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July 04, 2013, 10:00:25 PM |
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That feeling of panic is a good sign, it's a sign you are not comfortable with your current allocation.
It's a sign that you might be able to look at BTC with less awe, and more realism. I can't emphasis this enough, holding onto BTC for longer than a day is not investing, it's a bet that you will be able to sell at the right time. Don't get me wrong, I make bets that I will be on the right side of the volatility trade all the time. My point, is the fundamentals of long-term BTC holdings are not sound investing.
Investing is generally the based on the belief that "stored value" will be worth more in the future, than it's present value. But right now the value is based on supply & demand. In other words, the Psychology of the BTC holders. If every single BTC holder decided to sell at the same time, the value would be nil. If more people want to buy, the value increases. But you can say that for a number of things, wheat, oil, etc. However, those items have an end use, ie convert to energy (machine or human energy).
What is the intrinsic value of BTC when there is no general tax revenue to back up BTC? What value do you want to assign to it today? tomorrow? Okay, what about everyone else? And that's a problem, a problem that creates the huge price swings. You can do a technical analysis, and on a short-term basis it works, but fundamentals will rule the long term.
Instead of talking about BTC, lets talk about investing in forex. The reason most traders speculate in one currency over another is due to the economy. Is the county that sponsors the currency increasing it's value above the money supply? (using a very loose definition of value & money supply here) So what is the value of BTC economy? There is none, or very little - it's really just a knowledge based economy.
There is another measure we could use to place a fiat value on a single BTC, and that is the cost to produce one BTC in the fiat. ie how much did it cost in electricity, hardware & knowledge to produce that single BTC. However, the dynamics are rapidly changing due to the large scale introduction of ASICS.
Also, there is under appreciated dynamic due to small scale miners being forced to either become a large scale miner with a large investment in equipment or exit the mining game. Large scale investment, usually means people who are liquid enough that they can hold BTC for the right price, ie they don't need the money and are not forced into selling. In other words, their BTC holdings are a fraction of their overall portfolio. But, this also means they can take a loss if they feel that it's no longer worth the risk of further downgrades.
With a decent number of BTC transactions used to facility the trading of illicit goods, you have to look at the big picture. If you take it to an extreme conclusion, the miners & Bitcoin Foundation are supporting the trading of illicit goods. And that's why I think many BTC evangelists hate the idea of being licensed, regulated or subject to some taxing authority. However, having one exchange responsible for 80% of BTC exchanges, is just asking for trouble. Basically, there is a real possibility that the exchange of BTC to USD may become impossible, either due to legal issues or lack of access to exchanges. And that will cause a supply & demand imbalance that cannot be corrected.
I would point out a recent technical change has created an interesting long-term positive for BTC. The current bitcoind software is configured to generate a limited number of BTC. However, the number of orphaned BTC or lost wallets is increasing daily. The new minimum transaction cost will create even more orphaned BTC, as it becomes uneconomical to consolidate small wallets. If you assume Gavin increases the transaction costs over time, even more orphaned BTC will occur. This has the long-term effect of decreasing the supply of BTC.
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