Bitcoin the Bubblecoin

[Herodes]

Another thing to consider is that as the price gets higher and higher, the market becomes harder to manipulate.  

That's wrong. If icoins became more distributed, it would be harder to manipulate. However, it is likely that bitcoin becomes less distributed, since the large holders can easily manipulate the market today, and gather more coins.

It seems to me you've made up your mind, and no matter what anyone says, you cling to your own ideas. I think coastermonger has a very good point.

[cbeast]

This post was moved to the economics section. I don't think the solution is one of economics any more than Bitcoin is a tool of economics. I also no longer believe that we need an alt-crypto. I'm just saying that we need "speed limit signs" of a sort that predicts the safe trading zone for Bitcoin trading within degrees of freedom in much the same way the difficulty factor is calculated. I mean, why didn't Satoshi just leave the difficulty factor of 1 until all 21 million bitcoins are released? If it's all about letting the free market decide, then why not? It's too bad he didn't talk about the trading side of Bitcoin. I think this would have been addressed.

[drhobomanxxiii]

Everyone seems to be missing a rather big point... Arbitrage.

I'm going to go through a roundabout process to make my point here, so bear with me.

The gold standard is price fixing a monetary unit to a given price for gold as determined in that unit. If you allow that exchange rate (price) to float, it's no longer a standard, but if gold is priced in dollars instead of bitcoins, dollars will see a stability come about as another market for goods arises between the two mediums (as gold and dollars are both mediums in themselves, just as they are goods.)

Let's also say that silver is priced in dollars, but there's also a silver/gold market in place. Now it's very easy for the market to create equilibrium across the three goods thanks to arbitrage. As the price of Gold/Dollars goes up, the price of Silver/Gold and Silver/Dollars will adjust accordingly, creating a new equilibrium. In this case, Silver/Gold would tend to go down while Silver/Dollars would tend to go up.

Let's also say that you may work at a gold or silver mine to earn dollars, which you may then use to purchase the very silver or gold you mine, or the other good that you don't mine. That process is arbitrage as well, except that the gold or silver producers are the ones who are really committing the act of arbitrage through your labor, while you may commit an act of arbitrage across the dollars to gold or silver (or both!) This works in the same exact manner to create an equilibrium across the emerging gold/silver/dollar economy.

Let's bring it back to bitcoins now.

If bitcoins are priced only in dollars, then there's really only the market for Bitcoin/Dollars to set the price.

What if there were a new market of goods that were priced in both Bitcoins and Dollars, and that price was not set by the exchange rate of the Bitcoin/Dollars market? Or even if its price lagged that of the Bitcoin/Dollars market enough to allow for arbitrage to occur? In this case, Widgets (the new market,) would be a tool for the market to further weigh the price of all markets involved, just as with the above example of gold and silver.

What if there were another new good, Watchets, and this good did the same thing? Or what if it were priced only in bitcoins? A new market for relative subjective value exchange would arise, further creating stability in the Bitcoin/Dollar pricing market.

I think the point should be extremely clear at this juncture... The only thing the market needs to create price stability is arbitrage. The only thing it needs is a significant market for goods that are priced in bitcoins, even if bitcoins are not yet the significant unit of account.

This will come about naturally as a larger market adopts the currency. The larger the network effect, the more significant are the opportunities for arbitrage. This will be especially true when people begin closing the loop between sale, production, and employment. As a complete circular flow is established, the adoption as a currency will begin in full-swing, thus creating a self-compounding network effect.

[cbeast]

Renaming it TiggerCoin.

[Asrael999]

Renaming it TiggerCoin.

I remain to be convinced that Bitcoin can bounce...........

[SylTi]

I have to agree, and it's one of the bigger problems facing bitcoin.  If bitcoin is ever going to be a "currency" like it was meant to be it is going to have to be more stable.  And quite frankly there isn't anything in place to make that happen, I agree that simply more merchants and people using bitcoin isn't in itself going to make it stable, more stable yes but probably not stable to the point of it being used as an actual currency.

My theory is that
1) Someone/something will come up with some new code to help stabilize bitcoin some how, how this gets implemented with the approval of the entire community is yet to be seen though. I know some very smart people have some very good ideas they are working with right now.

2) Something "better" replaces bitcoin. Bitcoin is version 1.0 in the p2p crypto currency market and it's become quite evident that people like the idea of this type of currency ,  so it's not unrealistic that someone or some company will come up with something similar but address some of bitcoins problems and gains acceptance from the mainstream.

The truth is we need market maker at major trading site.
Way too many bitcoin are stocked on cold wallet and this make the market very illiquid

[Akka]

Well, as long as Bitcoin is only fueled by speculation and there is no economy behind it it will always only have mania and depression cycles unless it completely dies due to that.

All the speculators do not have any interest at building it. It's simply sell as high as possible and buy back as low as possible. Therefore every rally at a certain level will be fueled as much as possible as well as every crash.

IMO the only way to fix this is if there where any real Bitcoin economy that would account for a constant inflow of Value and a constant outflow. If a certain amount of USD, EUR, ect. flows in and out each day it would make it more resistant to hype and despair manipulation.

Just a growth in user base doesn't help here. More speculators will make it worse not better. Funny thing is this pure speculation is just money changing hands, so it's basically gambling. As Gox for example takes 0.3 % of each side it is gambling with a house edge of 0.6% and it's not a pure luck game but a skill game. Most people speculating here would be far better of just playing roulette in a casino.

[johnyj]

I've been talking with a friend of mine for over two years about investing in Bitcoin. He is not at all interested. He calls it bubblecoin and has a point. Bitcoin will always trade at plus or minus 50% or more and will never stabilize. There is no plan to create any stabilizing factor. Simply expanding the user base will not stop people from pumping and dumping and causing panics. If this were true, then small countries would generally have unstable currencies and large countries would have stable currencies.

Price is psychological and there are no psychological tools to create faith in the price stability, nor is there even any discussion about it. Psychology, sociology, and economics uses statistics to create useful tools. Bitcoin uses "invisible hands" of the free market. Analysts use statistics to look at the market, but their results are not peer reviewed, nor even publicly available. Market analysts are the soothsayers of economics. We need a useful predictive tool for Bitcoin price that is useful for business.

You could always reduce the risk by using a lower leverage, if you only put 10% of your risk capital in bitcoin, then 50% of price movement in bitcoin will only result in 5% volatility for your total risk capital, and a 500% rise in price will result in a 50% total return

People's risk management skill will improve over time

[DeathAndTaxes]

If the OP is correct then why doesn't gold move 10%+ per day?

If the OP is correct then why does silver (a market which is about 5% that of gold) have daily volatility about 800% of that compared to gold (silver's relative beta is 8.0 compared to gold).

Larger markets are less volatile markets.

How do you think the exchange rates between major currencies pairs have so little volatility?    Any guess on how huge the forex market is?  Got a guess.  I will give you a benchmark.  The world GDP is $75 trillion ....  got your guess now (you probably aren't even close) scroll down.

















It is ~$1,800 trillion.  That's right 1.8 quadrillion dollars annually to stabilize a global economy of $75 trillion.   There are no small stable markets ever.   Small and stable never go together.   Bitcoin even at $10B is tiny compared to even silver ($550B) and silver is considered highly volatile as a "small" market compare to gold which is nearly 16x larger (~$8,000B) or 800x larger than Bitcoin.   When Bitcoin is 800x larger it will take tens of billions of dollars to move the market a couple % and as result outside of huge events it won't move more than a couple percent.

[cbeast]

If the OP is correct then why doesn't gold move 10%+ per day?

If the OP is correct then why does silver (a market which is about 5% that of gold) have daily volatility about 800% of that compared to gold (silver's relative beta is 8.0 compared to gold).

Larger markets are less volatile markets.

How do you think the exchange rates between major currencies pairs have so little volatility?    Any guess on how huge the forex market is?  Got a guess.  I will give you a benchmark.  The world GDP is $75 trillion ....  got your guess now (you probably aren't even close) scroll down.















It is ~$1,800 trillion.  That's right 1.8 quadrillion dollars annually to stabilize a global economy of $75 trillion.   There are no small stable markets ever.   Small and stable never go together.   Bitcoin even at $10B is tiny compared to even silver ($550B) and silver is considered highly volatile as a "small" market compare to gold which is nearly 16x larger (~$8,000B) or 800x larger than Bitcoin.   When Bitcoin is 800x larger it will take tens of billions of dollars to move the market a couple % and as result outside of huge events it won't move more than a couple percent.

Good questions all. The answer to all of them is simple. Bitcoin is a 24/7 global market with instant transfer of assets. It doesn't matter how big the market base is. There are no capital controls and no market cool-down periods. Show me another market like that anywhere! All of your examples fail that test. Bitcoin is a 24/7/365 roller coaster theme park, Baby!


edit: Having said this. We must be diligent to use the tools of math to find our own "realistic value" of Bitcoin. Rolling averages help with that.