An insider's opinion on the crazy Bitcoin market

[evoorhees]

This morning, a family member of mine asked me to write up my opinion of the Bitcoin price movement recently. For those who don't know me, I've been heavily involved in Bitcoin since May 2011. It is my full time life, my career, and my passion. The price in 2013 has been wild, and here's what I wrote to my family member.

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Unfortunately, while I'm certainly an insider, not even I know if the price will rise or fall tomorrow, or next week, or next month, or next year. Guessing short term price movements is a fool's game.

My sentiment is the same today as it was a year or two years ago: either Bitcoin is worth zero, or is worth thousands of dollars each. It will take years for the market to figure out which it is. If you believe in the Bitcoin story, that it may revolutionize the world of finance, then it's a good idea to hold on to some Bitcoins. If you think it's just too risky, or are unconvinced of the narrative, then it's best to sell. As stated many times, Bitcoins are incredibly risky and volatile. The whole thing is one grand experiment. Don't ever hold more money in Bitcoin than you can afford to lose, and in general you should assume the whole thing will go to zero.

Now, if you're curious why this price may be going crazy right now, it's a few factors:

1) A handful of "respectable" online merchants are now accepting Bitcoin, this proves that real businesses see the value in it. It's likely that others will follow.

2) Cyprus scared the hell out of everyone (and rightly so). While a few Cypriots may have bought some Bitcoin, the bigger influence is a world of onlookers who are all thinking, "well that could happen to US!" and "look how Bitcoin solves the problem of trusting banks." It's not so much that Cypriots are buying bitcoins now, but rather that the world realizes that as this euro (and soon dollar...) crisis continues unfolding, a greater number of people will seek some degree of refuge in Bitcoin. Speculators, seeing this possibility, are buying up Bitcoins.

3) Venture capital (and private investor) money is moving into Bitcoin. A small handful of VC firms putting in a small handful of their money could explain the entire current price rise.

4) An increasingly wide swath of the libertarian/gold & silver "hard money" types are buying into Bitcoin. They were very skeptical at first, but are coming around. There are probably a few hundred thousand people like this in America who are deciding to put a few grand into Bitcoin.

5) The FinCEN ruling clarified the government's stance on Bitcoin about 3 weeks ago. The good news is Bitcoin is very much legal, and will be treated basically like money. People don't need to worry that the government will come down on it any time soon.

6) The press attention gained from all of the above real-world events is fueling a huge amount of hype (justified or not).

7) Ignorant, foolish people are buying bitcoins simply because the price is going up and they think (consciously or unconsciously) that this means it'll go up tomorrow. Maybe 1% of the buying interest is from people like this, or maybe 99%. Such people may get really lucky, or impoverish themselves, but either way they're in it for the wrong reason.

All of the above have combined over the past couple months to cause this price rally. It may well be a bubble, and could fall back down to $20/coin. Or, it could be the "new normal" and a new stable price between $100-$300 will be found. Or, it could be the start of a mega bubble that drives prices over $1000 before they come crashing down somewhere and cause widespread misery and chaos. The price right now could be the highest Bitcoin will ever be from now on, or the lowest. Nobody knows!

My advice... don't obsess over the fluctuating price on any given day. The market will figure out the value of these coins, and there ain't a damn thing anyone can do to prevent this from playing out.

But certainly, Bitcoin is the most important thing happening on the planet right now... and it has nothing to do with the price.

-Erik

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[Peter Lambert]

Nice analysis. I really like point 7 - buying bitcoins hoping to make a quick buck on their price is a very risky strategy.

[evoorhees]

Nice analysis. I really like point 7 - buying bitcoins hoping to make a quick buck on their price is a very risky strategy.

Well, holding bitcoins in any quantity for any reason is "very risky" in my opinion. But those who do it simply because the price is rising (without understanding the fundamental reasons why Bitcoin is valuable) are both risky and incredibly foolish.

[freequant]

That's probably the most level headed and objective piece of advice I have ever read on Bitcoin.
What you said was true two years ago, is true now, and will remain true a few years from now.
That would make great material for Bitcoin primers

[evoorhees]

That's probably the most level headed and objective piece of advice I have ever read on Bitcoin.
What you said was true two years ago, is true now, and will remain true a few years from now.
That would make great material for Bitcoin primers

I happen to have written one:  http://evoorhees.blogspot.com/2012/04/bitcoin-libertarian-introduction.html

[virtualmaster]

They are some good points.
I think also that at the moment when begin the the price rally above 20$ it was driven mostly by speculation/investiture rather then real business.
However during the last 3 mounts bitcoin gained a huge media interest and popularity exactly because this price rally. This had the benefit that:
- more people read about the bitcoin and cryptocurrency idea and get familiar with it
- more shops and services started to accept bitcoin
and this way the price development was at least partly backed.
The price will surely crash once for a limited time but it will unlikely come under 100$. A lot of people are waiting a price crash to buy cheap bitcoins so when the price will approach 100$ a huge amount of buyers will jump in the market.

[lucif]

1) A handful of "respectable" online merchants are now accepting Bitcoin, this proves that real businesses see the value in it. It's likely that others will follow.

This is common mistake. They accept Bitpay - not Bitcoin. You claim you are insider, so you should know difference. Big difference.

Those who accept REAL Bitcoin now suffer from such volatility and get paralyzed.

You should add here that this 2-billion bubble only stays on two interconnected amateur companies - mtgox and bitpay. Bring down any - and everything will collapse.

[evoorhees]

1) A handful of "respectable" online merchants are now accepting Bitcoin, this proves that real businesses see the value in it. It's likely that others will follow.

This is common mistake. They accept Bitpay - not Bitcoin. You claim you are insider, so you should know difference. Big difference.

Those who accept REAL Bitcoin now suffer from such volatility and get paralyzed.

You should add here that this 2-billion bubble only stays on two interconnected amateur companies - mtgox and bitpay. Bring down any - and everything will collapse.

Let me refute that for you.

A merchant who uses Bitpay to accept Bitcoin and convert into dollars is just as legitimate as a merchant who accepts Bitcoin directly and keep it as such.

The reason is this: Bitcoin's value grows in proportion to the number of places, and ease with which, one can spend it. If every merchant on earth accepted Bitcoin, but converted into USD via Bitpay, then the following fact would be true: Every merchant on earth accepts Bitcoin. At this point, fewer and fewer people would decide to convert to dollars at all. The fact that we aren't there yet doesn't mean the steps to get there are invalid.

And sure, it's true that those who accept Bitcoin "suffer" from volatility. But they've been suffering all the way up to $190. Give me a volatile currency that appreciates over a stable currency that depreciates any day of the week.

And no, taking away Gox and Bitpay would not make Bitcoin collapse, I assure you. Within 3 months, it'd be like nothing happened at all. Why? Because as a trader, it is very easy to switch exchanges. And as a merchant, it is very easy to switch processors. Bitpay's client's do not have to spend months of integration time, and thus if Bitpay disappeared an alternative would be swiftly found. Same with Gox.

Do not confuse a few points of market-based economic concentration (Bitpay/Gox/etc) with rigid centralization.

[jwzguy]

Speaking of places you can spend it, rent seems like a fairly big deal. Rent in NYC seems like a HUGE deal...closely following AE Property Management in Memphis's announcement last week, an NYC company is now accepting Bitcoin: http://www.prweb.com/releases/2013/4/prweb10608334.htm

If things like this keep popping up, I won't be worried about the price going to 0, ever.

[lucif]

Yes, but wordpress, namecheap and others probably may consider stay away from such risky processors.

Their turnover will just disappear. I don't say bitcoin will collapse, no. Price will. Again, two huge differences

[evoorhees]

DVC a good investment.

Currently the value of the coins is quite high, we can see that even the TRC (who is dead) 0.0056 BTC sale and all other currencies are as follows:

PPC: 0.00267 BTC
LTC: 0.02479 BTC
NMC: 0.00661 BTC
NVC: 0.02022 BTC
DVC: 0.00000199 BTC

Even as that NMC and TRC are dead market currencies and LTC and PPC are very new and overvalued currencies.

The current value of DVC is: 0.00000199
Let's be pessimistic and assume that value can reach 1/10 of the current value of the PPC or 1/20 of the TRC, that would leave the DVC in 0002, an increase of 1,000 times its value!

We can be very pessimistic and say that only go up to 100 times its value 0.0002 still a HUGE PROFIT MARGIN.

Do not know about you, but I'm going to get 1 BTC to DVC and leave the account frozen several months or a year, I am sure that in the worst case I will take 50 or 60 times my investment, and at best Where I can take over 100 even up to 1000.

Why do I assert this? Because we have seen how the currencies to be included in major markets disproportionately increase their value, as happened with LTC, TRC and PPC to be put in BTC-E, and MTGOX LTC plans to put on their market, which would make their price increased a lot and people tipping smaller coin (As happened to BTC), we get those coins smaller TRC and NMC have not already tested structure and be super unstable (TRC for several days does not process a single block ).

At MTGOX put LTC, and maybe PPC, BTC-E will be forced to put between their quotes DVC, which currently shoot its price is just ridiculous.

For the record, I find all the alt coins pretty silly, with the exception of namecoin which actually has interesting features to it. The rest is just the frothy wake of Bitcoin, but hey, I have nothing against competition and I'm glad that alt coins exist.

[lucif]

Hehe... Insiders... They invented a currency which root is in absence of middleman and building economy on two central points of failure.

People still put Bitcoins in "bank"(hello instawallet), they still use intermediates like Bitpay to launder money for BFL process transactions "without risk". They still have ability to lend coins for short (play against own market).

Hey, Insiders! What actually did you change in this crazy world except making nasdaq-99 2.0?

[wopwop]

Biased opinion is biased

[WiseOldOwl]

Hehe... Insiders... They invented a currency which root is in absence of middleman and building economy on two central points of failure.

People still put Bitcoins in "bank"(hello instawallet), they still use intermediates like Bitpay to launder money for BFL process transactions "without risk". They still have ability to lend coins for short (play against own market).

Hey, Insiders! What actually did you change in this crazy world except making nasdaq-99 2.0?

Its growing organically, even still. It is all just part of the process.
 "You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it."
These third parties you talk about help ease the populous into Bitcoin, why?, because it is what they are used too.


*edit - Hey evoorhees, long time no chat

[lucif]

Where the mtgox moves - tell me, insiders?

Why the silkroad money launder #1 moves to democracy heaven jurisdiction right into bernanke hands?

What happened to Kaddafi who offered alternate world currency?

Where do they go?

[Spaceman_Spiff]

entire post

Well said.  I think you are a great spokesperson for the bitcoin community.

[virtualmaster]

I don't say bitcoin will collapse, no. Price will.

Price will collapse but not now and not when 15.000 new user are waiting by Mt Gox for verification.
They all need bitcoins and are eager to buy some coins regardless of how much will be the market price which will be pushed by them higher and higher.

[wopwop]

I don't say bitcoin will collapse, no. Price will.

Price will collapse but not now and not when 15.000 new user are waiting by Mt Gox for verification.
They all need bitcoins and are eager to buy some coins regardless of how much will be the market price which will be pushed by them higher and higher.

or they need to withdraw

doesnt say shit this queue #

[virtualmaster]

I don't say bitcoin will collapse, no. Price will.

Price will collapse but not now and not when 15.000 new user are waiting by Mt Gox for verification.
They all need bitcoins and are eager to buy some coins regardless of how much will be the market price which will be pushed by them higher and higher.

or they need to withdraw

doesnt say shit this queue #

15.000 miner ?

[zeroday]

Don't ever hold more money in Bitcoin than you can afford to lose, and in general you should assume the whole thing will go to zero.

Ironically, I would say the opposite. Don't keep more money in fiat than you can afford to lose.
A week ago I lost the significant part of my wealth on European bank account after Cyprus thing. But my bitcoins are still safe and gained in value thirty-fold.