A totally different mindset on bitcoin

[johnyj]

The latest crash proved that people's mindset has not been adjusted to bitcoin at all  

In a traditional economy, when something's return is highly above average (e.g. more than 100% per year), people will start to believe this is a bubble, and sooner or later, this bubble will burst and the return will eventually fall back to a reasonable ROI, like 10% per year

This wisdom have fundamental theory support: In a world where capital is largely available, if some products' return is very high, there will be more and more capitals attracted to produce this product and increase the supply, and earning will eventually drop to the cost of the capital (loan interest). Means high return will never last for too long

But for bitcoin, it is totally different. No matter how much capitals are added into bitcoin mining, the total amount of coins generated per day will never change (and just get less and less). The added capital just increased number of miners and raised network difficulty, reduced the production of each miner, thus increased the per coin value, instead of decrease it like in a traditional economy

So, in theory, bitcoin's valuation model is totally different than any of existing financial/economy model, and the anticipation should also be totally different. The price can rise quickly and forever, if there is a limitation on how high it can go, that will be available fiat money supply

But why people are still shouting this is a bubble when they see the price doubled in less than a month? The old mindset still rules, they are not confident at all in this new technology

[1715538481]

1715538481

[1715538481]

1715538481

[1715538481]

1715538481

[johnyj]

In central bank's view, the total amount of money supply can grow exponentially with economy, price level should be stable

In bitcoiner's view, the bitcoin exchange price can grow exponentially with economy, money supply should be stable

[luffy]

thanks for making this different view available
in general, technology comes first and then the mindset (it can take years for BTC)

[Operatr]

The problem is the mindset is based on what people know, which is fiat. It is all we have ever had until now. Bitcoin makes no sense to them, and goes against everything they know about economy as Bitcoin does not function like a fiat at all aside the medium of exchange part.

I find this as I try to explain Bitcoin to people I know. The concept is apparently so strange they have trouble digesting it and are hard pressed to not think its some kind of scam. We just have to keep trying to educate them on the truth instead of media fodder.

[qbits]

1. This wisdom have fundamental theory support: In a world when capital is largely available, if some products' return is very high, there will be more and more capitals attracted to produce this product and increase the supply, and earning will eventually drop to the cost of the capital (loan interest). Means high return will never last for too long

2. But for bitcoin, it is totally different. No matter how much capitals are added into bitcoin mining, the total amount of coins generated per day will never change (and just get less and less). The added capital just increased number of miners and raised network difficulty, reduced the production of each miner, thus increased the per coin value, instead of decrease it like in a traditional economy

3. So, in theory, bitcoin's valuation model is totally different than any of existing financial/economy model, and the anticipation should also be totally different. The price can rise quickly and forever, if there is a limitation on how high it can go, that will be available fiat money supply

4. But why people are still shouting this is a bubble when they see the price doubled in less than a month? The old mindset still rules, they are not confident at all in this new technology

Hi Johnyj, just wanted to point out a few obvious things, some shortcoming in your argument. I would like to see this discussion develop and my response is by no means pissing contest...

ad 1. by in large you are correct.

ad 2. rules governing bitcoin production my be different than ones governing production of cars or tulips, but human nature is always the same. I still mine and own bitcoins myself, but after a while, if somebody offers high enough price I will sell. Why? Well since most goods are prices in other currencies, they come in handy. Secondly and most importantly like any miner I have a figure in my head which tells me how much $ I need to invest in electricity and computer hardware to mine 1 BTC. Let's say for the time being this is about $40 - $50 / BTC. As difficulty increases this figure will grow to $100-$120/BTC in the next two months and who knows what happens next. These figures are similar for other miners except for ones mining on ASIC chips or ones that have access to free electricity.

So what is someone offered to buy bitcoins from me for $1000? How about $10'000? I would sell immediately as my profit margin would be so huge I could not imagine making a better deal by waiting further. Sad fact about bitcoin is that there are some early adopters of this currency who sit in 100'000 + BTC accounts and hence every single one of them has the power to wipe out entire exchanges like mtgox. Should they be in a hurry to get some hard cash that is. Their entry price into BTC for them was sub $/BTC so... you fill in the blanks.

ad 3. value of anything is a function of supply & demand. As once one VP, from a company I shall not name here, told me: price is a balance between fear and greed. IMHO nothing sums up price psychology better. And it does not matter whether we talk about a price of a stock, bitcoin, sheep wool or whatever else.

ad 4. new technology? what do you mean by that? sure BTC has some very nice features, in face I like BTC. (So does BitTorrent.) Biggest feature of all is that it managed to survive to this point. I was very very impressed by the quick recovery after the crash two days ago. But... fundamentaly BTC trading is done by humans and there is no change there (yet).

[johnyj]

Hi Johnyj, just wanted to point out a few obvious things, some shortcoming in your argument. I would like to see this discussion develop and my response is by no means pissing contest...

ad 1. by in large you are correct.

ad 2. rules governing bitcoin production my be different than ones governing production of cars or tulips, but human nature is always the same. I still mine and own bitcoins myself, but after a while, if somebody offers high enough price I will sell. Why? Well since most goods are prices in other currencies, they come in handy. Secondly and most importantly like any miner I have a figure in my head which tells me how much $ I need to invest in electricity and computer hardware to mine 1 BTC. Let's say for the time being this is about $40 - $50 / BTC. As difficulty increases this figure will grow to $100-$120/BTC in the next two months and who knows what happens next. These figures are similar for other miners except for ones mining on ASIC chips or ones that have access to free electricity.

So what is someone offered to buy bitcoins from me for $1000? How about $10'000? I would sell immediately as my profit margin would be so huge I could not imagine making a better deal by waiting further. Sad fact about bitcoin is that there are some early adopters of this currency who sit in 100'000 + BTC accounts and hence every single one of them has the power to wipe out entire exchanges like mtgox. Should they be in a hurry to get some hard cash that is. Their entry price into BTC for them was sub $/BTC so... you fill in the blanks.

ad 3. value of anything is a function of supply & demand. As once one VP, from a company I shall not name here, told me: price is a balance between fear and greed. IMHO nothing sums up price psychology better. And it does not matter whether we talk about a price of a stock, bitcoin, sheep wool or whatever else.

ad 4. new technology? what do you mean by that? sure BTC has some very nice features, in face I like BTC. (So does BitTorrent.) Biggest feature of all is that it managed to survive to this point. I was very very impressed by the quick recovery after the crash two days ago. But... fundamentaly BTC trading is done by humans and there is no change there (yet).

I agree, the BTC price is kind of related to electricity cost. And that is a baseline, you normally get higher rate. There are 3600 coins generated per day and MtGox daily volume is at least 10x this amount, even all the mined coins are sold daily, it won't affect the exchange a lot. In a couple of months, when ASIC mining devices hit market at mass scale, difficulty will rise by at least 5x

I noticed that you still evaluate profit in dollars term, because you think dollar is a standard unit of value, this is a mindset difference. If you dig a little into today's money issuering mechanism and compare USD with bitcoin, maybe you will get less certain which one is the real bubble: At least you have to buy equipment and consume electricity to mine bitcoin, but FED just write a number of 0s in their account to create USD

A tricky question is: If someone just write some numbers in their account (say 10K USD) and transfer it to you in exchange for one bitcoin, will you give them your hard earned numbers in blockchain in exchange for these numbers created out of thin air?

When bitcoin price crashed, at least 400K coins were bought at 70-120 range, who do you think were buying those coins? Those people who writing those numbers 

[qbits]

I agree, the BTC price is kind of related to electricity cost. And that is a baseline, you normally get higher rate. There are 3600 coins generated per day and MtGox daily volume is at least 10x this amount, even all the mined coins are sold daily, it won't affect the exchange a lot. In a couple of months, when ASIC mining devices hit market at mass scale, difficulty will rise by at least 5x

I noticed that you still evaluate profit in dollars term, because you think dollar is a standard unit of value, this is a mindset difference. If you dig a little into today's money issuering mechanism and compare USD with bitcoin, maybe you will get less certain which one is the real bubble: At least you have to buy equipment and consume electricity to mine bitcoin, but FED just write a number of 0s in their account to create USD

A tricky question is: If someone just write some numbers in their account (say 10K USD) and transfer it to you in exchange for one bitcoin, will you give them your hard earned numbers in blockchain in exchange for these numbers created out of thin air?

When bitcoin price crashed, at least 400K coins were bought at 70-120 range, who do you think were buying those coins? Those people who writing those numbers 

I don't necessarily evaluate my profits in $ terms. It's just that prices for electricity, food, GPUs to mine BTC and rest of it are at this point in time sticky with respect to $ or €. If and when inflation hits we will all quickly switch to another measure of value or we will index prices. Trust me on this one as I already have lived through hyper-inflation at one point in my life.

Whether this new measure of value will be BTC or gold or something else remains to be seen. But unless commodities are priced in BTC it is very difficult to imagine BTC will have a significant role to play.

To put is simply as I have in another thread. Would you rather have a 10'000 BTC or a $500k house for the next 10 years? And at this point in time 10k BTC is worth more than $500k, but if you needed to hold on to it for the next 10 years it is very difficult to be confident all those BTCs will be worth something in 10 years time. And everyone that would choose BTC over a house at this point in time must admit to himself that they are in fact speculating on the future value of bitcoin.

Why? Well let me list the rationale:
- first and obvious is the evidential reason: if people were bullish about 10 year value of BTC it's price would go up, and perceived future price of BTC would be influencing it's current price. Recent market volatility proves to the contrary: at the slightest nudge BTC holders are prepared to sell BTC asap. This is a market of speculators not long time holders. And for the record I still own about 5 BTC and did not sell a single satoshi in April. In fact I'm buying.

- then there is a problem of some early adopters who accumulated large holdings of BTC. Anecdotal stories tell of accounts with 100k+ BTC. These players can potentially wipe out the whole buy orderbook at mtgox. Since they cannot & should not be controlled, they are dangerous to the BTC. In fact my gut reaction on April 10th was that one of the whales have had enough, decided to get some hard cash and unloaded.

- let's be fair about numbers from thin air: where do you think most of my BTCs came from? They came from thin air as one of my computers got lucky and decided to think of a number that meant something. The analogy is perfect. All those BTCs can be traced back to a random number that somebody liked that I got paid for in BTC. Why is that fundamentally different from €? After all in both we can transact electronically. And at this particular point in time most people prefer to get paid in € or $ and not BTC. You can easily verify this by visiting your local shopping mall and check in what currency prices are expressed. Some folks from Cyprus may disagree which brings me to another point.

- the only fundamental difference is that with BTC new currency issue is limited however with traditional currencies this power resides with a central bank who has the power to issue new currency at will. Naturally every central bank justifies this power as means necessary to achieve price stability. To some extent they are successful. The only problem they have is working together with governments bent on spending more than they earn, and believe me I have seen this personally in the country where I live. For that reason we can all agree that fiat currencies created by central banks will fail, but... that does not imply that BTC will be successful. In fact commodity price instability expressed in BTC makes it vulnerable to speculation and failure.

- another comment about numbers from thin air: recently (about a month ago) I witnessed a very interesting development: namely I was minding my own business mining casually at slush's pool. when all of a sudden there was a fork in the blockchain cause by software glitch, which slush had lost and we miners got a big fat 0 pay for 6 blocks or so. which was nothing in particular. but then after a few weeks I noticed a post in the pool's thread that "bitcoin committee" or someone had decided, that we should have gotten compensated for those 6 blocks and that have gotten paid somehow. Now those BTC had to have gotten from somewhere. And as much as I think Marek aka slush is a nice guy I doubt these came from his pocket. Now if "committee" somehow allowed for these BTCs to be created don't they have the same powers as a central bank??? Who controls BTC protocol? Public vote? Committee? Who are these people?

So we can all agree that holding $ or € for a long time is not a smart thing as these currencies are likely to loose in value=purchasing power.
We can also agree that volatility of BTC makes it unsuitable as "store of value" as of now. It still is a speculative market without many rules set in stone.

And yeah I'd take those $10k today thank you very much

p.s. naaah, I would probably go out to buy a couple of graphic cards, and would just raise the difficulty for everyone, so... not such a good idea.

[odolvlobo]

... The added capital just increased number of miners and raised network difficulty, reduced the production of each miner, thus increased the per coin value, instead of decrease it like in a traditional economy

So, in theory, bitcoin's valuation model is totally different than any of existing financial/economy model, and the anticipation should also be totally different. The price can rise quickly and forever, if there is a limitation on how high it can go, that will be available fiat money supply

But why people are still shouting this is a bubble when they see the price doubled in less than a month? The old mindset still rules, they are not confident at all in this new technology

How do you arrive at the conclusion that bitcoin value rises due to difficulty? The Labor Theory of Value is not accepted by most. My understanding is that the difficulty depends on the price (which creates a ceiling), but the price is not dependent on the difficulty (rather, supply vs. demand).

Also, I think your logic is a flawed. You argue that production costs should allow the value to rise, but that people mistakenly see a bubble (when the price has risen far above production costs).

In central bank's view, the total amount of money supply can grow exponentially with faster than the economy, price level should be stable rise.

In bitcoiner's view, the bitcoin exchange price can grow exponentially with economy, money supply should be stable

FTFY

[pretendo]

good rational expectations. We know the supply and expected supply, and the best investors can estimate adoption, therefore immanentizing the price effects of future growth of bitcoin

[mestar]

My understanding is that the difficulty depends on the price (which creates a ceiling), but the price is not dependent on the difficulty (rather, supply vs. demand).

Higher price causes difficulty go to up, with a lag in weeks.

Higher difficulty causes the supply (in $), with a lag measured in months. (More miners join, more electric power is used, miners must sell to pay for those costs)

[odolvlobo]

My understanding is that the difficulty depends on the price (which creates a ceiling), but the price is not dependent on the difficulty (rather, supply vs. demand).

Higher price causes difficulty go to up, with a lag in weeks.

Higher difficulty causes the supply (in $), with a lag measured in months. (More miners join, more electric power is used, miners must sell to pay for those costs)

New bitcoins supplied by miners are an insignificant portion of the supply. That couldn't be a significant factor in price determination, even if mining costs were 100% of mining revenue.

[mestar]

New bitcoins supplied by miners are an insignificant portion of the supply. That couldn't be a significant factor in price determination, even if mining costs were 100% of mining revenue.

You say it is insignificant, I say it is significant, because it always pushes the price on the exchange in one way: downward. 

And its effect will always be there, because miners get paid in bitcoins but must pay the electricity costs in other currencies.  Thus, that $200k daily has a huge motivation to pass trough the exchange, pushing the price down.

And this is the important point:  this amount scales with the price of bitcoin, if it goes to $1000, it becomes 10 times larger. 

We'll see how it goes in the next 3 years.

[jubalix]

The latest crash proved that people's mindset has not been adjusted to bitcoin at all  

In a traditional economy, when something's return is highly above average (e.g. more than 100% per year), people will start to believe this is a bubble, and sooner or later, this bubble will burst and the return will eventually fall back to a reasonable ROI, like 10% per year

This wisdom have fundamental theory support: In a world when capital is largely available, if some products' return is very high, there will be more and more capitals attracted to produce this product and increase the supply, and earning will eventually drop to the cost of the capital (loan interest). Means high return will never last for too long

But for bitcoin, it is totally different. No matter how much capitals are added into bitcoin mining, the total amount of coins generated per day will never change (and just get less and less). The added capital just increased number of miners and raised network difficulty, reduced the production of each miner, thus increased the per coin value, instead of decrease it like in a traditional economy

So, in theory, bitcoin's valuation model is totally different than any of existing financial/economy model, and the anticipation should also be totally different. The price can rise quickly and forever, if there is a limitation on how high it can go, that will be available fiat money supply

But why people are still shouting this is a bubble when they see the price doubled in less than a month? The old mindset still rules, they are not confident at all in this new technology

your right it is a completely diff mindset....see most people are used to  playing in the market which is just swaping leger amount of State fiat

not being a state actor creating a better currency....

[johnyj]

To put is simply as I have in another thread. Would you rather have a 10'000 BTC or a $500k house for the next 10 years?

That depends on how rich you are. If you are still in the stage of buying your first or second house, house should worth more than bitcoin. But for those holding 10+ houses and wonder where to put their extra fiat, bitcoin is the way to go

- then there is a problem of some early adopters who accumulated large holdings of BTC. Anecdotal stories tell of accounts with 100k+ BTC. These players can potentially wipe out the whole buy orderbook at mtgox. Since they cannot & should not be controlled, they are dangerous to the BTC. In fact my gut reaction on April 10th was that one of the whales have had enough, decided to get some hard cash and unloaded.

Totally fine, as more and more such people cash out their coin, some one else will become the new "early adopters" holding 100k+ bitcoin, bitcoins just changes from weaker hands to stronger hands

- the only fundamental difference is that with BTC new currency issue is limited however with traditional currencies this power resides with a central bank who has the power to issue new currency at will.

If I'm a commercial bank, I will ensure price stability by only put money on those elements which are not included in CPI, for example house and bitcoin. By doing so I can endlessly get money from central bank without worrying they start a new round of tighten

- Now if "committee" somehow allowed for these BTCs to be created don't they have the same powers as a central bank??? Who controls BTC protocol? Public vote? Committee? Who are these people?

The coins you received as a compensate are not created as will, they are tooken from slush's pocket, no one can create coin out of thin air

So far there is no clear decision making process for bitcoin, mostly rely on IRC channel communication between pool operators and core developers, and the worst thing they can do is forking the chain. But even with a forked chain, existing coins will not be affected

[qbits]

1. That depends on how rich you are. If you are still in the stage of buying your first or second house, house should worth more than bitcoin. But for those holding 10+ houses and wonder where to put their extra fiat, bitcoin is the way to go

2. Totally fine, as more and more such people cash out their coin, some one else will become the new "early adopters" holding 100k+ bitcoin, bitcoins just changes from weaker hands to stronger hands

3. So far there is no clear decision making process for bitcoin, mostly rely on IRC channel communication between pool operators and core developers, and the worst thing they can do is forking the chain. But even with a forked chain, existing coins will not be affected

ad 1: didn't think of it like that. It is an interesting point of view. Still it is speculation that is driving the purchase of BTC instead of 11th house.

ad 2: the problem with large holders is that they can by sheer volume influence the price at the exchange. So they drop coins, earn $, reduce BTC price and then buy them back at discount. So they have in fact taken $ from small investors that took flight, they themselves however retain their BTC positions. I'm not sure that this is in fact happening but I'm very suspicious... There is lot's regulation governing stock exchanges, none of which are applicable to say mtgox which opens opportunity for price manipulation. How would have thought I would one day argue for regulation

ad 3: I'm not sure Marek paid BTC 150 for those 6 blocks. Certainly he can afford it Shall we ask him?

[odolvlobo]

New bitcoins supplied by miners are an insignificant portion of the supply. That couldn't be a significant factor in price determination, even if mining costs were 100% of mining revenue.

You say it is insignificant, I say it is significant, because it always pushes the price on the exchange in one way: downward. 

And its effect will always be there, because miners get paid in bitcoins but must pay the electricity costs in other currencies.  Thus, that $200k daily has a huge motivation to pass trough the exchange, pushing the price down.

Daily volume at Mt. Gox over the last 30 days is 119k BTC. Only 3600 BTC, or 3% of that is mined daily. It is not huge.

[mestar]

Daily volume at Mt. Gox over the last 30 days is 119k BTC. Only 3600 BTC, or 3% of that is mined daily. It is not huge.

Last 30 days were totally crazy.

[johnyj]

ad 2: the problem with large holders is that they can by sheer volume influence the price at the exchange. So they drop coins, earn $, reduce BTC price and then buy them back at discount. So they have in fact taken $ from small investors that took flight, they themselves however retain their BTC positions. I'm not sure that this is in fact happening but I'm very suspicious... There is lot's regulation governing stock exchanges, none of which are applicable to say mtgox which opens opportunity for price manipulation. How would have thought I would one day argue for regulation

Essentially everything have certain degree of speculation due to supply and demand variance, there are bubbles from time to time. But bitcoin are still in the early stages of adoption, people's mindset have not changed, exchanges are not enough robust and distributed. When there are many powerful players in the bitcoin trading, the situation will be different, each player have a higher risk, someone might go broke because of shorting bitcoin

[Francesco]

The latest crash proved that people's mindset has not been adjusted to bitcoin at all  

In a traditional economy, when something's return is highly above average (e.g. more than 100% per year), people will start to believe this is a bubble, and sooner or later, this bubble will burst and the return will eventually fall back to a reasonable ROI, like 10% per year

This wisdom have fundamental theory support: In a world when capital is largely available, if some products' return is very high, there will be more and more capitals attracted to produce this product and increase the supply, and earning will eventually drop to the cost of the capital (loan interest). Means high return will never last for too long

But for bitcoin, it is totally different. No matter how much capitals are added into bitcoin mining, the total amount of coins generated per day will never change (and just get less and less). The added capital just increased number of miners and raised network difficulty, reduced the production of each miner, thus increased the per coin value, instead of decrease it like in a traditional economy

So, in theory, bitcoin's valuation model is totally different than any of existing financial/economy model, and the anticipation should also be totally different. The price can rise quickly and forever, if there is a limitation on how high it can go, that will be available fiat money supply

But why people are still shouting this is a bubble when they see the price doubled in less than a month? The old mindset still rules, they are not confident at all in this new technology

Well, no. A bubble is defined by the fact that most people do not really want the asset (bitcoin, or tulips, or whatever), but rather just hope to sell for a higher price  at some point. So it is bound to collapse anyway, whatever the asset is.

[Anonymouss]

The latest crash proved that people's mindset has not been adjusted to bitcoin at all  

In a traditional economy, when something's return is highly above average (e.g. more than 100% per year), people will start to believe this is a bubble, and sooner or later, this bubble will burst and the return will eventually fall back to a reasonable ROI, like 10% per year

This wisdom have fundamental theory support: In a world when capital is largely available, if some products' return is very high, there will be more and more capitals attracted to produce this product and increase the supply, and earning will eventually drop to the cost of the capital (loan interest). Means high return will never last for too long

But for bitcoin, it is totally different. No matter how much capitals are added into bitcoin mining, the total amount of coins generated per day will never change (and just get less and less). The added capital just increased number of miners and raised network difficulty, reduced the production of each miner, thus increased the per coin value, instead of decrease it like in a traditional economy

So, in theory, bitcoin's valuation model is totally different than any of existing financial/economy model, and the anticipation should also be totally different. The price can rise quickly and forever, if there is a limitation on how high it can go, that will be available fiat money supply

But why people are still shouting this is a bubble when they see the price doubled in less than a month? The old mindset still rules, they are not confident at all in this new technology

Well, no. A bubble is defined by the fact that most people do not really want the asset (bitcoin, or tulips, or whatever), but rather just hope to sell for a higher price  at some point. So it is bound to collapse anyway, whatever the asset is.

Basically this. When people start using it to buy goods instead of buy/sell that's when we will see the platform level out. The problem now is people are over valuing their bitcoin and are starting to hoard them.

[johnyj]

Well, no. A bubble is defined by the fact that most people do not really want the asset (bitcoin, or tulips, or whatever), but rather just hope to sell for a higher price  at some point. So it is bound to collapse anyway, whatever the asset is.

Why it is bound to collapse? Given enough money supply, a bubble can last for decades, everyone can sell at a higher price, as long as they can get new loan to finance their purchase

Based on your logic, there are plenty of fiat money available out there, the bitcoin price should not crash

[johnyj]

Basically this. When people start using it to buy goods instead of buy/sell that's when we will see the platform level out. The problem now is people are over valuing their bitcoin and are starting to hoard them.

If everyone is hoarding their coins now, there will be no sell pressure, only buying order, the price will go to infinite

[jubalix]

yes, facebook, the internet and countless other inventions had an uptake 10% per year

The latest crash proved that people's mindset has not been adjusted to bitcoin at all  

In a traditional economy, when something's return is highly above average (e.g. more than 100% per year), people will start to believe this is a bubble, and sooner or later, this bubble will burst and the return will eventually fall back to a reasonable ROI, like 10% per year

This wisdom have fundamental theory support: In a world where capital is largely available, if some products' return is very high, there will be more and more capitals attracted to produce this product and increase the supply, and earning will eventually drop to the cost of the capital (loan interest). Means high return will never last for too long

But for bitcoin, it is totally different. No matter how much capitals are added into bitcoin mining, the total amount of coins generated per day will never change (and just get less and less). The added capital just increased number of miners and raised network difficulty, reduced the production of each miner, thus increased the per coin value, instead of decrease it like in a traditional economy

So, in theory, bitcoin's valuation model is totally different than any of existing financial/economy model, and the anticipation should also be totally different. The price can rise quickly and forever, if there is a limitation on how high it can go, that will be available fiat money supply

But why people are still shouting this is a bubble when they see the price doubled in less than a month? The old mindset still rules, they are not confident at all in this new technology

[johnyj]

yes, facebook, the internet and countless other inventions had an uptake 10% per year

Good to bring this up. Those things you mentioned are still in the stage of market expansion, after reach majority adoption, the growth will slow down, eventually the return will drop. This is very similar to pyramid effect, when the market is stil large, there will be exponential growth and gain

But bitcoin is again different. Even bitcoin reached 100% market penetration, people would still want more, since the demand for money is endless

[Francesco]

Well, no. A bubble is defined by the fact that most people do not really want the asset (bitcoin, or tulips, or whatever), but rather just hope to sell for a higher price  at some point. So it is bound to collapse anyway, whatever the asset is.

Why it is bound to collapse? Given enough money supply, a bubble can last for decades, everyone can sell at a higher price, as long as they can get new loan to finance their purchase

Based on your logic, there are plenty of fiat money available out there, the bitcoin price should not crash

Not everyone. For me to sell, there must be someone else to buy at least as much. If everyone sells, the price crashes. If everyone suspects many others are just waiting for the right time to sell, the ideal strategy is wait as long as possible, but sell just a minute before the others. This creates the crash.

[johnyj]

Well, no. A bubble is defined by the fact that most people do not really want the asset (bitcoin, or tulips, or whatever), but rather just hope to sell for a higher price  at some point. So it is bound to collapse anyway, whatever the asset is.

Why it is bound to collapse? Given enough money supply, a bubble can last for decades, everyone can sell at a higher price, as long as they can get new loan to finance their purchase

Based on your logic, there are plenty of fiat money available out there, the bitcoin price should not crash

Not everyone. For me to sell, there must be someone else to buy at least as much. If everyone sells, the price crashes. If everyone suspects many others are just waiting for the right time to sell, the ideal strategy is wait as long as possible, but sell just a minute before the others. This creates the crash.

This is speculator's mindset. Speculator typically don't have fundamental knowledge about the traded instruments, they only care about the price, so when they see the price dropped a bit, they panic sell

By the way, a good speculator always sell when price is still on the rise, so that he don't need to worry about the liquidity

[Razick]

The latest crash proved that people's mindset has not been adjusted to bitcoin at all  

In a traditional economy, when something's return is highly above average (e.g. more than 100% per year), people will start to believe this is a bubble, and sooner or later, this bubble will burst and the return will eventually fall back to a reasonable ROI, like 10% per year

This wisdom have fundamental theory support: In a world where capital is largely available, if some products' return is very high, there will be more and more capitals attracted to produce this product and increase the supply, and earning will eventually drop to the cost of the capital (loan interest). Means high return will never last for too long

But for bitcoin, it is totally different. No matter how much capitals are added into bitcoin mining, the total amount of coins generated per day will never change (and just get less and less). The added capital just increased number of miners and raised network difficulty, reduced the production of each miner, thus increased the per coin value, instead of decrease it like in a traditional economy

So, in theory, bitcoin's valuation model is totally different than any of existing financial/economy model, and the anticipation should also be totally different. The price can rise quickly and forever, if there is a limitation on how high it can go, that will be available fiat money supply

But why people are still shouting this is a bubble when they see the price doubled in less than a month? The old mindset still rules, they are not confident at all in this new technology

The huge increase in price was not sustainable, and it exceeded the real growth of value. I agree with you for the most part though; and by the way: If the price settles at $50 with a 5-10% monthly growth rate (my target/estimate), would still be a bubble by the standards of most other assets.

[Razick]

Hi Johnyj, just wanted to point out a few obvious things, some shortcoming in your argument. I would like to see this discussion develop and my response is by no means pissing contest...

ad 1. by in large you are correct.

ad 2. rules governing bitcoin production my be different than ones governing production of cars or tulips, but human nature is always the same. I still mine and own bitcoins myself, but after a while, if somebody offers high enough price I will sell. Why? Well since most goods are prices in other currencies, they come in handy. Secondly and most importantly like any miner I have a figure in my head which tells me how much $ I need to invest in electricity and computer hardware to mine 1 BTC. Let's say for the time being this is about $40 - $50 / BTC. As difficulty increases this figure will grow to $100-$120/BTC in the next two months and who knows what happens next. These figures are similar for other miners except for ones mining on ASIC chips or ones that have access to free electricity.

So what is someone offered to buy bitcoins from me for $1000? How about $10'000? I would sell immediately as my profit margin would be so huge I could not imagine making a better deal by waiting further. Sad fact about bitcoin is that there are some early adopters of this currency who sit in 100'000 + BTC accounts and hence every single one of them has the power to wipe out entire exchanges like mtgox. Should they be in a hurry to get some hard cash that is. Their entry price into BTC for them was sub $/BTC so... you fill in the blanks.

ad 3. value of anything is a function of supply & demand. As once one VP, from a company I shall not name here, told me: price is a balance between fear and greed. IMHO nothing sums up price psychology better. And it does not matter whether we talk about a price of a stock, bitcoin, sheep wool or whatever else.

ad 4. new technology? what do you mean by that? sure BTC has some very nice features, in face I like BTC. (So does BitTorrent.) Biggest feature of all is that it managed to survive to this point. I was very very impressed by the quick recovery after the crash two days ago. But... fundamentaly BTC trading is done by humans and there is no change there (yet).

I agree, the BTC price is kind of related to electricity cost. And that is a baseline, you normally get higher rate. There are 3600 coins generated per day and MtGox daily volume is at least 10x this amount, even all the mined coins are sold daily, it won't affect the exchange a lot. In a couple of months, when ASIC mining devices hit market at mass scale, difficulty will rise by at least 5x

I noticed that you still evaluate profit in dollars term, because you think dollar is a standard unit of value, this is a mindset difference. If you dig a little into today's money issuering mechanism and compare USD with bitcoin, maybe you will get less certain which one is the real bubble: At least you have to buy equipment and consume electricity to mine bitcoin, but FED just write a number of 0s in their account to create USD

A tricky question is: If someone just write some numbers in their account (say 10K USD) and transfer it to you in exchange for one bitcoin, will you give them your hard earned numbers in blockchain in exchange for these numbers created out of thin air?

When bitcoin price crashed, at least 400K coins were bought at 70-120 range, who do you think were buying those coins? Those people who writing those numbers 

I don't think electricity costs have nearly the effect of supply and demand. We are going to have 21,000,000 coins eventually regardless, and there will always be more buyers than mining alone can suppply BTC to.

[johnyj]

The huge increase in price was not sustainable, and it exceeded the real growth of value. I agree with you for the most part though; and by the way: If the price settles at $50 with a 5-10% monthly growth rate (my target/estimate), would still be a bubble by the standards of most other assets.

To match 1% of the daily 2.8 billion USD printing speed with daily 3600 coins generation now, each coin would worth $7777. When we are still in a price discovery mode, any kind of growth rate is possible, since there are plenty of fiat money out there and the number of bitcoin is always limited

[Razick]

The huge increase in price was not sustainable, and it exceeded the real growth of value. I agree with you for the most part though; and by the way: If the price settles at $50 with a 5-10% monthly growth rate (my target/estimate), would still be a bubble by the standards of most other assets.

To match 1% of the daily 2.8 billion USD printing speed with daily 3600 coins generation now, each coin would worth $7777. When we are still in a price discovery mode, any kind of growth rate is possible, since there are plenty of fiat money out there and the number of bitcoin is always limited

It is, but would require mass adoption on a greater scale than the already impressive one we've been seeing.