Bitcoin's first major deflation event, and its consequences

[molecular]

When I first made this post, I had not even yet dreamed of $150 price swings in the bitcoin economy. My only hope is that the discussion helped others dream of just that this past week, and protect their money with stop orders and smart speculation. This is what happens when deflation gets out of hand. I hope that this correction helps return us to the new normal and we see healthy sustainable growth from here on out.

Stop orders and forced liquidations are a large part of what drove price down to $2.xx in 2011. But that's just part of it, I guess.

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[arepo]

... during the first bubble, the prices were not sustainable because the irrational bulls converted all of their fiat to btc and there reached a point where the influx suddenly stopped. this caused a panic and a huge correction, which left many, many bag-holders in its wake.

this time around, the influx of new buyers isn't slowing. people with little to no exposure of bitcoin are rushing to buy simply because the price has been going up, up, up. it's the same psychology, except the scale is much larger and the price is much higher for many more coins. smart money pulls its asks because it sees that the fundamentals are different this time around, and there won't be a huge crash. selloffs are immediately absorbed by new buyers who don't understand the risk of purchasing an asset whose price has made 500% gains in the last year.

[this] ... will inevitably lead to massive profit-taking, predatory speculation, and price volatility.

is it too soon for i told you so?

[Adrian-x]

is it too soon for i told you so?

Based on your argument, an "I told you so" would be fitting when we hit the utility value based on Bitcoins equivalent M1 to GDP - I estimate it would be somewhere between $2 and $20.

"I told you so" before that point might appear as if you are giving credit to the current price being the bottom based on your argument. 

I'm still bullish as it looks to me anything above $17 would suggest evidence that Bitcoin is being used as a store of wealth, and if that is the case it is all about confidence in the world in Fiat and the benefits Bitcoin has in being a finite P2P cryptocurrency and its first movers advantage.

The bottomed line is the Bitcoin economy won't grow at a viable pace if people are saving (Unfortunately this is a design oversight), and people will save while there is deflation, I'm no Keynesian but as discussed a lot in previous posts Bitcoin as a medium of exchange will suffer from the paradox of thrift. Bitcoin has properties that make it the new Digital gold, or a store of wealth, and it is here I think Bitcoin has great growth potential.   

[Larynth]

As usual I think the intellectuals in the community are over analyzing what is clearly a (Sling Blade reference) "It ain't got no gas in it"

It's only being used as a store of value because -> Merchants at large don't take it.
Merchants don't take it because -> the currency risk associated with a volatile commodity with no instant means of transfer into the fiat of your choice.
There's no means to transfer it into the fiat of your choice instantly because -> IT GOES AGAINST THE PLAN MAN!!!

In the end for bitcoin to move through this growing pain and reach adolescence someone (possibly coinseter.com) will have to give merchants the security of knowing they can instantly exchange the bitcoins received into fiat in their bank to pay overhead. At least until it reaches adulthood and they can pay their expenses in bitcoin.

[arepo]

is it too soon for i told you so?

Based on your argument, an "I told you so" would be fitting when we hit the utility value based on Bitcoins equivalent M1 to GDP - I estimate it would be somewhere between $2 and $20.

"I told you so" before that point might appear as if you are giving credit to the current price being the bottom based on your argument. 

i don't think we've bottomed out yet. but we're definitely within the range of sustainable price again. we shed 80% of the value of one coin in 3 days. that's completely unprecedented. it was all just some stuff.

before this the largest collapse in value was after the June bubble, which collapsed by 90% over the course of months. the 'i told you so' is because this was very, very irresponsible and we brought it on ourselves. also because i got shouted down these past 3 months, when i was talking something like sense the whole time.

[Larynth]

I don't think a panic driven by infrastructure issues should be called a bubble though. Bubbles pop because the groundswell behind some fad can't be sustained due to internal factors in the supply and demand curves.

This was a panic plain and simple. The second in several weeks that we have MtGox to thank for yet they still haven't fixed their massive trade lag. At the very least if they can't fix the lag they should code in stop-loss orders to ensure users won't have losses due to their server insufficiencies.

[computerlamp]

As usual I think the intellectuals in the community are over analyzing what is clearly a (Sling Blade reference) "It ain't got no gas in it"

It's only being used as a store of value because -> Merchants at large don't take it.
Merchants don't take it because -> the currency risk associated with a volatile commodity with no instant means of transfer into the fiat of your choice.
There's no means to transfer it into the fiat of your choice instantly because -> IT GOES AGAINST THE PLAN MAN!!!

In the end for bitcoin to move through this growing pain and reach adolescence someone (possibly coinseter.com) will have to give merchants the security of knowing they can instantly exchange the bitcoins received into fiat in their bank to pay overhead. At least until it reaches adulthood and they can pay their expenses in bitcoin.

Oh so the ability to change bitcoins to dollars instantly ... If only we had some sort of "bit pay" system ... Oh wait ... So what was the problem again?

[lebing]

As usual I think the intellectuals in the community are over analyzing what is clearly a (Sling Blade reference) "It ain't got no gas in it"

It's only being used as a store of value because -> Merchants at large don't take it.
Merchants don't take it because -> the currency risk associated with a volatile commodity with no instant means of transfer into the fiat of your choice.
There's no means to transfer it into the fiat of your choice instantly because -> IT GOES AGAINST THE PLAN MAN!!!

In the end for bitcoin to move through this growing pain and reach adolescence someone (possibly coinseter.com) will have to give merchants the security of knowing they can instantly exchange the bitcoins received into fiat in their bank to pay overhead. At least until it reaches adulthood and they can pay their expenses in bitcoin.

bitpay.com

and many other competitors in america and europe already.

I dont have any idea why I keep hearing this "volatility is bad for merchants" argument over and over again.

[alexh]

All the bashing on the hoarders...

[molecular]

I don't think a panic driven by infrastructure issues should be called a bubble though. Bubbles pop because the groundswell behind some fad can't be sustained due to internal factors in the supply and demand curves.

This was a panic plain and simple. The second in several weeks that we have MtGox to thank for yet they still haven't fixed their massive trade lag. At the very least if they can't fix the lag they should code in stop-loss orders to ensure users won't have losses due to their server insufficiencies.

that would've made the crash even harder. Wether that'd have been desireable I'm not sure.

[molecular]

As usual I think the intellectuals in the community are over analyzing what is clearly a (Sling Blade reference) "It ain't got no gas in it"

It's only being used as a store of value because -> Merchants at large don't take it.
Merchants don't take it because -> the currency risk associated with a volatile commodity with no instant means of transfer into the fiat of your choice.
There's no means to transfer it into the fiat of your choice instantly because -> IT GOES AGAINST THE PLAN MAN!!!

In the end for bitcoin to move through this growing pain and reach adolescence someone (possibly coinseter.com) will have to give merchants the security of knowing they can instantly exchange the bitcoins received into fiat in their bank to pay overhead. At least until it reaches adulthood and they can pay their expenses in bitcoin.

bitpay.com

and many other competitors in america and europe already.

I dont have any idea why I keep hearing this "volatility is bad for merchants" argument over and over again.

Not to derail the thread, but who is/are the Europeans doing this?

[sublime5447]

arepo, I have taken your concerns seriously and I thought about them and what others had to say here in this thread. I came - for myself - to the conclusion that your concerns do not have much substance.

I'm not blindly saying "all is good, enjoy the ride": there will be volatility, also to the downside.

I don't buy the "predatory speculation" explanation for the rally. Other simple fundamental reasons (like tons of people discovering bitcoin and businesses entering the game) seem more likely to me.

Neither do I think a "deflationary spiral" would happen or is a bad thing in general. I don't think it's currently applicable to bitcoin.

;tldr: people listened to you but noone got really scared.

What a bunch of bull you cant believe this right?

[lebing]

As usual I think the intellectuals in the community are over analyzing what is clearly a (Sling Blade reference) "It ain't got no gas in it"

It's only being used as a store of value because -> Merchants at large don't take it.
Merchants don't take it because -> the currency risk associated with a volatile commodity with no instant means of transfer into the fiat of your choice.
There's no means to transfer it into the fiat of your choice instantly because -> IT GOES AGAINST THE PLAN MAN!!!

In the end for bitcoin to move through this growing pain and reach adolescence someone (possibly coinseter.com) will have to give merchants the security of knowing they can instantly exchange the bitcoins received into fiat in their bank to pay overhead. At least until it reaches adulthood and they can pay their expenses in bitcoin.

bitpay.com

and many other competitors in america and europe already.

I dont have any idea why I keep hearing this "volatility is bad for merchants" argument over and over again.

Not to derail the thread, but who is/are the Europeans doing this?

http://paymium.com/ among others (links I cant remember at the moment)

[Larynth]

The problem with processors like bitpay is two-fold. First and foremost it's a third party risk as to the exchange rate fluctuations. By that I mean that this is a volatile market if I take a bicoin payment and the price drops 30% in a day I would potentially lose all my profits on items sold that day as the third party processor exchanged my payments for later deposit into my fiat account. Worse yet there is the chance that a processor could use their capital to "float" the payment to me at a lower exchange rate holding on to my bitcoins untill the market corrected and making a profit at my expense. Next there is the fact that avoiding processor fees is the whole reason to switch to bitcoin in the first place. If Visa and MC charge 2.5 to 4.5 percent depending on the card and the transaction and bitpay charges .99 as it's lowest rate what has the merchant really gained by switching? At that point his only gain is avoiding chargebacks from contested charges and fraud.

When I say the market needs the ability to transfer payments instantly I mean that I need to be able to (if I choose) transfer the overhead portion of my bitcoin income into fiat in my bank account at the exact rate I accepted it at. In other words John Q buys a desktop computer from me for 12 bitcoins and the exchange rate is $100 per at the moment of the sale I need to be able to rout his payment to my exchange account sell the 7 or 8 bitcoins to cover my expenses and have that money in an account that I can make payment to my supplier within the hour. I would want to have complete control of the remaining bitcoins that were my profit so that I could choose to liquidate them or save them for a better exchange rate. This type of control without a third party is the only way small businesses will see the upside.


As to the assumption that stop-loss orders firing automaticly would have made the crash worse than it was I think you're forgetting the fear factor. People don't panic if they know they will be able to sell their bitcoins at the rate they want to (or at least close to it, I'm sure there would have been some slippage) The reason for the crash was panic due to falling prices and more than a minute of lag all day. You have to remember the herd mentality of an exchange. One person getting scared and clamoring to sell will only spook the other investors if they are:  1) already afraid 2) convinced this person knows more than they do 3) fearful they won't be able to place their trade at their risk tolerance level once the frenzy starts. If you have a stop-loss set up you don't have to panic, if no one has to panic, the market doesn't have a panic-driven rush to sell.

[rta]

If Visa and MC charge 2.5 to 4.5 percent depending on the card and the transaction and bitpay charges .99 as it's lowest rate what has the merchant really gained by switching?

Are you saying merchant have nothing to gain from cutting one of their expenses (one of the biggest in some trades) by 60-77%? That sounds like pretty big savings to me.

[MindGrenade]

Cool, so we get to keep the increasing value of the currency as opposed to having the central banks siphon the value out of the dollars in my bank account? You feel more comfortable with the idea of your money losing value so you have to spend it right away?

The only reasons I'm not using my bitcoins thus far

A) I'm not being paid in bitcoins

B) Few are accepting them directly.

I'm not converting to fiat and back just to dip into my holdings. As soon as I can just do away with handling fiat and pay my rent in btc I shall do so.

When it takes off with gusto in 2014-2015, then I'll be using them as currency instead of just holding them

[sublime5447]

Cool, so we get to keep the increasing value of the currency as opposed to having the central banks siphon the value out of the dollars in my bank account? You feel more comfortable with the idea of your money losing value so you have to spend it right away?

The only reasons I'm not using my bitcoins thus far

A) I'm not being paid in bitcoins

B) Few are accepting them directly.

I'm not converting to fiat and back just to dip into my holdings. As soon as I can just do away with handling fiat and pay my rent in btc I shall do so.

When it takes off with gusto in 2014-2015, then I'll be using them as currency instead of just holding them

And they are not going to start accepting them.. they cant. It is not currency it is an asset but what kind of asset is it? 

[MoonShadow]

Cool, so we get to keep the increasing value of the currency as opposed to having the central banks siphon the value out of the dollars in my bank account? You feel more comfortable with the idea of your money losing value so you have to spend it right away?

The only reasons I'm not using my bitcoins thus far

A) I'm not being paid in bitcoins

B) Few are accepting them directly.

I'm not converting to fiat and back just to dip into my holdings. As soon as I can just do away with handling fiat and pay my rent in btc I shall do so.

When it takes off with gusto in 2014-2015, then I'll be using them as currency instead of just holding them

And they are not going to start accepting them.. they cant. It is not currency it is an asset but what kind of asset is it? 

An asset is something that generates value to the owner by some other method than speculation.  Bitcoin does not do that, it represents value that can be transfered, but cannot produce new value.  Bitcoin cannot ever be an "asset".

[deed02392]

Cool, so we get to keep the increasing value of the currency as opposed to having the central banks siphon the value out of the dollars in my bank account? You feel more comfortable with the idea of your money losing value so you have to spend it right away?

The only reasons I'm not using my bitcoins thus far

A) I'm not being paid in bitcoins

B) Few are accepting them directly.

I'm not converting to fiat and back just to dip into my holdings. As soon as I can just do away with handling fiat and pay my rent in btc I shall do so.

When it takes off with gusto in 2014-2015, then I'll be using them as currency instead of just holding them

And they are not going to start accepting them.. they cant. It is not currency it is an asset but what kind of asset is it? 

An asset is something that generates value to the owner by some other method than speculation.  Bitcoin does not do that, it represents value that can be transfered, but cannot produce new value.  Bitcoin cannot ever be an "asset".

What about as a means of transferring money for less than a bank would charge?

[MoonShadow]

Cool, so we get to keep the increasing value of the currency as opposed to having the central banks siphon the value out of the dollars in my bank account? You feel more comfortable with the idea of your money losing value so you have to spend it right away?

The only reasons I'm not using my bitcoins thus far

A) I'm not being paid in bitcoins

B) Few are accepting them directly.

I'm not converting to fiat and back just to dip into my holdings. As soon as I can just do away with handling fiat and pay my rent in btc I shall do so.

When it takes off with gusto in 2014-2015, then I'll be using them as currency instead of just holding them

And they are not going to start accepting them.. they cant. It is not currency it is an asset but what kind of asset is it? 

An asset is something that generates value to the owner by some other method than speculation.  Bitcoin does not do that, it represents value that can be transfered, but cannot produce new value.  Bitcoin cannot ever be an "asset".

What about as a means of transferring money for less than a bank would charge?

That's savings, not new value, more commonly known as "income".  Of course, unless you're renting it out, real estate doesn't qualify as an 'asset' either; so this is another one of those economic terms that have a bit different common usage.  If you have a mortagage, your home is a 'liability' not an asset.