You should maybe read this also.

Or this .

Maybe you need to read von Mises "the theory of money and credit" ?


Do you know where "dollar" comes from ?  It's a mass unit of gold.

Edit: I'm wrong, it was an amount of silver: 24 grams.

Past price is no indication for future price in a perfect market.
Investment decisions are based upon an analysis of fundamentals as compared to the current market price, and the belief that you know better than the market (if not, the market has already calculated the best possible price including all future benefits).

I would say it is in distribution phase.  There's nothing "socialist" in it.  Socialism consists in forced taking value from those that produce it to distribute it those that don't produce it.  Here, no value is produced.  Seigniorage is a problem in the creation of a monetary asset, as it is "unjust" value attribution without any contribution.  Seigniorage can be seen as a kind of "socialism".   There is only one fair form of seigniorage, and that would be a distribution as random as possible over all people.
The point in this distribution scheme is exactly this.   The shaking in and out does exactly that: distributing seigniorage as much as it can.
No produced value is taken or is redistributed.

Yes, exactly like gold.

My comment was ironic, because gold was the universal money for about 5000 years, until it was taken over by fiat, which was initially a gold scam.

This is why gold never worked as a monetary system either  
Great insight !

Keynesians are wrong in many respects, but they are a great theory if you are a state: it gives you the excuse to get more and more your hands on everything, and to spend more than you can.  Who wouldn't be seduced by the prospect that spending like crazy is a good thing ?

Nope, it is monetary theory.  If a monetary asset serves the purpose, and only serves the purpose, of buying stuff with, then its value (in fact, the inverse: the price of the goods expressed in that monetary asset) can easily be found using P x Q = M x V.

It's simple bookkeeping:

"the amount of money over the counter"  = "the total price of all the goods and services bought with it"  (in a given period).

The amount of money over the counter = the amount of money existing, times the average number of times a same unit has been spend.   That is M x V.  M = the amount of money existing, V is the average number of times the same unit is spent (in the given period).  It is also called the VELOCITY of the money.  V = 1/T, where T is the average holding time (in number of periods).

If the considered period is 1 year, and a coin gets spend on average 12 times per year (once a month), then the velocity is 12.  The holding time is 1/12 (of a year which is a month).

If there are 1000 coins, and they are on average spend 12 times a year, then 12 000 coins went over the counter to buy stuff with that year.

That must then be equal to the total price of goods that was bought, which is P x Q, where Q is a "reference good" and P is the price of the reference good.  Say that the reference good is "a loaf of bread", then the total amount of goods (expressed in equivalent loafs of bread) exchanged in a year is Q, and P is then the price of a loaf of bread.

P x Q is nothing else but the total price of all the goods that was bought, so it must be 12 000 coins too.

Hence, M x V = P x Q

Example: if the total amount of goods bought with bitcoin is $20 billion a year, and a bitcoin is held on average 14 days, then V is about 25.  M being 15 million (coins) we have that M x V = 375 million (coins traded a year).

If we take as "reference good" something that's worth $1.0 we have:


375 million = P x $20 billion.

P is the price (in bitcoin) of the reference good (worth $1).  So 1/P is the price of a bitcoin.

We find: 1/P = 20 000 / 375 = $53.3


So if bitcoin is used to buy 20 billion worth per year, and coins are on average held 14 days between a trade, the price of a coin should be $53.

What we have is that a lot of coins were held a lot longer, but a lot less stuff was bought with it.
It was not really used as a currency.

That was my idea when buying a few coins from the start: to hold them 15 - 20 years at least.

People are finally understanding the fundamentals of a currency :-)

I'm sorry, but that IS a demand.  Actually, it is a very real and inelastic demand !
However, it is true that that demand can only be responsible for a MUCH LOWER price of a coin, as given by the monetary formula P x Q = M x V.

This is why I insisted since I've been here (that is summer 2014 when I entered bitcoin) that the real fundamental is merchant adoption, as a *currency*.  That merchant adoption is on the rise in 2014.  However, it is still so terribly low that it can only support a price in the single or maybe double digits.

I've been countered by many to say that merchant adoption is not a fundamental but "store of value" is.  That's ridiculous, as I pointed out: store of value comes with trust, after another fundamental (currency) has shown that there IS a demand for it.  Gold has 5000 year proof of trust.  Bitcoin has only a very volatile 6 years behind it, and if anything, it proves that it is NOT YET a store of value.

However, it could become a great currency.

The market is finally realizing this.

Me too.  I see it as having bought a lottery ticket for the long run, with a drawing 20 - 30 years from now.  I expect it to go to 0, but I hope to win and have a great retirement :-)  Like with any lottery ticket, but this one is fun !

Indeed.   That's about the time scale involved to judge whether bitcoin is a success or a failure.
This is why I put some coins aside for the very long time.  I see them as a lottery ticket I bought of which the drawing is 20 years from now or so.  High chance it will be worth nothing, small chance that it will be worth a lot.  That's in the nature of lottery tickets.

The short term price swings on the scale of a few years have not much to do with it.

Of course, I could start trading, and "sell high and buy low"  but I'm no good at that, and it takes too much time and attention.  Moreover, I believe that the bitcoin price is fundamentally unpredictable as it is determined mainly by belief (the real fundamentals of bitcoin are now in the single or double digits as a currency).  Belief is highly volatile.

If it goes to zero, too bad, that's what happens with lottery tickets.  You expect this.  But if it goes to the moon (in 20-30 years from now), I have a great retirement :-)

If the market is so terribly illiquid that even just trading the inflationary part is going to crash prices, then you have a serious problem !  That would mean that demand is essentially inexisting and that the price is actually determined by a very very shallow shell of coins, where essentially 99% is frozen and doesn't participate in the market.  That's an explosive, highly unstable situation !

That's like assuming, say, that 1 million tons of gold are held by people who never trade them, and that the price is determined by the small amount of people trading 3 tons or so.  Any gold mine can then "crash the price" if they do anything else than hold their own gold. 

That's then an asset with no fundamentals at all: the day that the price goes below any trigger level that makes an insignificant part of these holders panic-sell, the crash down is unavoidable.  An asset of which the price is only held up by the fact that nobody's selling 99% of it, is a gigantically over-priced asset !


I know, but that is the fundamental that determines its sustainable price.  That is why that price is, today, very low.  In fact you are kind of wrong, because the black market did appreciate bitcoin as a medium of exchange.   I have no idea if this is still the case with all those law enforcement crackdowns on silk road and so on.  But it was probably an initial fundamental that drove up the bitcoin price for real in early stages.
If, say, $100 million worth of goods were exchanged for bitcoin on the black market, there were 10 million coins, and coins were held on average 30 days, then that would have pushed the coins price to of the order of $1.-
I can easily be off a factor of 10 on these numbers, so that may even push the price to $10.-, if all coins participated.
That was enough to bootstrap bitcoin.


That's simple !  Greater fool hypothesis, which worked out, until end of 2013.   The history of bitcoin was fantastic up to that point: average 800% rise.  The moon was the limit.

This is what I'm saying: bitcoin's price has mainly been driven by greater fool hypothesis, and the fundamental of currency value has been lagging behind.  The large adoption of bitcoin in 2014 couldn't cover the huge gap that existed between its fundamental and the actual price, which was mainly driven by the "belief in to the moon soon".  I remember even in october, people waiting for a rally to a few thousand $.

The point is that the influx of money wasn't sufficient (there were not enough greater fools).


It is a lot to sustain a "greater fool" price.  It would have been no problem if we were at the fundamental price of a few $, and adoption (merchant adoption) rose at the same or higher velocity as the inflation.  If during the year, there was 10% more merchant adoption, then 10% inflation would have been exactly OK to keep the price constant.

Of course, the price wouldn't be the fundamental, because there is of course speculation of the future fundamental, which can really be high.  At full adoption (all fiat replaced by bitcoin), a coin should go for about $ 3 million (value of today).  Full merchant adoption, meaning we use bitcoin everywhere in the world as the normal currency.



Well, that depends on where bitcoin levels off in adoption.  If 0.1% of world fiat is replaced by bitcoin (when will that happen ?  15 years from now ?  30 years from now ?), the market cap should be of the order of 10 times higher than now if bitcoin velocity is the same as fiat velocity.  However, at 0.1%, most of the economy is still fiat, so fast conversion to fiat is then still probable.  If the bitcoin holding times are 10 times shorter (because quick reconversion to fiat) than fiat holding times (which are of the order of 6 months or so), then the current market cap will be sufficient to provide with that currency usage.
In other words, with a full liquidity of bitcoin in a 0.1% of all fiat market share, and 10 times higher velocity (because of fast conversion to fiat), the total market cap doesn't even need to increase.
People buying now will then have about the same bitcoin price as 15 or 30 years from now.
The difference being that now, most of the price is "greater fool" driven, and then, it is equal to the fundamental as demand for currency.  And of course, there will not be any "greater fool" incentive by then !

However, if bitcoin succeeds in replacing 2% of world fiat, and in concentrated economies so that the direct conversion to fiat is not so much the case anymore (retailers can pay their employees in bitcoin, and their suppliers in bitcoin...), then the market cap will be 20 times the current market cap.  The price will be around $ 5000 or so.  When will 2% of all world fiat be running on bitcoin ?  I don't think this can happen before 20-30 years in any case.

It can be that by that time, people start building confidence in bitcoin to store value in it for the long term (like in gold or so).  That may add a second fundamental to the price.  If 5% of the gold market is taken over by bitcoin, that would be about $35 billion or so, which is 8 times the current market cap.  So instead of 20 times the current market cap, we can make it 30 times the current market cap, bringing a coin's price to about $8000 or so.

If you're serious, 2% of all of world fiat, and 5% of all of the gold market is a huge success for bitcoin.   I don't think that it is possible before several decades, so 20 years from now is terribly optimistic.

In these cases, indeed, one can make a reasonable benefit by buying now.  The market price, not based upon "greater fool" but on those two far future estimated fundamentals, can already incorporate them with their estimated chance of success.

As the estimation of that success is widely unknown, rational speculation on that price can be very wide: from already a few $1000 now (to remain there for several years) to much lower than today.


I'm NOT saying that bitcoin is dead, at all.  I'm simply trying to analyse the price components today, and my conclusion is that the price today and in the last 2 years is mainly driven by the "greater fool" drive, and not by any current fundamental.  It could be driven by a speculation on a future fundamental in part, but then there's no reason why it goes down: everything seems to indicate a brighter future today than a year ago. 

Prices of several thousand $ are not sustainable with the current fundamentals however, so it is very strange that people were expecting that.  It is normal to run out of "greater fools" at these prices.

The problem is that miners have real expenses in $$ (or other fiat).  They have to cover that.  Well, they can work at loss for a while, but sooner or later they have to pay the bills.

Of course, mining can be a way of acquiring coins ; it is a different way of *buying* coins.  But when it starts to be cheaper to buy coins than to mine them, it would be totally ridiculous to spend your $$ on mining, while you can get more coins buying them.

In any case, whether you spend your $$ on mining, or you spend them on buying coins, that is fiat that is flowing into bitcoin.  So it doesn't matter.  You can abstractly consider that a miner "sells his coins to himself" if he's holding them.

Normally, the mining cost is close to the market price in any case.


You give the exact reason in your second paragraph why your first is wrong.
If it would be right now a fundamental of bitcoin for people to "store value in for the long term" (so, WITHOUT the idea of getting more out of it than the economic growth, which is what stabilized sound money brings you ; so WITHOUT the speculation on seigniorage), then those people would not "wait for a bull market".   A more or less flat price would be good enough for them.  It would be a STORE of value, and not a means to GAIN.
Point is:
1) last year bitcoin has been going down for the whole year: you must be a nutcracker to "store value" in something that is loosing value on the short term so much
2) bitcoin only exists for 6 years ; you must be a nutcracker to store value for a much longer time in something that even didn't exist for that time.
3) bitcoin is NOT YET "sound money" with an inflation rate of about 10%

So all these reasons indicate that it is totally absurd to consider - at this moment - bitcoin by any measure a "store of value" for the long term.  

I agree with you that "store of value in the long term" is ALSO a fundamental. It is most of the price of gold, and part of the price of real estate. But right now, for bitcoin, that doesn't make any sense.  There's no long term proof of faith (like gold and real estate).  In order to want to put value in a "store of value" you want to have long term faith in its ability to KEEP its value.  First of all, bitcoin is too young, and second, bitcoin has shown for more than a year that it can go down severely.

However, and that is what your second paragraph indicates: people buying into bitcoin do this for *speculative* purposes: to get much much more out than they want to put in.  To "go to the moon".  That is nothing else but the "greater fool" principle.

"greater fool" is NOT a fundamental.  It is a strong price component... until the bubble bursts.  Once the belief in "greater fool" is gone, it's gone.

Indeed.  What you are saying is that bitcoins actual fundamental as a currency must be around that.

However, the actual market price may include speculation on a future, higher fundamental.  Nothing stops one from thinking that bitcoin will, one day, be used as a currency so much, that its *has to* cost, say, $100,-, or $500,- or $10 000,-.
The top of the scale is about $ 3 million, when bitcoin would eventually replace all of the world's M2 fiat.

So depending on the probability you assign to that future price, and the time when you think it will occur, the current "true" market price may as well be higher (or lower !).

So if you give it a 1% probability that 15 years from now, the bitcoin price is about $ 100 000 (because it took over 3% of the fiat market), you would be willing to consider about a price today of $ 1000,-, diminished with the normal interest rate over 15 years.  So maybe something like $ 600,-.

But you're probably right that the current necessary price for bitcoin as a currency for its use to buy stuff with, must be a 2-digit number or so.  Mainly probably on the black market.

Actually, there was, as long as many of those buyers thought ("greater fool") that it was going "to the moon soon".
Now that it is clear that the moon is at about 400 000 km still, that flow is drying out.

You're willing to pour in a few $ 1 million a day if you think you'll get out 5 or 10 times more in 6 months from now (not realising that this means that people will have then to pour in a few $ 10 million a day, thinking that they will get out 5 or 10 times more 6 months from there, which means that they think tht people will have then to pour in a few $ 100 million a day .....).

The absence of rally in november and december made these people realize that the flow of greater fools was drying out.

The only fundamental price support is by necessary demand, for buying stuff (as a currency) for instance.  Until last year, bitcoin's price was essentially determined by speculative "greater fool soon" hopes.  These are gone now.

Everyone who thinks that the price of bitcoin can rise without fundamentals such as merchant adoption, is retarded.

If generalized adoption occurs, and that will take decades, the price of bitcoin can be very very high.  But many thought that it was a matter of months or at most a year or so, inspired by the successive manipulations which pushed the price very high without any support.  As long as that increase was a self-fulfilling prophecy, things pumped up, but the last Gox manipulation over $1000 was too high to be sustained with the 10% inflation.

The long decay over more than a year has finally killed all hopes for "the $10 000 rally next month".  But that hope was the pump that made money flow in.

I think the speculative phase (fast to the moon) is now over, and that bitcoin will go to its fundamentals, based upon merchant adoption.

Nothing stops that adoption from pushing the price really very high.  The maximum being about $3 million, if all trade in the world is done in bitcoin.  That's however a multi-decade track.

$0.00001

Because no matter what, at that price I buy :-)  I'm willing to put $200,- on the table to buy up all the stash ;-)
So the price will never go below that.

But the article is not bad.  They ALMOST discovered the monetary formula.  Not completely.  But almost 

I'm not talking about wealth accumulation, I'm talking about seigniorage.  Seigniorage is "unfair", as it is value obtained against nothing.  I'm not talking about "all equal wealth".  I'm talking about random (not even equal) seigniorage distribution, which is probably much more fair than a few initial minters sitting on all of the stash and obtaining most of the seigniorage.


I wasn't talking about any "fair distribution of wealth".  But just about "fair distribution of seigniorage".

Indeed, the best way would have been to give "everybody initially the same amount of coins", but that is of course not possible.  Shaking is the next best thing. That was my point.

It is very funny to see how self-assigned supporters of a totally free trade system like bitcoin (no regulations, no state, freedom to act) are calling desperately for collective rules and behavior denying the exact principles of freedom on which the system they pretend to support is built !


"I'm a freedom supporter, but please all do as I say :-) "