Bubble and crashes

[Bitcoiner]

I think the effects of that "illusion" could be debated all day. I need to do a lot more reading up on the topic, myself

Here are three interesting threads that I found that you guys might be interested in:

A big one:
http://mises.org/Community/forums/t/6197.aspx

http://mises.org/Community/forums/p/17430/339679.aspx#339679
http://mises.org/Community/forums/p/8938/273181.aspx#273181

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[Bitcoiner]

I like this post: http://mises.org/Community/forums/p/6197/345624.aspx#345624

This is how I see how banking can work under the Bitcoin models (again, I don't see how fractional reserve could be stable with on-demand deposits without an inflationary lender of last resort):

Fractional reserve banking can be replaced by two types of accounts;  the first is typically known as  demand account where you maintain ownership of the funds.  This type of account is held with the 100% reserve requirement.  In layman's terms,  it is the money you would deposit from your job and use to pay monthly bills.  Think of this account as an electronic safe deposit box which is dynamic.   You would pay a small fee for the convenience of ATM access and automatic bill payment.  The bank would make a profit off the fees paid by each depositor. 

The second type of account is typically known as an investment account.  This is like purchasing a Certificate of deposit.  You would loan the money to the bank in return for interest at a future date.  The bank uses these funds to loan to the community.  These funds would have a zero reserve requirement thus be at risk as all investments are.  The bank would profit on these investments where they pay you X percent return, but in actuality, they may make X+ return.

The history of banking shows that when these two types of accounts are kept separate, the bank failure rate can approach zero.

[Gavin Andresen]

First: it looks like we're in the middle of our first Bitcoin Bubble.  Price today went from about 0.8 US cents to 1.4 US cents on the Bitcoin Market.  Maybe the price won't crash back down... will be interesting to see what happens.

Second, RE: lending:  I think it's going to be really hard to establish enough trust to create a lending bitcoin bank.  I base that on my experiences dabbling as a Prosper.com lender; when hard times hit, repaying your Bitcoin debts will be WAAAAY down on the priority list.

Instead, I think we'll see Ponzi schemes masquerading as lending banks.  Buyer beware!

[Bitcoiner]

First: it looks like we're in the middle of our first Bitcoin Bubble.  Price today went from about 0.8 US cents to 1.4 US cents on the Bitcoin Market.  Maybe the price won't crash back down... will be interesting to see what happens.

Second, RE: lending:  I think it's going to be really hard to establish enough trust to create a lending bitcoin bank.  I base that on my experiences dabbling as a Prosper.com lender; when hard times hit, repaying your Bitcoin debts will be WAAAAY down on the priority list.

Instead, I think we'll see Ponzi schemes masquerading as lending banks.  Buyer beware!

Damn; and I've held off on buying some simply because I don't want to use paypal. Comeon guys! I'm willing to trade poker chips in USD$ for bitcoins!

Agree with you, unsecured Bitcoin loans are pretty much a non-starter for now, and likely will be for a long time until we have a good distributed reputation system in place, and even then they will still be expensive due to the risk.

[Stone Man]

First: it looks like we're in the middle of our first Bitcoin Bubble.  Price today went from about 0.8 US cents to 1.4 US cents on the Bitcoin Market.  Maybe the price won't crash back down... will be interesting to see what happens...

I think since the slashdotting we are seeing a lot of people interested in trying bitcoins so it could cause a bit of a bubble.
There is also a real demand increase that will not go away easily since it is now 3 times harder to generate bitcoins I have estimated that instead of the electricity, cpu depreciation, and ISP costing me $0.006/BC it is now about $0.018. I don't know about anyone else  but that part of the bubble seems to be here to stay.

What do you think?

[scepticus]

the answers to your questions should be in the FAQ at ripplepay.com or one of the other ripple sites. The routing is explained in quite som edetail, but I haven't got the link right to hand just now..

[Gavin Andresen]

Bitcoin will get mentioned someplace with lots of readers, a bunch of those readers will like the idea and try to buy Bitcoins, their price will rise which will draw even more people to "invest", which will drive the price up even more... until people decide that the price isn't going to rise any more and everybody rushes to sell before the price drops.  I predict there will be between one and five Bitcoin bubbles (price will double or more and then crash back down below the starting price) in the next four years .

I'm resurrecting this old thread because I like to reality-check my predictions.

Number of bubbles so far:  one.

(the $0.008 to $0.014 price rise turned out not to be a bubble; the recent $10 to $30 back down under $10 was definitely a bubble)

Zero to one bubbles and crashes per year for the next three years still seems about right.

[miscreanity]

Excellent thread, thanks for resurrecting it.

I'm not sure trying to estimate how many bubbles there should be is accurate. They don't necessarily occur because of an attempt to create them. What did you base your projections on?

What could even happen is that we could see wild swings in Bitcoin value relative to say, USD, but in reality it is the USD that's unstable, not Bitcoin.

As Bitcoiner had pointed out, bubbles must be in relation to another asset. Bitcoin experiencing a "bubble" in this case seems to be tied more to global instability than the Bitcoin system itself. Rather than a bubble, it looks like a deflationary escape from other assets (not always the same ones) mirrored by a rise in Bitcoin.

Any significant wave of new interest will generate a disturbance of capital flow until the pool is large enough to stably withstand the shocks. Derivatives such as Namecoin will likely help with that. Niche entries that are blockchain-compatible will directly provide additional liquidity, much like fractional reserve banking. The major difference is that each variant is also self-regulating - the human control risk is nullified.

I think the danger of fractional reserve banking is losing sight of which asset the system is based on. In our case, fiat dollars are certainly not what the original foundation was. It was dollars as claims on gold and silver. Dollars simply made fungible transfers easier. Bitcoin is providing the same service, but acting in both functions (precious metals backing as well as easily-exchanged currency) while removing the human influence.

Coming back to the bubble topic: in order to estimate the number of shocks to be expected, it might be better to look at how quickly the global economy is deteriorating. Its state seems to be accelerating to the downside with 1-2 minor crises per year and 1 major crisis every 2 years or so. If this rate does increase, then we might expect Bitcoin to undergo more frequent periods of high volatility as well depending on which asset class is most closely associated with the system at the time.

[Gavin Andresen]

As Bitcoiner had pointed out, bubbles must be in relation to another asset. Bitcoin experiencing a "bubble" in this case seems to be tied more to global instability than the Bitcoin system itself. Rather than a bubble, it looks like a deflationary escape from other assets (not always the same ones) mirrored by a rise in Bitcoin.

I think the rise from less than $1 per bitcoin to over $30 per bitcoin was purely a speculative bubble, fueled by all the press/publicity. Even in the absence of global financial uneasiness I think a bubble was inevitable; maybe a lot of the interest in Bitcoin is/was driven by people looking for a deflationary escape, but I doubt it.  Measure bitcoin prices in milligrams of gold (the time-tested deflationary escape) and you'll still see a big bubble and pop over the last few months.

I think it will be years (if we're lucky) before a significant number of investors look at Bitcoin as a deflationary escape from other assets.

What's your prediction for the number of bitcoin bubbles over the next three years?  (measured against whatever basket of currencies or assets you like)  I based my projections on "feels about right to me."

[evoorhees]

There will be numerous bubbles... probably 1-3 per year for a number of years. Bitcoin is so revolutionary, and it's true implications lay somewhere between "gonna collapse and nobody will use it" to "it will totally change the world and dominate international finance." 

With a range of outcomes like that, and extremely liquid global marketplaces for bitcoins, nobody should be surprised to see wild swings in price while humanity tries to discover the "real" value of this new invention.

The true value of Bitcoin is unknowable... it is something the marketplace is trying to figure out.

[Trader Steve]

There will be numerous bubbles... probably 1-3 per year for a number of years. Bitcoin is so revolutionary, and it's true implications lay somewhere between "gonna collapse and nobody will use it" to "it will totally change the world and dominate international finance." 

With a range of outcomes like that, and extremely liquid global marketplaces for bitcoins, nobody should be surprised to see wild swings in price while humanity tries to discover the "real" value of this new invention.

The true value of Bitcoin is unknowable... it is something the marketplace is trying to figure out.

+1

[walidzohair]

I think we will have at least 2-3 bubbles a year .. iy really depend on teh number of stock whales that decide to take advantage of bitcoin.


Maybe one per new (region) entering the bitcoin era. region would be something like states, Europe, middle-east, the Asian five, china , japan and Koreas, .. etc.


Every time a new "nation" = "region"="hordes of individual new speculators and users" enter the bitcoin market a whale will show on buying in mass to raise up teh prices and whip out a lot of small new individual speculators.

Well at least this is what happens here in the ME region and regular stock markets.

the question is will BTc survive the crash EVERY time and can be worth something more than 0.01USD ? will the hard faithful miners stay there after every crash and with even lower prices between crashes to secure our beloved BTC growth ?

I think these are the million dollar (not btc) questions!!!

[miscreanity]

What's your prediction for the number of bitcoin bubbles over the next three years?  (measured against whatever basket of currencies or assets you like)  I based my projections on "feels about right to me."

I'm with evoorhees on the price/value discovery aspect.

As far as bubbles, it depends on the trigger. If there's a spread by word-of-mouth I'd expect a more gradual growth rate, so we might not see any discernible bubbles like the 3,000% jump this year.

From what I gather (feel free to correct me), the slashdot effect (reddit, et al.) seems to have been the major trigger that started the run up. That's a good source of early adopters with technical know-how.

The next trigger will probably be a more usable interface; possibly a functional mobile application. Once that happens, the next rise will likely be much bigger. Any subsequent correction from that should take a longer time to stabilize. Continuing spread of awareness and subsequent waves of new participants ought to bring volatility down.

With mobile usage, I think the Bitcoin economy might grow faster than you'd expect (whether its flexible enough to handle the growth as is remains to be seen). Exogenous shocks from national economies are frightening individuals enough to get them moving into alternatives (gold, Swiss francs, etc). If even a small fraction of that moves into BTCs out of curiosity, the flows could be immense relative to the size of the Bitcoin economy.

I guess it's just hard for me to describe what happened with Bitcoin as a bubble, even though it has the hallmarks. It seems more like naturally exponential growth.

I'm basing my estimation on an assumption of apparent growth so far and what feels right to me in competing factors

2011 (remainder): 0-1
2012: 1-2 (major shock causing 30%+ ranges)
2013: 1-2
2014: 2+
2015: 2+ (weak bubbles; low in magnitude or quick to break)
2016: largely undetectable

[miscreanity]

BitCon 2011? I'm not sure 'Con' is the best representation for a financial instrument.

That's the kind of media shock I'm talking about; insane exposure. I might start buying as much as I can now...

Is there potential for any innovative surprises, or will we have to find out in person?

[Rassah]

BitCon 2011? I'm not sure 'Con' is the best representation for a financial instrument.

Well, the biggest bank in the game SecondLife had an administrator/representative who was a fox (had a fox avatar). ... though that bank did turn out to be somewhat of a ponzi scheme :/

[David M]

(the $0.008 to $0.014 price rise turned out not to be a bubble; the recent $10 to $30 back down under $10 was definitely a bubble)

IMO, Bitcoin has not had a bubble or a crash.

It has had a sustained bull run from $0.06 to $8, followed by a price spike, then a correction.

The re-testing of $6 after hitting $30, gave me a lot of confidence in the Bitcoin market and emphasized my opinion of a long price discovery phase embedded within a long term bull market.