The Economy Underlying Bitcoin Adoption?

[MatTheCat]

I have been itching to join in the 'I am a Central Bank' thread started by mindtomatter, but dont have access to post in that particular forum. In this thread, I have witnessed an astute and balanced argument, being met with some passionate hostility due to it undermiming some 'simple world' anti-establishment paradigms of other forum members as it indeed, undermined some of the other members get-rich-quick wishes.

I have been buying and spending (not selling and not stacking/hoarding) Bitcoins for about the past couple of years. Every single Bitcoin that I have spend, I have spent on Silk Road. The same rule applies for every other person that I know who also buys and spends Bitcoins.

Correct me if I am wrong, but Silk Road appears to me, to be thee major marketplace for real world Bitcoin transactions, in that the Bitcoins are used as a means of payment for goods and services, other than as an 'investment'. Without underlying market places such as Silk Road, Bitcoins would essentially be worthless. But the fact that in order to participate in this particular market place where anonymity is sacrosanct, Bitcoins must be procured, and traded. Due to a reasonable volume of real economic demand for Bitcoins, this ensures that Bitcoins can and have worked as a viable form of currency, and as the volume of economic activity increases, so to will the demand for Bitcoins increase, and thus the price will inevitably rise. However, although Silk Road has continued to steadily grow, I dont believe for one minute, that the recent metabolic rise in the value of Bitcoin, is mirrored in any shape or form, by the steady rise in the volume of trade on Silk Road.

What I am saying is that the value of Bitcoins has accelerated way out of proportion to the volume of economic exchange which forms the basis of the underlying value of Bitcoin. Thus, the market value of Bitcoin is not being driven up market forces Adam Smith stlye, but is being driven up by big market players. Probably just a relatively small handful of market players, and possibly by just one major market player.

I appreciate that many people on here will have become rich beyond what they could otherwise ever have hoped to be, due to being early adopters of Bitcoin (afraid I myself never bothered to save any of the bitcoins that I bought for like £3, so I remain a Bitcoin pauper), and those people are therefore in a state of euphoria regarding Bitcoin. However, my contention is that such a meteoric rise as is occurring at the moment, spells a death knell for Bitcoin. Without the underlying economy that stipulates upon the use of Bitcoin (of which Silk Road is thee predominant player), Bitcoins are nothing more than a Dutch tulip bubble.

Say I knew someone who was preparing to set himself up as a Silk Road vendor, but due to the sudden metabolic rise in Bitcoin, he suddenly got cold feet, knowing that a sudden collapse in the value of Bitcoin, could totally wipe him out and leave him owing piles of filthy fiat to some rather heavy types of people. If this were to be the case (which it is), then it would be reasonable to assume that many other individuals or groups considering entering into the Bitcoin economy would have the same apprehensions. It would also be reasonable to assume that traders already heavily involved in the (real) Bitcoin economy, whilst very grateful for the rapid increase in the value of the backlog of Bitcoins which they have not yet converted into the fiat currency essential for their day to day living costs, are also acutely aware of the great potential to take heavy losses should a crash occur. Thus the 'rise' of Bitcoin is counterproductive to the growth of the real Bitcoin economy.

In summation, this rapid increase in the market value of Bitcoins, is actually bad for the long term health of Bitcoin regarding it developing into a widely adopted means of payment. A currency must have stability of value as one of its primary properties. Bitcoin on the otherhand, is probably the most volatile commodity the world has seen in decades, and therefore far too hot a potatoe to touch for those seeking to engage in real world economic activity as opposed to using it as a speculative vehicle. The only way that I could be wrong here, were if the rapid rise in the value of Bitcoin simply has come about as a result of millions of people clamouring to get thier hands on some coin in order to make Silk Road transactions, but somehow, I just dont think that is the case. Also for small time money launderers who dont have connections into the political establishment, Bitcoin has become too hot to handle.

In order to accurately predict exactly how high Bitcoin will go before it crashes, and it will crash, one would probably have to be a fly on the wall inside the mind(s) of whichever few big players are manipulating this metabolic rise into existence. Whilst I would love to think that the rise is being caused by 'Normal Joes' just like you and me, seeing the light and turning our backs on the evil empire of the war mongering bankers, I just cant allow myself to be that naive. Bitcoin is already up 700% or something in just the past 5-6 months, it could go up another 700% in the next 6 months. But all this upside volatility is doing a lot of harm to the purpose for which Bitcoin was intended; that being as an alternative means of payment free from the Zionist controlled parasitic central bank system, as opposed to method for making some internet gooks who adopted early, rather wealthy. The downside volatilty, when it comes, will serve as a devastating blow to real Bitcoin economies.

[jbravo55414]

This is why the options and derivatives market was created -- to hedge off your underlying long exposure by buying a protective put and rolling from month to month or spreading it off with other options strategies -- it acts very much like an insurance policy and it drastically reduces the effect of volalitiy risk of the overall portfolio -- in this case long bit coin exposure -- I also believe the powers to move away from all centralised forms of currency will be a prevailing trend as governments become evermore pervasive in their citizens lives

[itsunderstood]

Good post.

Question:  How many tulips must I grow to obtain an ounce of [INSERT DRUG HERE]?

Haha, but seriously, I think the underlying essential truth of your post is that bitcoin is based on black markets.  That means not just SR products like heroin and meth and stolen goods, but also, human beings themselves, or naked pictures of humans.  I mean, everything that is illegal, is what has made bitcoin so huge.

Also, the nature of bitcoin is that the blockchain does show what coins have gone into and out of the SR tumbler.  So it is verifiable, that X number of bitcoins have propped up that illegal marketplace.

So how long until NATO forces raid SR and will that cause bitcoin volatility?  These are good questions.  However, NATO re-established the poppies that SR sells, whereas the Taliban had eradicated Afghan poppy production, so I guess the unspoken truth is that NATO is favorably disposed to black markets.  At least the ones they control.  The "T" is for Trade, of course.  Haha.

[MatTheCat]

This is why the options and derivatives market was created -- to hedge off your underlying long exposure by buying a protective put and rolling from month to month or spreading it off with other options strategies -- it acts very much like an insurance policy and it drastically reduces the effect of volalitiy risk of the overall portfolio -- in this case long bit coin exposure -- I also believe the powers to move away from all centralised forms of currency will be a prevailing trend as governments become evermore pervasive in their citizens lives

That may be all very well for long established high yielding trades, but somehow, I can't see the average Silk Road trader opting to hedge his long Bitcoin position with some Wall St derivative. Not least of all because it would bring unwelcome attention to his business activities.

[bezzeb]

In order to accurately predict exactly how high Bitcoin will go before it crashes, and it will crash, one would probably have to be a fly on the wall inside the mind(s) of whichever few big players are manipulating this metabolic rise into existence. Whilst I would love to think that the rise is being caused by 'Normal Joes' just like you and me, seeing the light and turning our backs on the evil empire of the war mongering bankers, I just cant allow myself to be that naive. Bitcoin is already up 700% or something in just the past 5-6 months, it could go up another 700% in the next 6 months. But all this upside volatility is doing a lot of harm to the purpose for which Bitcoin was intended; that being as an alternative means of payment free from the Zionist controlled parasitic central bank system, as opposed to method for making some internet gooks who adopted early, rather wealthy. The downside volatilty, when it comes, will serve as a devastating blow to real Bitcoin economies.

I agree with you that the meteoric (not metabolic) rise is unhealthy, but mainly because I'm one of those fools who was following bitcoin since it's first mention on slashdot (one of the gooks you speak of) who did NOT buy any.  No seriously, it's unhealthy regardless of how many i didn't buy.

The thing is that Bitcoin is starting to move beyond drug sales and into international exchange and wealth storage.  You've probably heard all the pundits out there talk about the market caps and relative volumes, but seriously - if Bitcoin does prove it's trustworthiness (not value - that will bounce around for years yet) then said trust will start to capture some percentage of what Western Union, Pay Pal, and all the rest churn through in a year.  The finite supply of of Bitcoins (and predicable inflation mechanism) means that to accomodate higer volumes, unit value must grow. 

Don't forget also, there is (sad for me) a chance that it will never crash and it will just keep on consuming more and more global financial transactions.  The banking instability in the news fuels this as people desperately seek safe havens.  As long as transaction volume grows, it seems to me that unit value must follow.

So early adopters - good on them.  Just like if your grand dad bought 100 gold eagles back when they were 20$ each and kept them in the basement until now.  Can't fault them really IMHO.  I just kick myself that I am not one of them.  But there's hope yet. 

[MatTheCat]

In order to accurately predict exactly how high Bitcoin will go before it crashes, and it will crash, one would probably have to be a fly on the wall inside the mind(s) of whichever few big players are manipulating this metabolic rise into existence. Whilst I would love to think that the rise is being caused by 'Normal Joes' just like you and me, seeing the light and turning our backs on the evil empire of the war mongering bankers, I just cant allow myself to be that naive. Bitcoin is already up 700% or something in just the past 5-6 months, it could go up another 700% in the next 6 months. But all this upside volatility is doing a lot of harm to the purpose for which Bitcoin was intended; that being as an alternative means of payment free from the Zionist controlled parasitic central bank system, as opposed to method for making some internet gooks who adopted early, rather wealthy. The downside volatilty, when it comes, will serve as a devastating blow to real Bitcoin economies.

I agree with you that the meteoric (not metabolic) rise is unhealthy, but mainly because I'm one of those fools who was following bitcoin since it's first mention on slashdot (one of the gooks you speak of) who did NOT buy any.  No seriously, it's unhealthy regardless of how many i didn't buy.

The thing is that Bitcoin is starting to move beyond drug sales and into international exchange and wealth storage.  You've probably heard all the pundits out there talk about the market caps and relative volumes, but seriously - if Bitcoin does prove it's trustworthiness (not value - that will bounce around for years yet) then said trust will start to capture some percentage of what Western Union, Pay Pal, and all the rest churn through in a year.  The finite supply of of Bitcoins (and predicable inflation mechanism) means that to accomodate higer volumes, unit value must grow. 

Don't forget also, there is (sad for me) a chance that it will never crash and it will just keep on consuming more and more global financial transactions.  The banking instability in the news fuels this as people desperately seek safe havens.  As long as transaction volume grows, it seems to me that unit value must follow.

So early adopters - good on them.  Just like if your grand dad bought 100 gold eagles back when they were 20$ each and kept them in the basement until now.  Can't fault them really IMHO.  I just kick myself that I am not one of them.  But there's hope yet. 

I know how you feel. I am a relatively Johnny come lately precious metals investor. In the past two years, my investment in PM metals has floated overall, at a constant value in terms of GBP (gold up a little, silver down a little). Had I instead invested everything I had at into Bitcoins at the time I was buying em for £3 in order to use on SR, I today would be a self made millionaire.  The fact that i didn't invest a single bean into Bitcoins (despite always intending to do so at some point), cause me a lot of annoyance.

I have always seen the huge potential in Bitcoin for all the reasons that you describe and plenty more. Perhaps it is because of the potential of Bitcoin, that we are now seeing this exponential rise in the market. Not as a result of this mass adoption actually occurring, but as a result of some entity working for the interests of banking establishment whose business/control model Bitcoin may pose a threat to, having entered the market to cause volatility which will prove intolerable to anyone using Bitcoin for any other purpose other than as speculation tool.

mindtomatter in this thread:

https://bitcointalk.org/index.php?topic=160512.0

discusses the matter brilliantly. I however cant participate in that particular forum due to my n00b status.

Perhaps both I and mindtomatter are missing the mark completely in our guesstimations, but one thing I would put my house on right now, is that Bitcoin isnt rising metabolically due to mass adoption, but due to some form of market cornering. What I wouldnt put my house on right now, is Bitcoin itself, even though I am well aware that there may well still be massive increases to come.

[bezzeb]

Perhaps both I and mindtomatter are missing the mark completely in our guesstimations, but one thing I would put my house on right now, is that Bitcoin isnt rising metabolically due to mass adoption, but due to some form of market cornering. What I wouldnt put my house on right now, is Bitcoin itself, even though I am well aware that there may well still be massive increases to come.

That's the main risk of any small market - it can be cornered by a few heavy weights and is susceptible to "trend" bubbles (eg. beaniebabies).

But look at the Hunt brothers who cornered the silver market (or tried)  They pushed a massive swing in value and made many sideline folks rich or poor depending on when they bought or sold, but in the end the commodity survived and is today widely traded around the globe.

So if BTC survives this growth spurt along with whatever brute manipulation which may be in progress, it should afterwards be clear sailing I'd think...  As long as the core math which fuels the chain of trust survives in tact.  I don't frankly see how it can fail in the long run.  In the short run though I'd expect stormy seas.

[MatTheCat]

That's the main risk of any small market - it can be cornered by a few heavy weights and is susceptible to "trend" bubbles (eg. beaniebabies).

But look at the Hunt brothers who cornered the silver market (or tried)  They pushed a massive swing in value and made many sideline folks rich or poor depending on when they bought or sold, but in the end the commodity survived and is today widely traded around the globe.

So if BTC survives this growth spurt along with whatever brute manipulation which may be in progress, it should afterwards be clear sailing I'd think...  As long as the core math which fuels the chain of trust survives in tact.  I don't frankly see how it can fail in the long run.  In the short run though I'd expect stormy seas.

The difference between what the Hunt brothers attempted and what is happening with Bitcoin now, is that the Silver cornering scam did not or would not have, cannibalised the economic market which underpinned it. Silver is an industrial metal of the utmost importance. None of us would be sitting here now on our laptops, tablets, smart phones, PCs, etc, if not for silver. The only replacement for industrial silver, is gold!

A Bitcoin market cornering scam on the otherhand, would very much cannibalise any economic activity underpinning it. Just imagine you had purchased a kilo of cocaine on the darknet using bitcoin. And in the week you had to wait until it arrived, the value of Bitcoin had doubled? You would feel seriously out of pocket although the seller would be delighted. Of course, this isn't such a bad scenario as you get what you paid for with as much of your personal resources as you intended to pay for it with and the seller gets the jackpot. But just think about when it goes the other way, and in the week that it takes for your package to arrive, Bitcoin goes down 50%. You are brushing sweat of your brow, thankful for the lucky escape, but the seller has just made a crippling loss. Worse still, he has ten customers just like you. Even worse than that, he is acquiring his gear from a bunch of gangster types who want paid in Euros, not Bitcoins! Clearly, this poor chap (and lots more like him), is in a spot of bother.

If/when the market volatility kills off a sufficient quantity of the market which underpins the whole value and point of Bitcoin, then everyone is going to be left holding a big bunch of thin air, that doesn't have no government, law enforcement, or military to back it up and enforce its use.

[itsunderstood]

Just imagine you had purchased a kilo of cocaine

[...]

If/when the market volatility kills off a sufficient quantity of the market

Good thing the market for coke is going nowhere.

Personally I wouldn't even use coke if it were free, but thanks to all those rich hollywood types and politicians, I think bitcoin would survive your scenario.  It is up to the gangsters to manage their overhead, just like farmers must preserve seedcorn.  ...Well, before the Monsanto terminator seed program I mean. 

[jbravo55414]

This is why the options and derivatives market was created -- to hedge off your underlying long exposure by buying a protective put and rolling from month to month or spreading it off with other options strategies -- it acts very much like an insurance policy and it drastically reduces the effect of volalitiy risk of the overall portfolio -- in this case long bit coin exposure -- I also believe the powers to move away from all centralised forms of currency will be a prevailing trend as governments become evermore pervasive in their citizens lives

That may be all very well for long established high yielding trades, but somehow, I can't see the average Silk Road trader opting to hedge his long Bitcoin position with some Wall St derivative. Not least of all because it would bring unwelcome attention to his business activities.

There exists a derivatives market for BTC -- it is not on Wall Street or subject to revealing your information

[bezzeb]

The difference between what the Hunt brothers attempted and what is happening with Bitcoin now, is that the Silver cornering scam did not or would not have, cannibalised the economic market which underpinned it. Silver is an industrial metal of the utmost importance. None of us would be sitting here now on our laptops, tablets, smart phones, PCs, etc, if not for silver. The only replacement for industrial silver, is gold!

A Bitcoin market cornering scam on the otherhand, would very much cannibalise any economic activity underpinning it. Just imagine you had purchased a kilo of cocaine on the darknet using bitcoin. And in the week you had to wait until it arrived, the value of Bitcoin had doubled? You would feel seriously out of pocket although the seller would be delighted. Of course, this isn't such a bad scenario as you get what you paid for with as much of your personal resources as you intended to pay for it with and the seller gets the jackpot. But just think about when it goes the other way, and in the week that it takes for your package to arrive, Bitcoin goes down 50%. You are brushing sweat of your brow, thankful for the lucky escape, but the seller has just made a crippling loss. Worse still, he has ten customers just like you. Even worse than that, he is acquiring his gear from a bunch of gangster types who want paid in Euros, not Bitcoins! Clearly, this poor chap (and lots more like him), is in a spot of bother.

If/when the market volatility kills off a sufficient quantity of the market which underpins the whole value and point of Bitcoin, then everyone is going to be left holding a big bunch of thin air, that doesn't have no government, law enforcement, or military to back it up and enforce its use.

You're right, the analogy with the Hunt brothers isn't even close to perfect, but the one similarity that drove me to the analogy with Silver is the finite nature of BTC's and difficulty to counterfeit.  (Though coin and bullion scraping / filling does exist and an untrained eye shouldn't be trading MS coins....)  That's one way BTC wins - can't fake them.  But I digress.

I fully agree that as long as such stupendous price swings continue - Bitcoin has no chance for normal commerce.  Todays bitcoin purchases smell of speculative gambling or drug dealing and I look forward to the day when this all calms the hell down and we can start to use it the way it was intended.  Tanstaafl.

[puax]

Extremely interesting post. I think you hit the nail on the head except that I doubt valuation is driven by a few key players. What would be their advantage, to sell at an inflated price? The market won't be liquid enough for them to dump their holdings and make a profit.

I think it's just a case of many people buying in due to recent publicity.