Bitcoin Forum

This morning, a family member of mine asked me to write up my opinion of the Bitcoin price movement recently. For those who don't know me, I've been heavily involved in Bitcoin since May 2011. It is my full time life, my career, and my passion. The price in 2013 has been wild, and here's what I wrote to my family member.

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Unfortunately, while I'm certainly an insider, not even I know if the price will rise or fall tomorrow, or next week, or next month, or next year. Guessing short term price movements is a fool's game.

My sentiment is the same today as it was a year or two years ago: either Bitcoin is worth zero, or is worth thousands of dollars each. It will take years for the market to figure out which it is. If you believe in the Bitcoin story, that it may revolutionize the world of finance, then it's a good idea to hold on to some Bitcoins. If you think it's just too risky, or are unconvinced of the narrative, then it's best to sell. As stated many times, Bitcoins are incredibly risky and volatile. The whole thing is one grand experiment. Don't ever hold more money in Bitcoin than you can afford to lose, and in general you should assume the whole thing will go to zero.

Now, if you're curious why this price may be going crazy right now, it's a few factors:

1) A handful of "respectable" online merchants are now accepting Bitcoin, this proves that real businesses see the value in it. It's likely that others will follow.

2) Cyprus scared the hell out of everyone (and rightly so). While a few Cypriots may have bought some Bitcoin, the bigger influence is a world of onlookers who are all thinking, "well that could happen to US!" and "look how Bitcoin solves the problem of trusting banks." It's not so much that Cypriots are buying bitcoins now, but rather that the world realizes that as this euro (and soon dollar...) crisis continues unfolding, a greater number of people will seek some degree of refuge in Bitcoin. Speculators, seeing this possibility, are buying up Bitcoins.

3) Venture capital (and private investor) money is moving into Bitcoin. A small handful of VC firms putting in a small handful of their money could explain the entire current price rise.

4) An increasingly wide swath of the libertarian/gold & silver "hard money" types are buying into Bitcoin. They were very skeptical at first, but are coming around. There are probably a few hundred thousand people like this in America who are deciding to put a few grand into Bitcoin.

5) The FinCEN ruling clarified the government's stance on Bitcoin about 3 weeks ago. The good news is Bitcoin is very much legal, and will be treated basically like money. People don't need to worry that the government will come down on it any time soon.

6) The press attention gained from all of the above real-world events is fueling a huge amount of hype (justified or not).

7) Ignorant, foolish people are buying bitcoins simply because the price is going up and they think (consciously or unconsciously) that this means it'll go up tomorrow. Maybe 1% of the buying interest is from people like this, or maybe 99%. Such people may get really lucky, or impoverish themselves, but either way they're in it for the wrong reason.

All of the above have combined over the past couple months to cause this price rally. It may well be a bubble, and could fall back down to $20/coin. Or, it could be the "new normal" and a new stable price between $100-$300 will be found. Or, it could be the start of a mega bubble that drives prices over $1000 before they come crashing down somewhere and cause widespread misery and chaos. The price right now could be the highest Bitcoin will ever be from now on, or the lowest. Nobody knows!

My advice... don't obsess over the fluctuating price on any given day. The market will figure out the value of these coins, and there ain't a damn thing anyone can do to prevent this from playing out.

But certainly, Bitcoin is the most important thing happening on the planet right now... and it has nothing to do with the price.

-Erik

Nice analysis. I really like point 7 - buying bitcoins hoping to make a quick buck on their price is a very risky strategy.

Well, holding bitcoins in any quantity for any reason is "very risky" in my opinion. But those who do it simply because the price is rising (without understanding the fundamental reasons why Bitcoin is valuable) are both risky and incredibly foolish.

That's probably the most level headed and objective piece of advice I have ever read on Bitcoin.
What you said was true two years ago, is true now, and will remain true a few years from now.
That would make great material for Bitcoin primers

I happen to have written one:  http://evoorhees.blogspot.com/2012/04/bitcoin-libertarian-introduction.html (http://evoorhees.blogspot.com/2012/04/bitcoin-libertarian-introduction.html)

They are some good points.
I think also that at the moment when begin the the price rally above 20$ it was driven mostly by speculation/investiture rather then real business.
However during the last 3 mounts bitcoin gained a huge media interest and popularity exactly because this price rally. This had the benefit that:
- more people read about the bitcoin and cryptocurrency idea and get familiar with it
- more shops and services started to accept bitcoin
and this way the price development was at least partly backed.
The price will surely crash once for a limited time but it will unlikely come under 100$. A lot of people are waiting a price crash to buy cheap bitcoins so when the price will approach 100$ a huge amount of buyers will jump in the market.

This is common mistake. They accept Bitpay - not Bitcoin. You claim you are insider, so you should know difference. Big difference.

Those who accept REAL Bitcoin now suffer from such volatility and get paralyzed.

You should add here that this 2-billion bubble only stays on two interconnected amateur companies - mtgox and bitpay. Bring down any - and everything will collapse.

Let me refute that for you.

A merchant who uses Bitpay to accept Bitcoin and convert into dollars is just as legitimate as a merchant who accepts Bitcoin directly and keep it as such.

The reason is this: Bitcoin's value grows in proportion to the number of places, and ease with which, one can spend it. If every merchant on earth accepted Bitcoin, but converted into USD via Bitpay, then the following fact would be true: Every merchant on earth accepts Bitcoin. At this point, fewer and fewer people would decide to convert to dollars at all. The fact that we aren't there yet doesn't mean the steps to get there are invalid.

And sure, it's true that those who accept Bitcoin "suffer" from volatility. But they've been suffering all the way up to $190. Give me a volatile currency that appreciates over a stable currency that depreciates any day of the week.

And no, taking away Gox and Bitpay would not make Bitcoin collapse, I assure you. Within 3 months, it'd be like nothing happened at all. Why? Because as a trader, it is very easy to switch exchanges. And as a merchant, it is very easy to switch processors. Bitpay's client's do not have to spend months of integration time, and thus if Bitpay disappeared an alternative would be swiftly found. Same with Gox.

Do not confuse a few points of market-based economic concentration (Bitpay/Gox/etc) with rigid centralization.

Speaking of places you can spend it, rent seems like a fairly big deal. Rent in NYC seems like a HUGE deal...closely following AE Property Management in Memphis's announcement last week, an NYC company is now accepting Bitcoin: http://www.prweb.com/releases/2013/4/prweb10608334.htm

If things like this keep popping up, I won't be worried about the price going to 0, ever.

Yes, but wordpress, namecheap and others probably may consider stay away from such risky processors.

Their turnover will just disappear. I don't say bitcoin will collapse, no. Price will. Again, two huge differences

For the record, I find all the alt coins pretty silly, with the exception of namecoin which actually has interesting features to it. The rest is just the frothy wake of Bitcoin, but hey, I have nothing against competition and I'm glad that alt coins exist.

Hehe... Insiders... They invented a currency which root is in absence of middleman and building economy on two central points of failure.

People still put Bitcoins in "bank"(hello instawallet), they still use intermediates like Bitpay to launder money for BFL process transactions "without risk". They still have ability to lend coins for short (play against own market).

Hey, Insiders! What actually did you change in this crazy world except making nasdaq-99 2.0?

Biased opinion is biased

Its growing organically, even still. It is all just part of the process.
 "You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it."
These third parties you talk about help ease the populous into Bitcoin, why?, because it is what they are used too.


*edit - Hey evoorhees, long time no chat

Where the mtgox moves - tell me, insiders?

Why the silkroad money launder #1 moves to democracy heaven jurisdiction right into bernanke hands?

What happened to Kaddafi who offered alternate world currency?

Where do they go?

Well said.  I think you are a great spokesperson for the bitcoin community.

Price will collapse but not now and not when 15.000 new user are waiting by Mt Gox for verification.
They all need bitcoins and are eager to buy some coins regardless of how much will be the market price which will be pushed by them higher and higher.

or they need to withdraw

doesnt say shit this queue #

15.000 miner ?

Ironically, I would say the opposite. Don't keep more money in fiat than you can afford to lose.
A week ago I lost the significant part of my wealth on European bank account after Cyprus thing. But my bitcoins are still safe and gained in value thirty-fold.

How about we settle in the middle and say.... diversify your portfolio and you minimize the risk of any one single financial factor crippling you?

MTGox redirecting the new accounts to get verified, Is that new policy? Can anyone confirm if that was the policy before?

OP, you are reading my thoughts. Disagree only with the last sentence. Although bitcoin is really amazing technology, I would not say that this is the most important thing on the planet.

There is something else to be worried about, though: false PR statements as part of pump'n'dump scheme. Many businesses are claimed to be "accepting Bitcoin" - but when I go to their Web site, there is no mention of Bitcoin whatsoever. Case in point: The NYC company you mentioned does not accept bitcoins. See their payment page, https://www.mysmartstreet.com/payment.aspx
It only accepts bitcoins in the prweb story. What I think is happening all to often is that wealthy owners or executives of companies get personally invested in BTC, then use their companies to drive confidence up by false announcements (or at least announcements that they themselves don't take seriously).

I am a huge bitcoin enthusiast, but I am tired of hype and false-flag bullshit.

Second that..
Just like Bitpay's CEO announcing transactions of $5 million last month, IS THERE PROOF TO BACK THAT STATEMENT?

Or they don't want to withdraw now, but want to be able to do it fast in the future.

I find it interesting that in none of the multitude of mainstream press reports on this latest "bitcoin bubble" nor in this excellent "insider's opinion" (from one of Bitcoin's finest spokespeople) have I seen mentioned what I believe is one of the most important drivers of the recent massive jump in the fundamental value of a bitcoin: the transition to the fourth generation of mining technology, ASIC chips.

While I agree all of Erik's points help explain the short-term influx of new buyers, I believe the long-term fundamental value of each bitcoin is best explained by the MARGINAL COST to mine each new bitcoin.

If the number of bitcoins was forever fixed, every new dollar or euro that entered the market would simply go to paying off someone selling that bitcoin, who then removes that dollar or euro from bitcoin's market capitalization.

But since (on average, currently) 3,600 new BTCs are created and enter the market every day, I believe what is paid to mine these new, marginal coins is the most important factor in the long-term, equilibrium value of all bitcoins.

Anyone who has been following the developments from Avalon, ASICMINER, BFLabs (and perhaps others?) can see the massive expected jumps in network hash rate and mining difficulty that are already in progress as this technological transition unfolds.  The increase between third gen and fourth gen hash rates is orders of magnitude greater than all previous jumps, and the transition will probably happen faster as well.

Just as the first generation of CPU miners are no longer viable, second generation GPU miners will soon be swept away, and perhaps lower spec third generation FPGA devices may as well.

All of the thousands of small miners all over the world who have grown used to receiving (and perhaps selling) their newly minted coins will soon need to now buy their new coins at market prices, or make large investments in new ASIC equipment to keep pace with large (now mostly semi-professional) competing mining farms.


That's why when friends or family members ask ME about bitcoin's recent price explosion, I don't use the word "bubble" at all, but tell them it is a completely rational pricing shock reacting to a massive and imminent change in market fundamentals.

And I'm not selling (many of) my coins yet either.

I'd appreciate it if you would actually read the story before you call it "hype" and "bullshit" - their press release clearly says that current tenants need to contact them and manually set up a Bitcoin payment. And I KNOW this one isn't false: https://www.aepropertymanage.com/ - they announced last week and their announcement is on the front page. I talked to them, they already have the payment button hooked to Coinbase. Any of their current tenants can pay their rent immediately with BTC through the webpage.

I did read the story before posting. I still call bullshit. Half-baked. Their Website clearly states they accept MasterCard, e-check, and debit. There is no bitcoin. Why not? Why the manual setup? Why not even the mention of it on the payment page? It is hard to take this seriously.
Don't hate me for being this harsh. Bitcoin deserves better than half-baked PR statements and "contact the manager for manual processing". If and when their payment page actually includes bitcoin, I'll be happy to change my attitude and welcome the effort. The same goes to gogreensolar and the likes.

Are you sure? Because you clearly didn't even read my post, in which I posted a link to a property management company with a page that does accept bitcoin payment online, and made sure to point it out.

I was talking about the NYC company, you are talking about Memphis company.

Nobody never like my questions ))

Erik, Why Dubai, and did you like it there?

The next Kaddafi will put most of his money in a bitcoin brain wallet and other bitcoin child currencies when he will be in danger and when he will be shut in his head the privat keys cannot be any more recovered. So will remain less bitcoins and they will be more valorous. But Mt Gox will not be impressed just will continue trading.

I forgot something.
Hollywood will make a great film about the dictators lost treasure in the blockchain and everybody will search his passphrase.
The increased interest will make again the bitcoin prices to grow.

The info around that is sketchy. Apparently $5.2m worth of transactions during March which consist of 5100 completed invoices? So that's an average of $980 per transactions. Seems rather high if you ask me.

How much of that was actual money and how much of that was just bitcoins moving around? If they paid out $5.2m in USD they would be at massive risk of losing lots of money at least until they could sell $5.2m worth of bitcoins on the markets to recoup thei payouts which as far as I know would take a little while and would create negative pressure on the price.

Nicely played. I like your some what unbiased approach. Thanks

As long as I can still go on localbitcoins.com in any major city I travel to in the world and buy/sell with cash avoiding all government verification bullshit, limits, data mining and centralized exchange authorities seizing funds like they are paypal or something then I'm happy with bitcoin. MtGox monopoly will self destruct soon, esp when p2p exchanging starts growing. I traded my first coins in 2010 with a guy on IRC for Pecunix

It would be great if the algorithm can set to control the bitcoin price increase so that they could be more affordable.

The latest news, sorry but I didn't found in English but you can translate with Google:
http://www.profil.at/articles/1315/560/356308/bankgeheimnis-auf-posten
http://www.heute.at/news/politik/art23660,866455
As I understood it seems that Austria and Switzerland almost agreed to share all data with the US authorities about accounts of US citizens in 2 years.
What percentage of this money will be transferred in bitcoin in the next 2 years ?

States are getting more and more desperate for money..... this is not going to end well. :(

It would be a good thing if everything were to collapse the soonest possible, so that they have the political excuse to default on these monstrous debts for once and for good.

Thanks Erik for an excellent summary, one that every bitcoin holder / potential investor should read.

One thought on the above (5) however: If the gov't ever considers bitcoin a threat to the 'real' economy, or a 'clear and present danger' to US interests at home or abroad, for whatever reason (i.e. funding enemies of the state, etc.) could this change very quickly and without warning?

Nobody saw US gold confiscation coming in the 1930's, for example.

Bitcoins may be safe on a PC or thumb drive, but I'd guess that a very large percentage are stored with trusted parties (US or soon-to-be US based) like Mt.Gox and others. Needless to say that 'bitcoin funds can never be frozen' does NOT apply in that case. Just ask any (former) e-gold account holder.

In addition, such sites have reasonably low daily withdrawal limits for security reasons.


 

Yeah. Before this happens we need a better deterministic brain wallet generator.

Why are the number 7 group "in it for the wrong reason", but 2, 3, and 4 are not? What are the practical differences between any of these? All of these can be made to be very right if the price goes up significantly, or made to be very wrong if the price goes down significantly. Their individual "reasons" for buying bitcoins doesn't seem to matter at all, at least from how I see it.