Bitcoin Forum

The EMH says that market prices are approximately "correct" and you can't expect large gains. Yet many Bitcoiners expect large increases in the price of bitcoins. Is the EMH failing in the Bitcoin market, giving us a true free lunch? Or are Bitcoin investors deluding themselves by not recognizing the likelihood of loss?

IMO the BTC market is currently skewed because so many participants have coins that they got for "free". In that sense it's all free lunch and the actual market value hasn't been established yet. Throw in the fact that widespread adoption (ie: demand) hasn't even begun to occur yet and there are just too many uncertainties for the market to decide what a BTC is really worth.

I wouldn't say the EMH has failed, it just hasn't had enough time to arrive at a conclusion yet.

The market is still too small to have truly achieved efficiency is maybe one way to think of it.

I think it's "tend toward".

The reason why this is because, as the market get larger, the more way we can send individuals to try and solve all kind of problem.

Lot of those individuals are going to fail, but somebody will figure out something and gain a profit.

We have an extremely small economy, worth only about 1.97 million USD.

Thus there is an imbalance between the supply of one commodity (bitcoins) and the supply of the exchange medium (LRUSD)

At this phase, insufficient access to LRUSD (the common denominator for trading) is Bitcoin's Achilles' heel.
  http://bitcointalk.org/index.php?topic=2436.msg32962#msg32962

And the lack of a general stock market does not help, not being able to trade across with various currencies and commodities and meta-trading.

The btc market is as efficient as it can be at the moment, and the price is the correct one, even taking into account the expectation of an increase in value. The only issue is that the market does not know by how much the value will increase or when, if it did then btc would already be at that point.

A market can't predict the future, but it can see a general trend. The fact that people are spending btc is disproving the deflationary spiral myth, and if it's not being spent now, it will later, which will fuel growth as accumulated capital.

So true! I am accumulating as much bitcoin as I possibly can right now. I already sold advertising, writings, programming, drawing, etc. I even got tipped!

The EMH is only anywhere near correct when all possible valuers know about and have access to the a free market.

If I invent a lighter than balsa wood stronger than titanium alloy in my basement and sell some to my neighbor for $1/oz it isn't right to say that that is it's value. I don't know how long it will take to get the word out about this material, probably not as long as explaining and spreading bitcoin though. As someone mentioned, "tends towards" is a lot more accurate.

"You can't expect large gains" means that the expectation value of your investment is approx. zero. But that doesn't mean large gains aren't probable.

The Efficient Market Hypotheses doesn't apply, because it's not an efficient market.

It's too cumbersome to get funds in and out (for many people), and even where it is possible the time delays mess with the market.

More importantly, the future value of Bitcoins depends almost entirely on the presence or absence of future coercive government action. That must be one of the hardest things (if not the hardest thing) for any market to predict.

You're not factoring in the risks. If bitcoin fails we lose all our money. Secondly you're not factoring in time preferences, lots of money now is worth more that lots of money later (this is why you get above inflation interest rates on savings).

The value of bitcoins at the moment is:
  (Value of bitcoins when successful) * (Chance that bitcoin will succeed) * (Time preference factor)

Simplisticly the time preference factor the money lost because you could

As time goes by, the chance that bitcoin will succeed and the time preference factor go up. When/if bitcoin has succeeded they will both be 1.

I doubt most people here have their life savings in bitcoin.

What if someone has no savings except for a few bitcoins? Would that be the same thing?

But I don't doubt there are many here whose only life saving are in bitcoins.

I have some saving in dollars, but I fear for the time when hyperinflation kicks in.

There are only 2 major threats to bitcoin in the long run as I see it.

1.Government action.
Those who write libertarian theory are not always the ones who benefit from markets or even participate. Sometimes some of them make gov sound so bad that it discourages actual capitalist action. IE "Bitcoin is cool but why bother? the 'government' will just crush it"
Governments by their very nature are behind the curve, it will take them some time to make Bitcoin illegal. Even if some governments make it illegal the chances of ALL governments making it illegal is nearly zero. Due to the distributed nature of Bitcoin, even mild success in a few small jurisdictions guarantees the value of a Bitcoin.

2.Competing digital currencies.
If a whole slew of digital currencies begin to prop up everywhere then the above point will be even less of a threat since there will be more market pressure to make alternative currency permissible. However if Bitcoin will survive the evolution of currency is not certain, a superior system could supplant it.

So as a longer term investment strategy, rather keep your eye on all digital currencies and invest in the best ones.

Whatever a Bitcoin is worth now it is a fraction of a fraction of the value they will be if the currency is even mildly successful. If you buy Bitcoins today and hold them, even if your jurisdiction develops a problem with Bitcoin ownership, you can still sell your Bitcoins to a exchange in a participating jurisdiction and have the money transferred to you via more traditional means.

Fundamentally Bitcoin is an incredible idea and at today's prices akin to land giveaways in the old west.

I say bring it on, I've already got some coins, and we know what happens to prices during prohibition :)

This special offer is limited to the first 10,000 participants.

Heh, you youngsters can talk about your 50-year investments. I'm old enough that I won't be around in 50 years, so I'll need to opt for the 20-year investment option.

You are forgetting a third major risk - a major bug in the bitcoin software that may be exploited in the future as bitcoin becomes more popular. The existence of such a bug will become increasingly less likely as bitcoin is used by more people and scrutinized more, but so far no security audit has been performed on the bitcoin client by any reliably third party, there exists no clear specification of the protocol used, and there are no alternative implementations of it. The bitcoin infrastructure rests completely on a a single client, and that may very well be its Achilles heel.

It is very important right now to write down a rock solid protocol definition for the bitcoin network, and add multiple independent implementations of it. That will insure that a single security bug in one of the implementations will not bring down the entire network.

The price increases relative to the risk involved :)

war on drugs = fail
war on terrorism=fail
war on alcohol=fail
war on porn=fail
war on bittorrent=epic fail
war on bitcoins=


I guess you can figure out the answer

 :D

The EMH is crap. They dont even acknowledge the possibility of bubbles. EMH is used for modeling financial investments mathematically and may have its uses in some specific cases, but as a general economic theory is crap, nonsense. So I would not make much of it.

+1
EMH does not help at all to base meaningful financial decisions upon.

I never heard this acronym before but this statement is not right.
Market prices help entrepreneurs finding out which activities allocate resources better. Some of these activities may bring you large gains, why not?

Maybe think of it this way. In a free market people who have good information the indicates prices should be different than they are will use it to buy or sell continuously until the price moves, or sell the info to someone who can. If the info is crap/uncertain/misinterpreted/already accounted for then people acting on it will tend to go broke, over time this leaves people who are only using relevant, accurate, unaccounted for information and prices will be the most accurate signal to look at.

Maybe phrase it this way. If you have better info about the value of something than it's current price then you can get rich by sharing it! Since you almost never will have this info, you should rely on the market price.

None of this applies to reality to any great extent because the number of free markets is zero.

Insider trading is illegal!

Efficient compared to what?  Free markets are certainly more efficient than:
1.  Zero trade - each person attempting to create/supply all his own needs/goods/services
2.  Barter - direct trade with no medium of exchange
3.  Regulated trade - prices set and/or resources allocated by gov't bureau-Rats based on a) severe lack of information, b) incompetence, c) corruption

But despite being more efficient than the alternatives, free market pricing is really only efficient (in the sense meant in the EMH) on the average and in the long run.  In the short term there is often volatility around the mean due to innumerable factors including people's changing wants & values, unforeseen events, etc.


Excellent points made here.  The fact that Bitcoiners expect bitcoins' value to rise dramatically doesn't indicate a failure of the EMH.  Bitcoins are likely priced about right for their value today.  Bitcoiners are simply doing what every good entrepreneur / speculator does.  We are making a prediction / educated guess / bet about what will happen in the future, i.e., that as time goes by many others will become more knowledgeable about the nature of money and currency and will come to value bitcoins much more than they do now.  If our prediction is correct, we profit; if not, we lose.  C'est la vie!

That's because the value of stuff can be volitile in the short term as well. For an extreme example, if there is a hurricane approaching, the price of food goes up because food becomes more valuable. If you think the value of stuff on the market is mispriced, it is usually because the market knows stuff you don't than the other way around (that's what the EMH says).

It's not neccesarily bad though. Any rational trading (irrational traders end up bust very quickly), tends to transmit information to the market. Speculators are useful because they amagamate information and transmit to the market (when they get it wrong they lose money). Even pure price analysis can be useful because if you see patterns that indicate insider trading you amplify the message the traders are sending.

It isn't bad at all. Incorporating your information into the market price is a service to countless people. It makes planning and allocating resources correctly possible.

I said it to illustrate how the EMH could be true, but would not mean anything about our world because we have never seen a free market. It is explicitly illegal to trade on information that would make prices move to their correct levels!

Great point, great example.  Thanks ptd.

If you think about it the government is engaging in large amounts of complicated market manipulation. Most market regulation is actually about stopping the market from effectively transmitting information. This effect can be very subtle, I suspect that the dollar is partly kept up by goverment regulations requiring banks to own "safe" assets. Markets are very ruthless to inefficient beings (like governments).

Rule 1 of economics is you cannot make money without doing something useful.

Your market analyses are looking into the market data and finding out what the trends are signal (rising price of a company as it becomes successful, thus less risky) and what is noise (bubbles). When you trade based on these analyses you make amplify the signal, thus making markets efficient.

The EMH is not useful in this regard, because knowing the market is usually right does not tell you when it is wrong (which is the whole basis of speculation to begin).