an easy payment API, handles all the coins, and deposits it by end of day if you're US based.
What I don't get is why Gold/Silver websites haven't created a 24hr, live trading site using bitcoin for payment. Buy all the gold you want through Bitpay with insured and guaranteed payment, no need to phone agents to get a price quote. Maybe there is some kind of law regarding identity of payment or something I don't know about.
100% agree. I see parallels between Bitcoin of 2010s and dotcoms of the late nineties - overvalued, overhyped, and predictably crashed hard. But what once the crash cleared all the hype and hysteria, what was left was something useful. And that's why tech is booming now.
I foresee the same for Bitcoin. It will crash hard - heck, one could argue that it already has - but once people stop seeing it as an "investment" and start seeing it as something useful, cryptocurrencies just might rise again.
The conversation you're talking about is always happening, on IRC channels and mailing lists where work is actually discussed and merit trumps speculation.
Another bad thing about bitcoin is that even traders who sell real products and services for bitcoins use dollar as a price, and then convert it to bitcoin in real time. This makes bitcoin completely unnecessary, it doesn't add value to bitcoin, but the opposite - everyone start assuming bitcoin is like some virtual dollar tokens that have no meaning if there are no actual dollars involved.
That's true, but the solution is not to stop talking. The solution is to finish the conversation. The world needs to come to consensus about what Bitcoin is and how its value moves, so that a price can be set and we can move on. The way to get to that point faster is to help the effort to answer those questions.
A lot of people calling "crash" and saying the bubble has burst. Yeah it's "crashed" back to double what it was a year ago at it's peak. People in the Bitcoin world have extremely short-term memories. Remember the April 2011 crash? Oh you don't, well then have a look at this chart: http://arstechnica.com/tech-policy/2011/10/bitcoin-implodes-...
I think people who have amassed a quantity of these are going to learn a real lesson in the meaning of value. There's a reason precious metals like gold and silver have retained value for millennia, and schemes like this have not.
The VCs who have peddled this garbage are going to look like a bunch of frauds and fools. Not that it will materially affect them. The Cassandras who have been warning about Bitcoin will continue to be ignored, the press will still beat a door to put a microphone in front of these snake oil peddlers. With the talk of a bubble - if there is any sign of a bubble, it is a bunch of useless hashes like Bitcoin becoming worth $5-12 billion.
I suggest anyone who bought Bitcoins go read the Bitcoin FAQs of why Bitcoins are worth anything. It is complete nonsense. Moreover it is not falsifiable. It is basically "they are worth something because people think they are worth something". So even if Bitcoin crashes, that theory can still stand, since it can not be falsified. That stripe of value theorist can just say people stopped thinking Bitcoins were valuable, so their price fell.
Wise people can take the rise and fall of Bitcoin and ask real questions about where the value of commodities come from. The answer of the Bitcoin theorists, which is not that far off from mainstream economists, is a far cry from what economists like Benjamin Franklin, David Ricardo, Adam Smith thought the value of commodities came from.
I already mentioned how precious metals have retained value over millenia. Some Bitcoin advocates point to the dollar and say if the dollar retains value, why can't Bitcoin? This is a complex issue which would take too long to go into here. For one thing, the dollar does not retain its value - a dollar from today is worth much less than a dollar in 1978. Also, the conspiratorial gold bugs who say the dollar is about to collapse are probably overstating the immediacy of the problem - but that does not mean there is not a kernel of truth to their worries about paper currency. Just look at the history of currency from antiquity up until the Weimar Germany Mark to see why. No magic bullet has been found since then making the dollar bullet proof. Their worries may well be found to be correct, although probably are nothing to worry about for several decades.
It doesn't really matter. Even if bitcoin drops to five cents a coin, it can still be used as a currency. It's only bad for people storing their wealth in bitcoin which everyone knew was a bad idea - it's always been extremely volatile. The hope is that someday it will stabilize, but no one was ever claiming that it was in the present.
I'm sick of people treating the exchange rate of bitcoin as a metric for how successful it is. It doesn't matter.
>There's a reason precious metals like gold and silver have retained value for millennia, and schemes like this have not.
Ironic you would mention that. Gold only has value because people believe it has value. It's also somewhat volatile and not immune to bubbles.
Paper currencies are far more widely used and accepted than bitcoin and work just fine.
It was used as money because of its ornamental value and it derived its ornamental value from its inherent properties, for instance the fact that it doesn't perish,rust or degrade.
A cursory read of history would show that jewelry/ornaments are huge factor in the historical value of gold.
> Gold only has value because people believe it has value. It's also somewhat volatile and not immune to bubbles.
Gold and silver don't really have bubbles, they are kind of anti-bubbles. When it seems the music is about to stop in the musical chairs of the world economy, people pay a premium for precious metals because they feel safe in that they have value. Bubbles tend to happen in a go-go economy, precious metals become temporarily overpriced when people are worried about the world economy. Like the era when the Hunt brothers were buying silver.
Give some large gold coins to someone and let them play with them for a few minutes. I am no gold bug, but there is something about gold that makes it feel intrinsically valuable.
Paper currency can be used to pay taxes in a country, and settle debts with people who have to pay taxes in a country. I can issue my own currency and it will be worth something to people who want something from me.
And bitcoin is the only currency that can be used to pay for storing data in the world's most secure distributed timestamp database (the Bitcoin blockchain).
Gold has utility besides its currency value; it's easy to work, highly conductive and non-reactive, making it ideal for many industrial and aesthetic purposes.
Paper currency is backed by a government promise. Of course, if people lose faith in a state or a government persistently debases the fiat currency, people will lose confidence in it. But as I've pointed out before, while there have been many hyperinflationary episodes, it's not that frequent of a problem relative to the number of countries and currencies in existence.
> gold and the paper currency is printed on is only worth something because people think they are worth something
Gold has value. It can be used by dentists. It can be used in electronics. It has been inherently valuable for millennia.
As I said, paper currency is too complex a topic to go into fully here. Unlike gold, it obviously is not inherently valuable. You can look at Weimar German marks, Confederate dollars etc. to see that. Or even a US 1978 dollar versus a US 2014 dollar, to some extent. People who think Bitcoins can be worth something because the dollar seems to have some value are going to learn a hard lesson.
Great post. I'm fascinated by bitcoin. I think that a lot of good papers will be written about it, we as a world will advance our understanding of economics a bit, and it will inspire things that will outlast it by far. I'm not interested in buying any. Very unusual natural experiment.
Money is used to exchange goods and services between people. Any kind of money has inherent utility value, just by being money. Bitcoin is currently the best form of money ever invented. Speculative market value predicts this utility value.
I see the bagholders and snake oil peddlers have downvoted me into oblivion (Edit: Actually my parent post is ping-ponging but in negative territory at the time of this edit)
Here is a post I made 143 days ago, at a time when Bitcoin was seeing high after high every day -
Bitstamp Bitcoin was worth $460 that day. Today it is worth $350.
People who would have listened to me and those who agree with me then would be a lot better off now, especially if they had shorted Bitcoin (which is doable, sort of).
I was right saying Bitcoin will go down. It will continue to go down. That the Bitcoin bagholders and snake oil peddlers of HN will downvote me into oblivion is instructive. Not that I mind, I am only losing a little bit of HN karma while they have obviously lost thousands of dollars. They would be better off cutting their losses and trying to learn a lesson about their mistaken belief system then deciding to remove karma from those who observe that the emperor wears no clothes.
I think your down votes are coming because of your hostile tone. You make plenty of fair points, but your tone and insults are making them meaningless.
> There's a reason precious metals like gold and silver have retained value for millennia
Yeah, because gold and silver are good to use as money. They are fungible, long lasting, easily identifiable, can be divided without losing total value.
Kinda like bitcoin, except it can be traded with anyone with a computer over the Internet.
Unlike bitcoin, however, they have the trust of most people on the planet. They can trade hands without electricity and connectivity. And people understand them, how they work as a proxy for value, and while they certainly have their drawbacks, they are mostly stable in value.
Bitcoin has plenty of uses that gold and silver can't touch. But that doesn't make it a precious metal by any stretch.
No, and for the same reason a plane takeoff is never called an upwards "crash". "Correction" is just a term for a smallish or slow-moving crash. It's just how the word is defined. When skeptical people reference increases, they'll call it pumping or manipulation or whatever.
It's amazing to me how much price movements create news. Often people think the causality is the other way around; that there is some underlying news that must be responsible for price movements. Prognosticators in the stock market are forever looking for reasons for the price movements. Simply supply is greater than demand.
In the greater scheme of things this fall is no more significant than the last falls when bitcoin dropped from $30ish to $2, or when it dropped from $267 to $50ish. The question still remains: will bitcoin become a standard for online payments and a medium of savings? If it will, it will be a bargain whether it's $10, $100 or even $1000, and all these price movements, and the kerfuffle they cause will seem amazingly quaint to those looking back on the past (our present).
Just because there is a slim chance bitcoin might end up being worth 2,000x what it is right now does not mean it's current price is meaningless. I would buy a lot of power ball lottery tickets for 1 cent but at 1$ a pop there a poor investment.
I pointed out[1] 10 days ago that the Bitcoin had broken through a key support level and anybody trading a similar stock chart on technicals would be looking to go short.
From a purely technical perspective, there's no buy signal (yet).
Catching a falling knife is always a bad idea but seeing them before they fall can be highly profitable. It's just a shame there's no readily available vehicle for playing BTC on the short side.
> It's just a shame there's no readily available vehicle for playing BTC on the short side
In the UK at least there are multiple firms letting you buy/sell BTC Contracts For Difference, including shorting with a 10% initial margin if you really feel like taking crazy risks. (Plus500 is an example)
I have not been buying since I bought at ~300 probably a year or go now. I vowed I would not buy again until it neared 300 OR stabilized for 6+ months (which is hasn't).
Might cash out my short term portfolio and dump it all in if it keeps going in this direction.
Bitcoin price action has been suffering for the past few weeks. First the Mt Gox debacle, then China banning banks from processing it, then the IRS declaring it taxable as a property.
The major impact of that last decision will be on consumer adoption. Now, every time I want to make a transaction, I need to keep track of my taxes. I know that some wallet services are already developing ways to keep track of this automatically, but that's just an extra headache for the average consumer. This in essence will force consumers to think of bitcoin more as an investment, rather than a "currency" they can spend, and that will impede adoption.
I know nobody here likes to hear it, and I feel like a lot here in SV are tuning this out, but bitcoin is really, really struggling to find a relevant use case with consumers. Regular consumers have absolutely no reason to use bitcoin. The "1-click" payment and 1% price discount are not appealing enough to the average Joe who already gets 1-2% cash back, airline miles, and consumer protection on his credit card (and 1-click checkouts on many e-commerce platforms). And more regulation isn't helping the "crypto-anarchist" decentralization angle either. Add price volatility to that and it kills the consumer use case.
BUT PAYMENTS IS A TWO-SIDED MARKET. A winning product must appeal to both sides, the buyer and the seller. Bitcoin appeals to the seller at the expense of the buyer.
Consumer adoption is going to determine whether or not it succeeds on a grander scale. Unfortunately, Bitcoin does not solve a problem for consumers. Especially with tap-tap mobile payments around the corner.
When it comes to money, consumers want to be insured and cuddled and protected and not run the risk (however small) of being criminally liable for transactions and have someone to speak with if they make an erroneous transaction or have their card stolen. And they can already do all that, which makes it tremendously difficult to compel them to change the habits they've had in forever to adopt a system that does not provide them with significant advantages.
I've been in bitcoin since 2011 and used to be a big believer, but I don't see bitcoin gaining traction with consumers, in part because of the huge regulatory risk. Any significant threat to the banks' business will be met with harmful regulatory control (friendly reminder: Wall Street banks fund the largest political lobbies in Washington). It could be destined to eternally remain a store of value (like gold) or find very targeted applications (like specific types of machine-to-machine payments). The underlying blockchain technology could be of more use (if adopted by the banking system, for example) but that is still far in the future.
"Now, every time I want to make a transaction, I need to keep track of my taxes."
I don't think it is really that bad. To keep things simple you can just have two accounts one for your long term BTC investment where you have cap gains and losses and another for your spending money that is empty unless you want to buy something and then you buy enough BTC for your transaction which you immediately spend so you have no gain or less to keep track of.
even with software you would probably still want to maintain two different accounts so you aren't incurring tax liabilities willy nilly when you buy a bag of Cheetos. If you commingle everything then you would probably have to use FIFO accounting.
I'm still kicking myself for buying a bit at $17 after the $32 peak and selling as soon as it came back up to that again some months later. I feel like buying again.
Any possibility this could be partly due to coins stolen in relation to the Heartbleed exploit being cashed out? Even if it's just a single individual who gained access to a large stash, dumping it via the exchanges could be playing a part. Perhaps their motive would be to cash out before anyone catches on and starts trying to trace their transactions/withdrawals.
Care to explain? Taxes apply to capital gains, which are only realized when you sell. Not to holdings. People who have large coin balances don't owe taxes unless they sell coins, and then the tax is a percentage of the sale.
The logic is that people who mined or sold bitcoin last year (and at the time didn't know how it would be taxed) now need to sell more bitcoin to get the cash to pay their taxes, and all that selling depresses the price. This is a plausible mechanism, but I think it's clear that news from China is having a much larger effect on the price right now.
That's a myth. Satoshi compared it to gold multiple times. Imagine if gold was digital: You wouldn't be able to make it fit into a single category like "currency" or "investment". Or maybe you could, but you would have to leave behind this common modern assumption that a currency must have the exact same value every year, or even lose 2% every year.
Sure. If one had conviction that it would rise. One could buy now and see it at 10 bucks by the end of the week. If one had that belief... One would not invest.
If you have conviction BTC will be back then of course you'd get in now. But people thought getting in at 600 was a deal at one time... Look where we are. Those people aren't too pleased if they had conviction it was going to 1000 again.
If volatility has taught us anything, it is to be wary. Volatility means up-swings and down-swings. Perhaps the past year was just an up-swing and we're doing some mean-reversion. It's foolish to make blanket statements.
>>> If bitcoin's volatility has taught us anything.
Not sure if this has been touched on before, but is there manipulation going on with BTC? With traders who have a bigger stake making the price go up and down, or is this pretty natural for the cycle?
I'm actually interested in this. If there's another thread on HN talking about this, feel free to point me in that direction.
There certainly is opportunity for major traders to manipulate the price, and for exchange operators. Stage a denial of service attack against the biggest exchanges, or spread media FUD and watch the price temporarily tumble. Start buying and boost the price, sell and repeat. It's getting harder to manipulate now though with more decentralized trading, but a year ago you could blast just 2 exchanges offline and affect the price. Btcchina and MtGox, and since Gox left ports wide open this was easy to do.
Exchange operators could also fix the price if they wanted. There's nothing that prevents them from making hundreds of fake accounts on their own exchanges and bidding the price up or down since they are unregulated. They could even be pgp emailing each other to coordinate this for all we know.
It hasn't existed long enough to confidently predict any trend (and the efficient market hypothesis suggests that's impossible even if it had.) It could drop to sub $200 and stay there forever for all anyone knows.
When the announced they had amassed over 1% of all Bitcoins and they had been buying for months, you could calculate their average buy price. I did that and it worked out to be about $10 - $30 a coin.
Gonna be a nice quick plunge down to the low $200s. I feel bad for anyone who bought a lot around $800 -- you'll be waiting months to recoup that investment.
Or it could be forever... You just spoke the exact words that were spoken about WorldCom, Enron, etc. etc. Just sit tight, buy low, hold. Dollar cost average on the way down, blah blah blah.
If it takes me a few months to recoup my losses, that's okay. My biggest concern is that it'll level out around $95 and never rise up to $800 ever again.
Is this latent damage from the IRS ruling or something? I don't know why I'm still surprised by sudden, massive movement in BTC price, but usually the reasons seem pretty obvious (and over-reported).
China is cracking down on exchanges by forcing the state-owned banks to close their accounts. That is the speculative force that is driving down the price.
It is good that the price is going down since more people will buy Bitcoin now.
Personally I think its more a reversal of the "hype" valuation of bitcoin. For a while it was in the mainstream media all the time.
Also, probably more importantly, Mt. Gox was constantly pushing the prices higher because nobody could withdraw USD, so the only way to get out of Mt Gox was to use all your USD to buy bitcoins and then transfer them to another exchange.
Well, I've been ready[1] for this for awhile. It's all coming together nicely[2]. Now I wait for the magical event that sends bitcoin back to the moon at the EOY... or wipes me out.
There is speculation that Mt. Gox had been fractional for at least 6 months, and that Karpeles tried to buy back his losses and wound up igniting the $100-to-$1200 spike.
It's interesting that the price has fallen since then, and continues to fall. Either everyone is simultaneously becoming wary of Bitcoin, or there are other forces at work.
The other possibility is that since coin is concentrated into the hands of a few, those few can tank the price if they feel like bailing out.
Also, it's probably a good thing that the price has been correcting itself. It's still dangerous to its users, so until the fundamental problems are fixed, it probably shouldn't be priced too highly. I've written about why it's dangerous to its users here: https://news.ycombinator.com/item?id=7521906