Bitcoin Forum

Hey everyone,

This is a very important warning that I hope people will understand and take seriously.

Many people probably think that Bitcoin is finally "doing great", fueled by the popular media that constantly judges Bitcoins viability on its fiat exchange rate, and is now talking about the "comeback of Bitcoin". As many of you probably already know, the exchange rate means very little for Bitcoins viability as a currency, other than total liquidity of the system. The thing that truly decides whether Bitcoin is doing good or doing bad is the amount of trade being conducted with it.

As compared to when bitcoin was at 2 USD there has not been any increase in trade, and no new businesses or services that are attracting more bitcoin trade than usual have opened up. Because of this, the real value of the bitcoin economy has not increased. The only thing causing the upsurge in price again, are greedy people who are speculating that prices will rise even further in the future. This is how you create a bubble, and that's what is currently happening.

I know it's really hard for the people who are currently drunk with greed from their short term success (that is, if they're able to sell fast enough once the bubble bursts again). But please understand that even you, as a selfish trader and speculator, are NOT benefitting from creating another short term bubble. You might make a bunch of money in the short term (although with a huge risk associated with this profit). BUT! the new bubble is going to severely hurt all businesses using bitcoin, and thus will be extremely harmful to the bitcoin economy as a whole.

My company is currently running all its international transfers and payments to china in Bitcoin. Because of the immense advantages that bitcoin offers in business situations like this, I have been able to convince my partners to accept and use the currency. However, this has obviously only been possible since bitcoin became relatively stable at around 2 dollars. Now, with the rising prices, which are also seen in China, they are of course even more interested in getting hold of more bitcoins, and that's also great in theory.

The fact that Bitcoin is being used in a way such as this is also itself immensely benefitting to the Bitcoin market cap (which is what you speculators care about), of course im not making much of a difference on my own, but if the bitcoin price were allowed to be stable for a longer period of time, many more businesses that, like mine, operate out of several different countries would switch over for sure, ensuring a slow but steady, long term, healthy increase in bitcoin price.

What is going to happen instead is that the moment this new bubble bursts I will have to cease all trading with Bitcoins. There's no way I can give a rapidly depreciating currency to my partners. I would lose all credibility if my payment had lost 20% of its value after a few days. The only way I could continue to use bitcoins is if I overpaid the price by an amount so large a sudden 20% fall of the value of bitcoin wouldn't mean a loss for the the person im paying. And this is of course impossible to do profitably, and totally overshadows any of the advantages bitcoins have.

Bitcoin has enormous potential as a medium of exchange in international business, and could eventually raise to incredibly high prices, but you speculators are ruining your own long term profits by creating another short term bubble that is going to deter traders, and greatly harm the bitcoin economy as a whole.

What I'm trying to say is, I know you're a trader and don't care about much other than making profits. But even though your greed tells you to buy into the bubble now, and sell at the peak, it WILL be much more profitable for you in the long term if you let prices cool and not raise any further.

No, your absolutely incorrect.

Whilst I agree we need to protect ourselves from over speculation which could induce a bubble, your above statement leads to me to believe you have no idea what your talking about (I wont hold your low post count against you)

Your first point of no increase in trade, just by looking at the charts linked below, your statement is a total fallacy.
http://bitcoincharts.com/charts/mtgoxUSD#rg150ztgSzm1g10zm2g25zv
http://bitcoincharts.com/charts/thUSD#rg150ztgSzm1g10zm2g25zv

Cant you see how much trading volume has grown in the past 5 months?

Your second point "and no new businesses or services that are attracting more bitcoin trade than usual have opened up" is personally insulting.

In the past 5 days since we launched Instant Bank Cash Deposits @ BitInstant, we've seen over 30k USD in cash deposits- ONLY in cash deposits.
Since we've launched, we've transferred over $1.2m USD. 40% being first time Bitcoin buyers
Are you really gonna sit here and claim "The only thing causing the upsurge in price again, are greedy people who are speculating that prices will rise even further in the future"

I can leave it at that, because I know the hundreds of Bitcoin business owners will be replying to this post to defend their accomplishments.

Thus, I conclude while I agree we should avoid a bubble- you should also avoid statements that you cannot back up for factual evidence and proof.

if you don't want the bubble: don't buy bitcoin.

but i will buy mine :P

First of all, this was in no way an attempt at attacking bitcoin businesses or saying that they don't exist etc.

Perhaps the bitcoin economy has increased, but what I'm saying is that there has not been anywhere near a 250% upsurge in intra-bitcoin trade since the price was at $2.

You're right theres increased volume on the exchanges, and the price of bitcoin has been increasing. But this says nothing about the state of the bitcoin economy, it literally means nothing because this is all people buying bitcoin for speculative purposes, because thats pretty much the only thing you can do with bitcoin at the moment. You cannot spend $1.2 million dollars worth of bitcoin on anything meaningful currently.

A chart that would mean something is the number of transactions, but blockchain.info is currently inaccesible (at least for me) so i cant provide it here at the moment. But you would see that there hasn't been a significant increase in number of transactions, and most of them are probably attributed to speculation either way.

if you don't want the bubble, sell when the price is increasing and buy when the price is decreasing.

What a stupid call to action... :)

Explain to your Chinese partners about your thoughts on the dangers of another bitcoin bubble and the possible sudden decrease in bitcoin value so they can decide if they want to hold bitcoin or exchange it to Yuan or whatever. They can decide if they want to take the risk of holding bitcoin or not. If you or they don't want the exchange risk then just buy and sell bitcoins only when you need them/as soon as you receive them.

caveat emptor

Perhaps the intrinsic value was higher then $2 but do to volatility it was just a good deal at the time? 

You simply must explain to them that there will be huge fluctuations in the value of the coins, we are going to se quite a few bubbles before things start to calm down, and there is no way for any of us to change that. It might take 5-15 years before things calm down.

I bet the fluctuations will be heavily muted.  I'm not worried one bit.

People throwing money into Bitcoins are already much more aware of the risk they're taking than they did in June.  In June, people felt there was only one way to go - up.  Now everyone is well tuned into the fact that the market delivering a swift and harsh punishment is not out of the question.

The more the price goes up, the more people holding them will say, "Shit, I better sell these while I'm ahead, before it plummets again".  That very thought is what will prevent the bubble and keep the price in equilibrium.

I also wouldn't worry much about holding BTC.  The media is already chiming on that they're useful, that the dangers can be protected against, and that this is something that'll probably stick around for quite a while.  A new worm or trojan that steals wallets or mines bitcoins isn't going to shock anybody anymore.  To me, this is an excellent time to be acquiring BTC.

OP has a point. Grownup people hopefully behave responsibly and think somewhat long-term.  I for one have stopped "promoting" Bitcoin to my friends. I think developers and startup businesses need to focus on infrastructure, idiot-proof clients, security, etc. before it's time to start offering Bitcoin as a solution to this-or-that.

Bursting bubbles mostly bring about negative attention in the media and alienate potential future adopters.

 I am of course explaining that to them.

And I know the fluctuations are unavoidable, but the way to avoid them in the first place is by having a healthy bitcoin economy that relies on real trade rather than USD to BTC speculation.

I am trying to explain to everyone who currently are buying bitcoin in the hopes of getting rich off it would be much more profitable if they instead let the market cool and thus will not make the next fluctuation as violent as the last one.

Bitcoin is viable right now as a means of exchange internationally, but only in the brief periods of stability such as these last two months. But this sudden short term price increase will harm that viability once it bursts again.

OMG!

They're trying to stop the bubble! 

SELL! SELL! SELL! 

Sounds like a self-reinforcing market.  Price goes up which rewards the businesses that accept them, which encourages them to seek more trade using bitcoins.  Problem?


If price stability is an important factor, bitcoins received can be moved to an exchange and converted to USDs within minutes after receipt.  At some point there will be  options and other derivatives that will provide the ability to hedge and lessen exchange rate risk without having to immediately (or ever) convert out of bitcoins.

Yes! Don't create a bubble! Sell all your BTC now, cheap please! Thanks.

If I want to receive BTC but don't want to hold them - I'll give out a MtGox address as my receiving address, and leave a sell order open that cannot execute due to insufficient BTC.  At the earliest moment possible, my BTC's will be auto-sold.  Problem solved.

Oh, by the way... if BTC's somehow make it down to $2 again, I will probably drop another $100k on them.

I know, and I tried convincing people to do this while the market was falling, but why should they bother with it? They can't be bothered doing that as it doesnt save them any money or time compared to just doing an international wire transfer, selling bitcoins for money is such a huge clusterfuck, especially in China, and on top of that if you aren't standing by to receieve your payment they could get fucked within the timeframe of a few days.

Once the market stabilized at 2-3 I could show them that they could actually just accept bitcoin and then just hold it on their computer, and when they want to liquidate it they can just sell it at market rate to chinese OTC traders. This is so convenient for everybody, it doesn't attract more customers just because we're using bitcoins, but it just helps us all save money, proving that bitcoin is really damn useful.

But this usability will disappear the moment the next bubble bursts. Anyway I'm hoping that some people might refrain from aggresively speculate that the prices will go even higher, so the bubble wouldn't be as bad and the fallout from its burst wouldn't last longer. I know there's no way to prevent the next bubble (or the next one, or the one after that), but its amplitude and thus its negative effects on all of us (lack of commerce, media mentions declaring bitcoin dead, newcomers who buy in at the height of the bubble and come to forever hate bitcoin and consider it a ponzi scheme) can be mitigated by fewer, or more long term oriented speculators. A result of smaller bubbles would be more commerce, and more commerce will bring BOTH more stability AND higher prices, which translates into more $$$ for you speculators - RISK FREE.

I think you are right, it would be better with a slow growth but its simply impossible. You just cant tell everyone in the world not to buy as they see the price go up. And as the price go up, you cannot tell people they need to sell to stop it from going up.

We will not see stability.

corrected. wait a couple decades.

1. Has the economy shrunk by a factor of 15 since $30 to justify a $2 price?
2. If you are buying bitcoins to send to china, knowing full well they will hold rather than sell, you are doing more to create a bubble than speculators who buy and sell for limited profit.  Those who are greedy and hope for limitless growth will get what's coming to them regardless of what gets spewed in these forums.

Of course not, and I'm not so stupid I believe I can control the wild west of bitcoin.

I'm merely appealing to people who might be more interested in seeing Bitcoins long term success and long term profitability, or perhaps just traders that wishes to make more long term, rational trading decisions rather than rooting for volatility to increase casino gambling opportunities ala wall street bankers.

I'm just saying look at the facts. The bitcoin economy has not changed significantly in the last 2 months, but market capitalization has been rising more and more. These are obvious signs of a bubble, and I'm pretty sure most people know this. They just think they can make a quick buck by buying into the bubble now, inflating it further, and then just make sure theyre awake for when it bursts again so they can sell on the top. But what these traders dont realize is that through these short term profit schemes, they harm the long term profits bitcoin could otherwise make them.

Of course in the very long term, bitcoin will still succeed (and we WILL see stability at some point, a good guess could be in 2033 where the yearly  inflation rate of the total bitcoin money supply will be 0,4%), but the more bubbles in the beginning, the longer it will take, so although the traders are going for short term profits, and some of them will make it in this next bubble, they're losing out on orders of magnitude larger "mid term" (I.E. before 2033) gains that could be had if bitcoin doesn't burst badly again.

Growth in the Bitcoin economy exceeded two standard deviations from the mean during the bubble. It is currently less than one away right now and the capital inflows have been steadily rising. Overall, the general pace has resumed to what it was before the April-June bubble. The USD exchange rate would have to exceed $5.80 on the week to start being concerned, and $6.20 to trigger an immediate sell signal. Each time the price has jumped since November, it's built a stable base before continuing up.

It's also important to keep in mind that advances in science & technology are cumulative - they amplify prior improvements. Look at the comparison of bitcoin to gold (http://noblenomads.com/2011/12/30/accelerated-foundation/) - the former at a weekly level and the latter on a yearly level. That would effectively be about a 50:1 rate of growth just based on relative USD prices (the Bitcoin values are from mid-2010, not 2009).

http://noblenomads.com/wp-content/uploads/2011/12/usd-bitcoin-gold.png (http://noblenomads.com/wp-content/uploads/2011/12/usd-bitcoin-gold.png)

It can be expected that adoption rates will remain accelerated simply because of how small the Bitcoin economy still is relative to the rest of the world. I've compared Bitcoin's growth to that of Facebook and the patterns are similar there as well. We're still in an early phase, and Bitcoin has a far wider usage potential.

I consider this offensive.

Based on my analysis, I think that high volatility is probably here to stay for the foreseeable future. I don't think that it can be prevented, other than by growing the economy. I actually thought earlier today about writing something like the OP, before I saw this post.

I don't think that warning people will avoid it. However, I would advise people to act rationally rather than emotionally when speculating, and to expect further bubble(s) in the future.

Bubbles happen. It's human nature. You can't stop them.

People made way too much out of the last bubble, proclaiming the "end of bitcoin" when it popped. All nonsense. It was just a hype bubble, nothing new in the world here.

That's why if you believe in Bitcoin, as I do, but you're not into market timing or speculating, you can just use dollar cost averaging by buying BTC every month -- and stop worrying so much about the day-to-day price changes. Let the speculators sweat that stuff, you don't have to if you only care about the long-term success of BTC.

I've bought BTC at 6 cents, and I've bought it at $30. Overall I've been increasing my wealth since I discovered BTC because the long-term trend is up. And I don't worry about it.

nobody has the intention of building a wall bubble.

For that to mean anything you would first have to establish that $2/btc is where the price "should" be.  Maybe $2 was too low to hold for the amount of intra-bitcoin trade, in which case you wouldn't need 250% upsurge to justify the now higher price.

Until it is possible to easily buy and sell bitcoin, speculating is the cheapest way to buy them. International wire transfers cost around $50. Using a wire transfer to buy $5 worth of bitcoin would be stupid. I am planning a $500 or larger transfer, just to keep the transaction costs below 10%.

Since I have no immediate plans to spend those funds, I would mainly be buying and holding. I would likely try to convince businesses I deal with (especially remotely) to accept them, but they would likely incur the same fees while converting back to fiat.

OP has one thing correct: the fundamentals of the bitcoin economy are more important than the price. OP seems to feel that the fundamentals won't develop in the face of rapid speculation (which is probably true). However, the converse is also true: the fundamentals of the bitcoin economy can not improve without pushing up the price. Every exchange puts upward pressure on the price of bitcoin.

Perhaps I didn't explain that step properly.  Converting bitcoins to USDs allows you to lock in the exchange rate but there's no requirement that those funds be withdrawn at that instant in time.  Those USD funds can be left in the account with the exchange.  

At a later time conversion back to bitcoins can occur at whatever exchange rate exists at that time and as a result, bitcoins once again can be withdrawn.  There's no exchange rate risk using this tactic and the exchange fees are reasonably small -- for both selling and then buying back later the fee ranges from 0.6% to 1.2% combined, depending on monthly volume.  There might be risk to holding those USDs at the exchange though so this may not be the ideal approach.

Moving those funds to Liberty Reserve does add an additional expense but that provides a place where the funds can be parked and then easily moved back into a bitcoin exchange at a later time.

It is too bad there isn't yet a BTC/GAU exchange where the GAU is backed by physical gold (where delivery can be taken even).  http://Bitcoin-central.net (http://Bitcoin-central.net) offers a BTC/PGAU (Pecunix GAU) market but it appears to be unused -- currently there are no sellers shown.  That's probably what would serve you best for the problem you are describing.

As a long term miner myself, I haven't been selling bitcoins for the past 6 months. 2 $ is way to low to be cost efficient. So, a price around 10$ isn't a bubble to me AT ALL.

... do you know what a bubble is?

This is correct and by the way, it was really not  a bubble in logarithmic terms which is the more appropriate way to chart assets that show exponential rises in very short time.

And, bubbles or however people call strong rises, can not be avoided. Herding psychology is human and can never be avoided in free markets.

A bubble is a trade in high volumes at prices that are considerably in opposition to intrinsic values. That's why I wrote a "bubble to me". Though I know there is no direct correlation between market price and costs for miners, as long as miners are the main supplier of bitcoins they hold the power to not sell bitcoins under average production costs plus a profit. This will change when the minting rate will drop in half. I certainly am not willing to sell for dumping prices, and I am not pressured to sell for a long time. And I don't think I am the only miner who sees it that way. So, let the prices rise and we can talk again about any kind of bubble.

I concur with the statement that bubbles cannot be avoided. I think the opposite, it's rather important that this kind of pattern happens! This just means that there is a dynamic exchange between all sorts of interest groups around bitcoin. All those groups vary in size and if the trade volume is an indication, the groups grow in size, too. I also predict that this kind of pattern will happen more and more often in the future, if bitcoin rises in interest.

Shuai has a point. Also, you can't count exchange volume as trade volume, trading is indeed still fairly small.

But then again, it's pointless to try and stop speculation. We need these hiccups and rallies to build a financial foundation for larger-scale trade. 8M @ 2 USD is a little small to provide the kind of market a business trader from and to China is likely to need.

Bottom line: live with the fluctuations for a bit longer, and don't give up even if you lose the majority of funds at some point. Every day this goes on is one day less until we reach stability. And don't forget that swings can go both ways, volatility is both a risk to lose money and a chance to win some. Don't put in too much and you'll likely be fine.

I don't understand all this talk about buying bubbles with bitcoins.  You can just run over to Dollar tree or Dollar General and buy a three pack of bubble solution for a buck.  An economic bubble?   Oh, never mind!   Emily Litela.

I'd likely do another $10k-ish assuming similar conditions as the last time (lack of Bitcoin system weaknesses, scary global monetary issues and some disposable (and lose-able) income.)  Actually, I'd probably be buying into such a decline so I would not have the full funds left at the $2 point.

I expect that the only way to get down there again is if some truly massive holders decide to bail in something of a panic for some reason.  Back at the $15 level I thought it could only get into the $5 range if such players cashed out in a big way, and that they probably would do so mainly if they had advanced awareness of a weakness.  I was quite wrong it seems.  This wrong conjecture moderated my purchases, but fortunately (it currently appears) a lot of the moderation was on the way down and I plowed a good bit in in the lower ranges.

Interesting post.
Bubble happens.  Bubble is a way of evolution, i think.

Shuai,

For someone doing business with bitcoin you're kind of naive. I'm in China as well and have been using bitcoins for a large number of smallish business transactions and this has so far been a great success.

The second you're doing this you need to hedge at least part of your positions, if you don't do that then yes you'll end up with unhappy customers etc. THIS IS ESSENTIALLY THE SAME AS WHEN DOING BUSINESS IN ANY NON LOCAL CURRENCY. Once you hedge your costs you're beyond the point of people getting upset about losses etc provided that you've explained the volatile nature of the medium to them.

I'll forward this to wall street.

Share your feelings with the group.

On second thought, don't.