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Author Topic: Speculation in Bitcoins childhood.  (Read 2930 times)
da2ce7
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November 09, 2010, 07:47:30 AM
 #1

A recent thread about speculation has been hijacked by a troll.  So I decided to create another one. (Thread that is, not troll)


Speculation is indeed helping bitcoin more than is firstly obvious at first glance.

Firstly, the obvious one is that it is making bitcoins liquid, now that mtgox charges a fee; there is lots of incentive to develop and produce more competitive markets for bitcoin trading.  This will lower the barriers to obtaining and trading bitcoins, increasing demand, therefore value.

Secondary, bitcoin active speculation makes the bitcoin market much harder to be taken over covertly or single players; this has the benefit of spreading out bitcoins over a larger amount of people, therefor encouraging more common use.

Thirdly, the bitcoin speculation adds current value to the bitcoins, therefor greatly increasing the incentive to mine for more bitcoins; this can be seen with the dramatic increase of difficulty.  This increase in the bitcoin generation difficulty has directly has increased the security, therefore attractiveness, of bitcoin trades.

In each way outlined, speculation has indeed helped the bitcoin in becoming a useful cryptocurrency, in reality they are backing their own horse to win…  The best investment to make. Grin

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November 09, 2010, 08:43:50 AM
 #2

Speculation has benefits like the ones you mentioned but I think it also has downsides.

Some speculation is good, but if the Bitcoin economy becomes too dominated by speculation it will hurt Bitcoin's image.

People on this forum may unsterdand the benefits of speculation, but the average Joe doesn't and public opinion is very much financially conservative at the moment.

The average Joe would not be pleased if he bought some Bitcoins to send to his granny and they lost 50% of their USD value in a period of 24 hours.

This is why I think that Bitcoin web interfaces aimed at non-geek users should offer some sort of currency hedging, at least in the early stages of Bitcoin.

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November 09, 2010, 08:53:53 AM
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I dont think you got the issue. BrightAnarchist was worried about only speculation driving bitcoin. I am worried about that too. I dont think speculation should be stopped or anything, it serves its function, but bitcoin is not a casino, its a currency. We need business to start accepting bitcoin. If the only thing going on is speculation then it will die. The problem is not speculation, the problem is that we dont want bitcoin only driven by speculation, because its a no future road.
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November 09, 2010, 09:13:01 AM
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Yes, I completely agree that 'only speculation’ is bad (for bitcoin becoming a big economy), because speculation in the long run tends to the real value of the market, nothing.  If bitcoins are not used for trading real goods, then they will not have any value.

However, speculation is the _mechanism _ that develops the real economy, it is analogous to venture capital in upstarts, it gets the cart moving.  Without it, there would be no (hopefully soon) profitable mtgox, and generation difficulty would be still around 1500, and finally nobody would buy bitcoins for their grandmother, as that in itself would be speculation.

So in short: encourage the speculation, the more of it, the more solid the foundations of the bitcoin economy will be.  The more speculation, the stronger and more resilient the market will become once it finds its feet, (price).  The resistance values will be much stronger and reliable, therefore, creating greater certainty with trade.

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November 09, 2010, 10:10:32 AM
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From a strategy point of view, I think its important to promote Bitcoin for business, because its going to be the harder part. The speculation part will come alone, so I dont think there is going to be a lot of problem with that. But getting business to accept bitcoins I think should be one of the main focus of this community.
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November 09, 2010, 04:18:47 PM
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Speculation has benefits like the ones you mentioned but I think it also has downsides.

Some speculation is good, but if the Bitcoin economy becomes too dominated by speculation it will hurt Bitcoin's image.

People on this forum may unsterdand the benefits of speculation, but the average Joe doesn't and public opinion is very much financially conservative at the moment.

The average Joe would not be pleased if he bought some Bitcoins to send to his granny and they lost 50% of their USD value in a period of 24 hours.

This is why I think that Bitcoin web interfaces aimed at non-geek users should offer some sort of currency hedging, at least in the early stages of Bitcoin.

Speculators stabilize prices.

Some examples:

Suppose bitcoin is dominated by porn users in the USA. Every night the price rises when the kids go to sleep. A speculator notices this, buys coins earlier in the day and sells them higher at night. The swing in price is smaller because no there is more demand during the day and more supply at night. If his action doesn't smooth it out completely there will be a profit opportunity for another speculator to do the same thing with more volume.

An awesome new bitcoin MMORPG opens up and buys superbowl ads. Even though a bunch of people knew this was going to happen, none of the bought coins to sell to these people. Supply on the major markets is completely obliterated price first rises 20x and then for 3 hours you can't get coins at any price. Some people reason (speculate) that the price will fall before they need coins and sell them. If speculators had seen this coming and acted the price would still have rose (as it ought with more exposure and use) but it could have been much more smooth because it could have started weeks before the ads ran.

This is just to give an idea of how it happens. It's the same thing with farmers and food markets.

Congress banned futures in onions (not form the onion.com) http://money.cnn.com/2008/06/27/news/economy/The_onion_conundrum_Birger.fortune/
And it isn't a "conundrum", this is just the first article Ifound.

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November 09, 2010, 06:08:05 PM
 #7

The current prices don't seem like very stabilized in spite of large speculation on mtgox...



However it is very different on btcex.com, where prices of bitcoin to russian RUB is steadily rising.
https://btcex.com/

I don't know where the speculation is bigger, but i would guess that on mtgox (and i would probably be right).

So i wouldn't be so sure that speculation stabilizes prices, that is very risky statement.

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November 09, 2010, 06:14:44 PM
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I think the influx of new speculators mean that price instability increase?

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November 09, 2010, 06:28:40 PM
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I think the influx of new speculators mean that price instability increase?

Exactly. I find it very hard to believe that speculation **STABILIZES** prices.

I remember a case in my country when speculation caused our currency to jump by about 20% in matter of 48 hours. This is not what i would call "stable".
Perhaps only SMALL speculations sptabilize currency, but big ones surely can even damage large markets.

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November 09, 2010, 06:32:16 PM
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I think the influx of new speculators mean that price instability increase?

Exactly. I find it very hard to believe that speculation **STABILIZES** prices.

I remember a case in my country when speculation caused our currency to jump by about 20% in matter of 48 hours. This is not what i would call "stable".
Perhaps only SMALL speculations sptabilize currency, but big ones surely can even damage large markets.

My hypothesis is changes in the number of competitors causing a temporary price instability.

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November 09, 2010, 06:42:10 PM
 #11

looking at mtgox trade data there was one particular trade for exactly 100k coins that brought prices down to .20, and I'm betting that same amount will broken in multiple asks, which will, in the end, serve as a buffer against huge price increases. These radical changes are probably just the market adapting to all new comers than finally feel comfortable enough to put $ in mtgox, knowing they'll be able to cash out the profits.
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November 09, 2010, 06:45:24 PM
 #12

I think we are talking past each other here.

Can someone try to work out a definition of speculation?


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kiba
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November 09, 2010, 06:46:18 PM
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looking at mtgox trade data there was one particular trade for exactly 100k coins that brought prices down to .20, and I'm betting that same amount will broken in multiple asks, which will, in the end, serve as a buffer against huge price increases. These radical changes are probably just the market adapting to all new comers than finally feel comfortable enough to put $ in mtgox, knowing they'll be able to cash out the profits.

I guess my hypothesis is accurate in at least one instance.

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November 09, 2010, 06:54:32 PM
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Oops, I read it backwards... someone sold 100k bitcoins, thus lowering the price... I guess my point was completely wrong, then, this was just a simple 'cashing out my profits' scenario, though 100k coins is a hefty amount.
da2ce7
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November 10, 2010, 07:40:05 AM
 #15

Without the speculation there would be no regulated or agreed price for bitcoins, therefore trading them would have MUCH MUCH more variance eg (+/- %5000)... The prices would range from nothing to whatever somebody could be conned into paying...

With speculation, bitcoins have a relatively constant value (+/- 50%) that represents the future usefulness of the coins.

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ShadowOfHarbringer
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November 10, 2010, 08:22:24 AM
 #16

Without the speculation there would be no regulated or agreed price for bitcoins, therefore trading them would have MUCH MUCH more variance eg (+/- %5000)... The prices would range from nothing to whatever somebody could be conned into paying...

With speculation, bitcoins have a relatively constant value (+/- 50%) that represents the future usefulness of the coins.

Does any serious economic theories exist supporting what you are saying ?

After what is happening currently at MtGox (price down to ~0,18$), i don't think i am going to be convinced that speculation stabilizes prices...

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November 10, 2010, 08:58:56 AM
 #17

ah yes, 14c  atm. Cheesy  the simple fact that there is more intrest and investors in the market, means that there is more money in the market.
Thus with speculation, grater amounts of money are required to move the market _signifnatly_ to a different price.

Bitcoin is very young; I expect to have high variance for a while.   But in the +/- 50% range or a little more... Without the speculation, we would be seeing a trading range of many orders of magnitude larger, say at a guess ( 50x to 200x value).

For a more rigorous explanation please read the seminal work by John F. Muth: "The Ration Expectation and the Theory of Price Movements"

http://www.pe.vwl.uni-muenchen.de/personen/professoren/rees/sps_rees_ws10-11/sps_rees_muth.pdf

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November 10, 2010, 09:24:00 AM
 #18

A recent thread about speculation has been hijacked by a troll.  So I decided to create another one. (Thread that is, not troll)


Speculation is indeed helping bitcoin more than is firstly obvious at first glance.

Firstly, the obvious one is that it is making bitcoins liquid, now that mtgox charges a fee; there is lots of incentive to develop and produce more competitive markets for bitcoin trading.  This will lower the barriers to obtaining and trading bitcoins, increasing demand, therefore value.

Secondary, bitcoin active speculation makes the bitcoin market much harder to be taken over covertly or single players; this has the benefit of spreading out bitcoins over a larger amount of people, therefor encouraging more common use.

Thirdly, the bitcoin speculation adds current value to the bitcoins, therefor greatly increasing the incentive to mine for more bitcoins; this can be seen with the dramatic increase of difficulty.  This increase in the bitcoin generation difficulty has directly has increased the security, therefore attractiveness, of bitcoin trades.

In each way outlined, speculation has indeed helped the bitcoin in becoming a useful cryptocurrency, in reality they are backing their own horse to win…  The best investment to make. Grin

I'm sorry that I'm seen as a troll ... that was not my intention, sorry about that. I feel quite strongly about some things so I probably became too passionate.

I'll stay away from this thread don't worry Smiley I do not think there is any point in beating this topic ad nauseum.

I would just say that you have some good points (although I would distinguish between "real" value and speculative one which are mixed up together but are important to separate I think - no every "value" is a good value, some is just a bubble, I wouldn't think that is a good thing)

Nothing is black and white but I believe the bitcoin economy will stabilize when services of substance are introduced and speculation will not be a problem. The reason it is a problem in our real economy is because we allow banks to create money out of thin air which gives speculators cheap credit to manipulate markets with. This is not possible in bitcoin economy and ultimately real economy overwhelms the speculative one. At least I hope so ... speculation is bad only if it's excessive. I think this is the case right now with bitcoin ... but it is probably just temporary until real economy is introduced which is always much harder to do than speculation so speculative portion sets in first.

Good luck Wink
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