For now, bitcoin only suitable as a store of value

[Adrian-x]

wow i am amazed how blind investor mentality is! btw, that is not just towards you, there seems to be a lot of that blind mentality around; consumers and suppliers of goods and services are not concerned about the long term value of currency!

How that you know that, you can invest accordingly you can also follow the thought experiment to the conclusion that Bitcoin will become a store of value, before it becomes a currency.

[delgas]

johnyj:  Imagine a Roulette wheel, sometimes you win, sometime you lose but on average it all even out (well accept for 0 and 00, but lets pretend those aren't their and instead your paying 1% conversion fee at an exchange which has the same net effect).  Now would any sensible merchant agree to be payed with bets on a Roulette wheel?  No because you ALWAYS lose in the end, you hit a streak of losses and are eventually wiped out, business need their operating capitol if they loose it they can't make another set of products to sell just like you can't make another bet.  This is why stability is key.

This game is different, the house advantage is at bitcoin side, e.g. who hold the bitcoin wins long term wise. Because the fiat is inflated all the time (now 85 billion per month) and bitcoin supply is limited, the bitcoin value will increase over time

You're making a bold assumption that bitcoin wins in the long run.

I'll play devil's advocate here.

Imagine a scenario in which someone holds 10,000 or 100,000 bitcoins.  Let's say, an early adopter, who mined them all.  For the sake of argument, let's say bitcoin somehow magically reaches a value of 1,000USD per bitcoin.

You'll never convince the devil that such a person is better off keeping their "wealth" in bitcoin.  Playing by the rules of fiat currency is much more advantageous to this imaginary person.  To use basketball parlance, fiat currency is winner's outs.  When you score, you get the ball back to score again.  And when you have a shit load of cash, the rules are such that you AUTOMATICALLY make more money playing by fiat rules.  No risk involved.  Pretty genius, eh?  Go ahead, try to convince the devil it's a better move to keep the bitcoins.  Aside from TOTAL collapse of the fiat world (the devil knows this would have happened in 2009 if it ever was going to happen, and it didn't), there's much less risk in cashing out, because some other large stakeholder of BTC can cash out at a moments notice instead of you, screwing you out of millions or hundreds of millions in profit.

Truth be told, the devil knows the real issue is scale.  An individual needs a lot less than 100,000, or even 10,000, coins to control the market, cash out and drive the market into a downward spiral.  Cashing out slowly at first, then dumping the remainder at a particularly advantageous time to induce panic and intentionally tank the market.  The perfect time to execute this would be right after the majority of fiat on the exchanges buys in to pump the price (the devil selling on the way up at a rate that keeps resistance low enough for the upward trend to continue), as we saw play out last week.  There wouldn't be enough fiat on the exchanges (i.e. liquidity) to stop the downward trend.  The bitcoin seller gets a multimillion dollar payday, and can buy their coins back at 1/10 or 1/100th the cost at the same time.  And before you say that's not how it works, keep this in mind: we just saw this exact scenario play out, at a much smaller valuation, meaning there was a lot less money at stake than @ 1,000 per BTC.

The devil knows volatility rises as bitcoin exchange rate increases.  The chance of total collapse of the bitcoin economy increases the higher the per-BTC price goes.  There's way too much money at stake for that to not be the case.

The real value of bitcoin is determined by the amount of fiat sitting on the exchanges at any given point in time.  And moving fiat onto exchanges takes several orders of magnitude longer than selling large quantities of BTC.

We saw round two of this great transfer of wealth play out last week.  There will be many more, and the devil knows bitcoin is never more than a means to an end; big paydays for the whales.  There are too many whales in the ocean for BTC to ever reach a valuation "true believers" on this forum are predicting.

The only solution to this problem is making transfer into exchanges easier and faster.  And with unregulated exchanges, there's a snowball's chance in hell of enough fiat sitting at the ready to support large per-bitcoin values.

TL;DR - The real value of bitcoin is determined by the amount of fiat sitting on the exchanges at any given point in time.  And moving fiat onto exchanges takes several orders of magnitude longer than selling large quantities of BTC.  People aren't going to put millions or tens of millions of dollars on unregulated exchanges to support high per-bitcoin valuations.  Periods of stable and/or rising per-bitcoin prices are just the snake coiling up to strike, nothing more.

[lemonginger]

I could play roulette 5 times putting my bet on red each time. This could win me a lot of money or lose me a lot of money or come close to even.

If I play roulette 5000 times putting my bet on red each time I will more closely get the result of being down 1-2% as the house advantage dictates.

If I buy and spend bitcoin every day/week for several years the result will be a slow climb as bitcoin is a depreciating currency.

So no, bitcoin is not only suitable as a store of value.

Yes, but how many people want to suck up the variance of 100% swings in a day just because they know they may make money long term? Even that is far far far from certain. Another cryptocurrency comes up, a blockchain fork occurs, etc etc etc.

[leemar]

I would, 100% is almost irrelevant in terms of what is at stake here.

[johnyj]

johnyj:  Imagine a Roulette wheel, sometimes you win, sometime you lose but on average it all even out (well accept for 0 and 00, but lets pretend those aren't their and instead your paying 1% conversion fee at an exchange which has the same net effect).  Now would any sensible merchant agree to be payed with bets on a Roulette wheel?  No because you ALWAYS lose in the end, you hit a streak of losses and are eventually wiped out, business need their operating capitol if they loose it they can't make another set of products to sell just like you can't make another bet.  This is why stability is key.

This game is different, the house advantage is at bitcoin side, e.g. who hold the bitcoin wins long term wise. Because the fiat is inflated all the time (now 85 billion per month) and bitcoin supply is limited, the bitcoin value will increase over time

You're making a bold assumption that bitcoin wins in the long run.

I'll play devil's advocate here.

Imagine a scenario in which someone holds 10,000 or 100,000 bitcoins.  Let's say, an early adopter, who mined them all.  For the sake of argument, let's say bitcoin somehow magically reaches a value of 1,000USD per bitcoin.

You'll never convince the devil that such a person is better off keeping their "wealth" in bitcoin.  Playing by the rules of fiat currency is much more advantageous to this imaginary person.  To use basketball parlance, fiat currency is winner's outs.  When you score, you get the ball back to score again.  And when you have a shit load of cash, the rules are such that you AUTOMATICALLY make more money playing by fiat rules.  No risk involved.  Pretty genius, eh?  Go ahead, try to convince the devil it's a better move to keep the bitcoins.  Aside from TOTAL collapse of the fiat world (the devil knows this would have happened in 2009 if it ever was going to happen, and it didn't), there's much less risk in cashing out, because some other large stakeholder of BTC can cash out at a moments notice instead of you, screwing you out of millions or hundreds of millions in profit.

Truth be told, the devil knows the real issue is scale.  An individual needs a lot less than 100,000, or even 10,000, coins to control the market, cash out and drive the market into a downward spiral.  Cashing out slowly at first, then dumping the remainder at a particularly advantageous time to induce panic and intentionally tank the market.  The perfect time to execute this would be right after the majority of fiat on the exchanges buys in to pump the price (the devil selling on the way up at a rate that keeps resistance low enough for the upward trend to continue), as we saw play out last week.  There wouldn't be enough fiat on the exchanges (i.e. liquidity) to stop the downward trend.  The bitcoin seller gets a multimillion dollar payday, and can buy their coins back at 1/10 or 1/100th the cost at the same time.  And before you say that's not how it works, keep this in mind: we just saw this exact scenario play out, at a much smaller valuation, meaning there was a lot less money at stake than @ 1,000 per BTC.

The devil knows volatility rises as bitcoin exchange rate increases.  The chance of total collapse of the bitcoin economy increases the higher the per-BTC price goes.  There's way too much money at stake for that to not be the case.

The real value of bitcoin is determined by the amount of fiat sitting on the exchanges at any given point in time.  And moving fiat onto exchanges takes several orders of magnitude longer than selling large quantities of BTC.

We saw round two of this great transfer of wealth play out last week.  There will be many more, and the devil knows bitcoin is never more than a means to an end; big paydays for the whales.  There are too many whales in the ocean for BTC to ever reach a valuation "true believers" on this forum are predicting.

The only solution to this problem is making transfer into exchanges easier and faster.  And with unregulated exchanges, there's a snowball's chance in hell of enough fiat sitting at the ready to support large per-bitcoin values.

TL;DR - The real value of bitcoin is determined by the amount of fiat sitting on the exchanges at any given point in time.  And moving fiat onto exchanges takes several orders of magnitude longer than selling large quantities of BTC.  People aren't going to put millions or tens of millions of dollars on unregulated exchanges to support high per-bitcoin valuations.  Periods of stable and/or rising per-bitcoin prices are just the snake coiling up to strike, nothing more.

What you are talking about is "exchange value", not real value of bitcoin

Let's back to the starting point: Now a new country has been established and there is a bidding for a new currency. There are two entities announced their proposal: One currency will be created by mathematical calculation and can be generated by everyone; the other currency is generated by a guy called DEF and he could issue as much as he will, based on his judgement of how much is needed by the country. Which solution will be more likely to be accepted?

[Spendulus]

wow i am amazed how blind investor mentality is! btw, that is not just towards you, there seems to be a lot of that blind mentality around; consumers and suppliers of goods and services are not concerned about the long term value of currency! what matters for that use, $->btc-> goods and services->btc->$, is that for successful trading (of goods and services), the $ at each end has to roughly match! y, sometimes, someone (with the volatility, rarely both) in that transaction will benefit but that is not much security for people whose only interest is $1=$1 within the lifecycle of the transaction. sure, this might not be applicable for all traders (of goods and services) but it represents a downhill direction where less and less people are using btc for exchange of goods and services. my question remains unanswered "how do you hold the exchange value of a currency that you can't buy or sell anything with?!"

That's what I mean, bitcoin is not suitable for use as a currency due to high appreciation potential. Of course you can invent many derivatives to hedge the exchange risk, but the price will never be stable due to limited supply

Modern money are all valueless digits but they hold their exchange value due to 2 things: Consensus and Trust. If bitcoin has gained enough consensus and trust, it will hold the exchange value. And if it has value, you can buy and sell anything with it

I think the bolded part is false.  Consider if we just decide to talk and discuss microbitcoins (1/1,000,000) of a bitcoin.  Suddenly there are lots of monetary units. 

I recall in college working on a historical project, where Spanish gold was archived and stored.  It was basically, poured into depressions in the sand made with a dinner plate.  Each disk was worth a lot.  And there couldn't have been that many of them (hundreds or thousands).

You see the error in logic.  Both gold, and bitcoin are fungable.

[Razick]

This kind of large price swing will create huge uncertainty for the merchant and anyone who doing trade using bitcoin as a currency. For a currency, the most important character is stable exchange value

For a limited amount of supply, this kind of fast price swing is expected. So it will not be suitable for use as a transaction medium, if the merchant who receive the coins don't exchange the coin to USD immediately, he might lose 2/3 of it's exchange value overnight, it is clear none of the merchat will accept this kind of risk

So, currently the most possible use for bitcoin is act as a store of value, or the base currency. As a store of value, people tends to hold it for a long time, and in long term the price will always rise due to limited supply, the short term price swing will be irrelevant

Only when bitcoin first successfully established itself as a reputable digital asset, it price will stablize and then it can slowly becomes a widely used medium of exchange. Currently the people's confidence are still very weak and the large price swing is unavoidable

As a business owner, I agree that stable prices are preferable, but for the most part, Bitcoin is still a good currency. Things will work out.

[jorov]

The price instability problem can be explained:

1. There are some people who understand what Bitcoin is and what is the value of a unit (the system as a whole).
These are miners and business owners mostly.

2. There are too many people who DON'T know what Bitcoin is ... at all !

3. There are a bunch of speculators.


So the ones who know either don't sell or sell at very high price.

The ones who don't know want to buy cheap, because they see no value there yet.

Speculators take advantage of this market disagreement.


The picture will change when more people know what Bitcoin is ...

For me the reasonable market cap of Bitcoin system is about 1 trillion USD (at current USD value).

I intend to sell some and SPEND MORE of my coins gradually upon the climb.
And never stop mining !

[Timo Y]

It's just a disruptive, growth industry in its early penny stock stages. Penny stocks are volatile just like bitcoin. This doesn't mean they always will be.

+1

The number of users needs to stabilize first before we can have stable prices.

Also, we don't have a well functioning derivatives market for bitcoin. Once that is the case, adoption as a medium of exchange will explode.

[RenegadeMind]

Also, we don't have a well functioning derivatives market for bitcoin. Once that is the case, adoption as a medium of exchange will explode.

I don't see how derivatives could help. Could you elaborate?

[Timo Y]

Also, we don't have a well functioning derivatives market for bitcoin. Once that is the case, adoption as a medium of exchange will explode.

I don't see how derivatives could help. Could you elaborate?

For one, merchants could hedge against the sudden sharp price drops that we have seen in the last months.  As soon as a lot of merchants are doing this, it would also dampen the sharp price increases, since a fraction of speculators who expect bitcoin to rise would bet against the hedgers instead of buying bitcoin.

[digicoin]

The price of BTC is quite stable now. However, can it be a suitable store of value when its market cap is just more than 1 billion USD? I believe that there are more than 100 people in the world whose assets exceeds 1 billion USD

Taking 2 poor countries in South East Asia into account, Vietnam and Mianmar, the trade volume in 2012 exceeds 1 billion USD