Why are there people so damn desperate to keep the price below 400? What are they afraid of? What do they want?
Most people purchase Bitcoins in the speculative hope they can later profit by selling them at a higher price to other market participants. As it's mathematically impossible for this to continue ad infinitum it's foolish to think you can continue to make money at the expense of other market participants (of which you yourselves are among) beyond the peak of adoption.
Once adoption rates have peaked, which they more than likely did last year, there's little left but a massive downside caused by an imbalance of those wishing to cash out vs new money coming in from those wishing to speculate on further price rises. As the imbalance becomes more apparent new adopters are likely to become fewer and fewer thus escalating the downside.
As more people start to realize risk/reward is a bad bet and that the coins are gradually becoming worth less vs USD, a cash grab situation is likely to arise in which people will become aware coins are actually only backed by buy orders amounting to about 0.01% of the arbitrary market capitalization. This situation could be immensely profitable for those buying into the next round of folly.
All those who have become rich from Bitcoin have simply done so at the expense of later market participants, many of whom are likely to realize large losses on the flip side at some point. Hence why it's reasonably comparable to a giant ponzi scheme.
I have been trying for a while to wrap my mind around the price of bitcoin, and as such, it is necessary to understand the price formation of monetary assets in general. von Mises and Rothbard are a good starting point to that.
With bitcoin, we are witnessing - maybe - for the first time since a very very long time - the emergence of another market-determined monetary asset which has not been issued by a state and as such, imposing the quasi monopoly. The last time must have been when silver or gold became "money".
When an asset becomes a monetary asset, by definition, its market price will be way above its "usage price". For gold there remains still a jewelry usage price (which is way way below the market price of gold) ; for fiat and bitcoin, the usage price is essentially zero, so the ONLY price they have is their "monetary contribution".
In a steady-state system, the price of a monetary asset is given by the "quantity theory of money", which states that:
P x Q = M x V, where P is the price of the goods - so the price of the monetary asset is its inverse: B = 1 / P
B = 1/P = Q / (M x V)
Q is the amount of goods bought by the monetary asset, M is the amount of monetary asset in circulation, and V is the average velocity (the number of times per year that a given bitcoin is used to buy something).
V is the inverse of T, the (harmonic) average holding time of a bitcoin: the number of years a bitcoin is held as store of value.
So the "end value" in steady state of a bitcoin will ultimately depend on two things:
how much stuff is bought using bitcoin, and how long one holds one's bitcoins.
The rise in value from 0 to the steady state value B represents a lot of value of course, which "came out of nothing".
There is indeed an initial "free" transfer of value from the whole economy using bitcoin in the end steady state towards two classes of people:
- those who give out the first time a bitcoin (the miners). This is called seigniorage. It is what central banks are good at: printing new money and cashing in on first distribution of it.
- the "early adopters" who stored value in bitcoin before its market value reached B. This last thing is something that has probably not been witnessed since gold became money in the early days of history.
So yes, there is a steady flux of value from the recent adopters to the early adopters and the miners. That is part of the build-up of the market cap of the monetary asset.
Of course, the market price doesn't need to follow the quantity theory of money price: it can *anticipate* it. If everybody would be strongly convinced that a bitcoin were worth $ 10 000 in 5 years from now, most people wouldn't sell them below, say, $ 4000. People would be willing to buy them for $ 4000. It is because one doesn't really know that the price is lower, or higher, than the steady state monetary value once bitcoin is regularly used as means of payment.
In the end, however, the bitcoin price will be determined by two factors:
the total quantity of goods that is bought with it, and the average holding time of a bitcoin (as store of value).
This will determine the final market cap of the monetary asset "bitcoin". It can by potentially much higher than today, or it can be lower. It could potentially drop to zero if it fails to become a monetary asset after all.
What I'm not clear about, is whether bitcoin could become a sole store of value, without being able to buy goods with it.
So I have no idea what is the end market cap of bitcoin. I guess nobody has. There's a potential for a very high market cap if bitcoin is used a lot as means of payment, and if people hold it for a while.
Dump the velocity. and you are good to go. It has to be liquid, the owner needs to know that he can easily get rid of the bitcoins, actual trades are not needed.
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