ASICs are the reason the price is dropping, and it will not stop.

[Spaceman_Spiff]

Sorry, but the whole " backed by ... " discussion is such bullshit.  The only reason something needs backing, is if it is inherently crap to start with.  Fiat notes needed backing with gold because otherwise people that were used to using gold or silver as money before wouldn't have trusted them, as they would have been perceived as the Monopoly money that they are.  Infinitely printable Zimbabwe notes....

Fiat money is not backed by gold, that's how it differs from representative money.  Folks trust it just fine -- all the money in the world, including Bitcoin, is fiat.  With Bitcoin value halving in the past month, it may be unwise to draw attention to another dead currency.

Ok, I meant to say that currencies that are now fiat used to be backed by gold or silver.  Do you know of any fiat currency that did not have to go through the representative money stage first (or evolved from another fiat currency that had to do that first, like with the euro)?  I am honestly asking, but my guess is there are few examples.
If something is "just fine", then why back it up in the first place?

On the other hand, gold, silver and bitcoins are valued based on their properties, and how well they can serve as money or a store of value compared to the alternatives (+the non-monetary uses for silver and gold of course).

In other words, during the last month Bitcoin's ability to store value & its usefulness for commerce has HALVED?  Not sure if that's what i'd call a great store of value  

No, that's just price discovery going on.  Perhaps I should have said " gold, silver and bitcoin are valuable because of ...".

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Sorry, but the whole " backed by ... " discussion is such bullshit.  The only reason something needs backing, is if it is inherently crap to start with.  Fiat notes needed backing with gold because otherwise people that were used to using gold or silver as money before wouldn't have trusted them, as they would have been perceived as the Monopoly money that they are.  Infinitely printable Zimbabwe notes....

Fiat money is not backed by gold, that's how it differs from representative money.  Folks trust it just fine -- all the money in the world, including Bitcoin, is fiat.  With Bitcoin value halving in the past month, it may be unwise to draw attention to another dead currency.

Ok, I meant to say that currencies that are now fiat used to be backed by gold or silver.  Do you know of any fiat currency that did not have to go through the representative money stage first (or evolved from another fiat currency that had to do that first, like with the euro)?  I am honestly asking, but my guess is there are few examples.
If something is "just fine", then why back it up in the first place?

Well, for currencies which didn't start out on gold standard the euro comes to mind.  If you feel the euro evolved from other currencies, which in turn were once on gold standard, i doubt i'll find better examples.  Even if we assumed that all fiat was once representative, establishing lineage is no more than saying that all electronics once ran on vacuum tubes -- that's what was around at the time, now toobz are pretty much displaced by silicon chippery (or MOS or whatever), and thoughts of bringing toobz back are romantic but impractical.  

But that's cutting too wide a swath for representative money.  Kubla Khan* issued pure fiat paper money way back when.  It was backed by Kubla Khan.  It worked.

On the other hand, gold, silver and bitcoins are valued based on their properties, and how well they can serve as money or a store of value compared to the alternatives (+the non-monetary uses for silver and gold of course).

In other words, during the last month Bitcoin's ability to store value & its usefulness for commerce has HALVED?  Not sure if that's what i'd call a great store of value  

No, that's just price discovery going on.  Perhaps I should have said " gold, silver and bitcoin are valuable because of ...".

The problem with "price discovery" of a currency is no one knows when it's over.  Unlike haggling & auctions, there is never a point at which a price is established & transaction made.  Currencies forever remain in their "price discovery" phase, which makes them sort-a junky if the price fluctuates wildly.

*In Xanadu did Kubla Khan
 A stately pleasure-dome decree :
 Where Alph, the sacred river, ran
 Through caverns measureless to man
 Down to a sunless sea.  ==That Kubla Khan. Coleridge shopped on SR & wrote all about it

[Zendata]

Basically what OP is pointing towards despite his strange numbers, is over saturation... More coins and not as much demand equals low value.

It is this simple, and there is no need to make overly complex assumptions. Roughly 3,600 new coins are created every day. There must be demand for 3,600 new coins every day for price to stay steady. We just fell off a period of massive amounts of panic buying. Most panic buyers have sold out at this point. However, for price to rise again, we're going to have to wait for more infrastructure and useful functions to come out of bitcoin. And they are coming. Patience is a virtue.

http://thegenesisblock.com/significant-merchant-improvements-planned-for-bitcoin-v0-9/

Exactly. I dont see what the fuss is about.

[Bitcopia]

Fiat money is not backed by gold, that's how it differs from representative money.  Folks trust it just fine -- all the money in the world, including Bitcoin, is fiat.  With Bitcoin value halving in the past month, it may be unwise to draw attention to another dead currency.

I would argue that bitcoin is definitely not fiat money. While government law and regulation does influence bitcoin's value and circulation, it does not create bitcoin's value.

In other words, during the last month Bitcoin's ability to store value & its usefulness for commerce has HALVED?  Not sure if that's what i'd call a great store of value  

Gold's value dropped roughly 33% in the past year. But it's still an excellent store of value. The purpose of a store of value is not typically to be held for a couple of months to make a profit. It is to hedge against inflation. $44 would buy you 1.00 ounce of gold 30 years ago. Those same $44 will now buy you less than 0.04 ounce of gold, even after a massive price drop. At minimum, a 5 year chart should be used to see if something is a good store of value. Bitcoin hasn't even existed for 5 years.

[crumbs]

Fiat money is not backed by gold, that's how it differs from representative money.  Folks trust it just fine -- all the money in the world, including Bitcoin, is fiat.  With Bitcoin value halving in the past month, it may be unwise to draw attention to another dead currency.

I would argue that bitcoin is definitely not fiat money. While government law and regulation does influence bitcoin's value and circulation, it does not create bitcoin's value.

Fiat means simply "decree."  Fiat money differs from representational money by the simple fact that it is backed by nothing but fiat -- decree. 
Real currencies are issued by states, but if you & Fred agree that a shiny piece of tinfoil is worth one toy balloon, you have created a fiat currency.  Congratulations.

In other words, during the last month Bitcoin's ability to store value & its usefulness for commerce has HALVED?  Not sure if that's what i'd call a great store of value  

Gold's value dropped roughly 33% in the past year. But it's still an excellent store of value.

I'm afraid that's not quite right.  Gold turned out to be an *awful* store of value, as in "lost 33% in one year" awful.  If you invested in the oft-maligned US Dollar, you would have been 33% richer right now.  Don't repeat foolish things others have said.

The purpose of a store of value is not typically to be held for a couple of months to make a profit.

No, that's a purpose of an *investment* at best, but given your time frame of a "couple of month," i'd say "scam" is more likely.

It is to hedge against inflation. $44 would buy you 1.00 ounce of gold 30 years ago.

An ounce of gold was worth exactly  $416.25 exactly 30 years ago, move your decimal point, you're confusing people.

Those same $44 $416.25 will now buy you less than 0.04 more than 1/3 ounce of gold, even after a massive price drop. At minimum, a 5 year chart should be used to see if something is a good store of value.

I think you've been lied to, i'm sorry.  Your gold numbers are off by a factor of ~100.  One frickin' hundred. Two decimal places.  Not in your favor.  Good morning!

Bitcoin hasn't even existed for 5 years.

Then how could it be a great store of value?@!

[Spaceman_Spiff]

Apparently people view "store of value" differently.
Some appear to look at it as "low volatility".
I think it means " the expected value after a long period of time is not lower than the current value".

[Spaceman_Spiff]

Bitcoin hasn't even existed for 5 years.

Then how could it be a great store of value?@!

I think we might have had this discussion before. 

If gold had been discovered 4 years ago, you would say that it didn't have the properties to serve as a store of value?  (or whatever else you believe is a store of value, since you don't seem to think gold functions as one)

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Bitcoin hasn't even existed for 5 years.

Then how could it be a great store of value?@!

I think we might have had this discussion before.  

If gold had been discovered 4 years ago, you would say that it didn't have the properties to serve as a store of value?  (or whatever else you believe is a store of value, since you don't seem to think gold functions as one)

You're not seeing the whole picture.  You missed this part of the post i was replying to:

At minimum, a 5 year chart should be used to see if something is a good store of value. Bitcoin hasn't even existed for 5 years.

By his own measure, Bitcoin is a nonstarter.

Edit:  And sure, if gold was found 4 years ago it would be a godawful store of value.  Worse than it is today.
What do *you* consider a good store of value, so we can start somewhere? Honest question.

[Spaceman_Spiff]

Edit:  And sure, if gold was found 4 years ago it would be a godawful store of value.  Worse than it is today.
What do *you* consider a good store of value, so we can start somewhere? Honest question.

Yeah, I totally disagree with the newfound gold thing, but whatever.

What I find a good store of value?  Well, I guess a perfect store of value doesn't exist, people can always want or not want certain stuff in the future, production processes can always suddenly become a lot more efficient etc. .  Honestly, if bitcoin works out and there is no competitor to replace it, I would say it is has the properties to be the best store of value so far, although we are far too early for it perform that function reliable. The best ones I can think of now are gold, oil/gasoline, silver, alcohol, wood, base metals, tobacco, salt ....

What is your definition/example of a store of value?

[Bitcopia]

crumbs,

I was using gold prices from 1972 and blurted that out quickly this morning without proofing. Replace the 30 years with 40 years and the rest is valid. So, you're right, people have different ideas of what a store of value is. And everything has to exist for less than 5 years before it can exist for 5 years. So, how is bitcoin a non-starter? Edit: Even if you look at the past four years, from inception until now, bitcoin has absolutely been an excellent store of value. Maybe we can just agree to disagree.

[crumbs]

Edit:  And sure, if gold was found 4 years ago it would be a godawful store of value.  Worse than it is today.
What do *you* consider a good store of value, so we can start somewhere? Honest question.

Yeah, I totally disagree with the newfound gold thing, but whatever.

What I find a good store of value?  Well, I guess a perfect store of value doesn't exist, people can always want or not want certain stuff in the future, production processes can always suddenly become a lot more efficient etc. .  Honestly, if bitcoin works out and there is no competitor to replace it, I would say it is has the properties to be the best store of value so far, although we are far too early for it perform that function reliable. The best ones I can think of now are gold, oil/gasoline, silver, alcohol, wood, base metals, tobacco, salt ....

What is your definition/example of a store of value?

I'm pretty much with you on the store of value, all of the things you listed (i have problems with gold, i believe most of its value is simply convention, and a dying one at that, now that no one is using the gold standard).  I would just like to point out that the whole concept of "store of value" is flawed -- it implies taking money out of the economy, where it does absolutely no good.  This is a problem with non-inflationary currencies -- there is less incentive to use them -- your money will still be worth as much if you just locked it away in a safe.  Inflation?  Use it or lose it, buddy.  Curbs the hoarding instinct.  Something like that.  As a selfish guy, i don't want there to be a great "store of value," i don't like hoarders

[Littleshop]

Remember when people said that rise in hashrate caused a rise in price?

Now everyone is saying the opposite.

The reality is the hashrate has no effect on price whatsoever!!

You assume all miners have the same intention of coins.

GPU miners held coins.

ASIC miners sell coins.

The market is so small that the 3600 coins per day mined has a massive effect on it.

Agreed.  Though ASICMINER probably sells most of its coins, not all ASIC miners do that.  Smaller operators who own 1 device are probably not in such a hurry to sell like GPU miners.  The problem is that ASICMINER is controlling too much of the hashrate and makers of ASICS for everyone else just have not delivered enough volume.

[crumbs]

crumbs,

I was using gold prices from 1972 and blurted that out quickly this morning without proofing. Replace the 30 years with 40 years and the rest is valid. So, you're right, people have different ideas of what a store of value is. And everything has to exist for less than 5 years before it can exist for 5 years. So, how is bitcoin a non-starter? Edit: Even if you look at the past four years, from inception until now, bitcoin has absolutely been an excellent store of value. Maybe we can just agree to disagree.

At its inception, the value of 1 BTC = 0, so if Bitcoin today was worth only $0.01, it still would be a great investment.  It would be a lousy investment if, after buying it at today's price, it crashed to $0.01, though.  The problem is there's no guarantee that Bitcoin's value will keep going up, or even that it will stay the same.  
I can point to many stocks, let's say AAPL, that turned out to be great investments if you bought at the right time.  Does it follow that I should invest in AAPL now?  
I'm not saying "Bitcoin is worthless" -- it's an exceptional thing.  It's both brilliant & audacious, but so were many things that failed.  Let's hope i'm wrong -- i do.

[crumbs]

ASICs are the reason the price is dropping, and it will not stop.

Difficulty will skyrocket regardless. This will make Bitcoin network more secure, then even more secure then producers will jump to the next generation of ASIC chips and the cycle will repeat itself.

Do not forget that there are at least half a dozen of independent producers rushing to produce better and better ASIC miners ASAP. Many of those already invested loads of money into technology and about to start producing mass quantities of chips as soon as they can. In fact some are already in advanced stages of producing next generation of chips and expect to tap out in early Fall of 2013.

Expect ASIC miners to be cheap as dirt and in plentiful supply and not profitable to run anywhere but in places with free or very cheap electricity. This is inevitable.

OP's theory of ROI influence on Bitcoin price makes no sense. The only thing Bitcoin price depends on are network security and adoption level. Both of which BTW rise exponentially and mass production of mining devices drives difficulty that drives security and this so some degree drives Bitcoin price and adoption.

It appears that some "Bitcoin Miners" simply lose ability of independent rational thought when driven out of marketplace by newcomers. This is what causing prices to drop, not proliferation of the ASIC devices directly.

But this hysteria will pass with time.

Wait, are you suggesting that influx of newcomers, combined with irrationality of old school miners, is the reason the price dropped 30% over a few days?  RLY?

[Luckybit]

Nature abhors a vacuum

Economics abhors a magic machine that prints money.

Here's what the network will look like at the end of 2013.  Here's what the exchange rate will be set (forced) to by ASICminer and the few others fighting over ASICminer's scraps dumping their coins desperately trying to claw their way to make ROI

Incoming hashrates:

ASICminer = 800 - 1000 TH
Avalon Chips = 300 TH
Avalon Batch 2 = 30 TH
KNCMiner=  200 - 400 TH
BFL = 100 - 1000 TH

Hash rate : 1430 TH/sec - 2730 TH/sec

Difficulty : 203396803 - 388302987


If ROI is fast (i.e. meets 100% ROI in less than a year) because exchange rate is good, difficulty will go up to compensate as people want to buy magic money making machines

if exchange rate is sane, difficulty will not go up because ROI is normal, i.e. one year.  This is what is happening now.  This is what will continue to happen.  So let's see what the exchange rate will be to make ROI sane @ 1 year


Marginal rate for plebs to buy hardware (KNC miner) : 17,500$ per TH/sec.

Price of BTC if set by plebs

Low diff: 49$
Max diff: 93$

Marginal rate for ASICminer to buy hardware : <10,000$ per TH/sec.  We'll be conservative and use 10,000$.  In reality it's probably closer to 5,000$, which means halve these numbers.

Price of BTC when set by ASICminer

Low diff: 11$
Max diff: 21$


Asicminer controls the price of bitcoin.  They are the reason the price has dropped.  It is impossible for anyone to get ANYWHERE near their level of efficiency except the ASIC designers themselves.  All of who currently charge an order of magnitude more for their chips than they actually pay for them.  ASICminer can get their chips for pennies on the dollar compared to you, and pays next to nothing for their industrial electricity.

There is nowhere near enough demand to buy coins to make up for the massive amount mined and dumped on a constant basis.  The exchange rate will continue to plummet until the value of dumped coins actually meets the amount of money flowing in for goods and services (practically non-existant at this time.)

And as the price drops nobody who isn't an idiot will consider holding coins as an investment

TL;DR - Unless YOU are ASICMiner, or you got an ASIC already (Avalon Batch #1) - You are screwed.  No, don't buy coins either, the price is going to keep dropping.

Oh, bonus points.  They EASILY have enough hardware to 51% the network.  They could break 75%.

I expect difficulty to skyrocket exponentially. We should prepare for this and invest appropriately. PPcoin for instance.

[RationalSpeculator]

I think were just seeing the deflation of the bubble as hype has died down the amount of dollars offered on exchanges to buy coins has declined precipitously.  This graph is the single most important graph for understanding BTC.

http://www.bitcoinx.com/charts1/depth_mtgox.png

The value of BTC is almost always equal to the dollar depth divided by the coin depth, as coin depth increases or dollar depth declines then the exchange rate will fall.  Dollar depth peeked in mid May and has been on a steady decline punctuated by some sharp drops and then a temporary bulge during the Gox withdraw black-out.  Coin depth was in decline right up to the day of the peak and has been rising steadily since late May.

In the end the value of BTC is determined by the daily flow of dollars willing to invest permanently in BTC.  At the start of the year before the latest bubble that figure was around $100,000 and maintained a price of ~$15.  The sustainable price is directly proportional to the sustained investment rate divided by coins offered, but it is very likely that only a tiny fractions of new coins are being offered for sale and virtually no old coins.  Their could be some effect if ASIC miners are more or less inclined to sell their coins then GPU miners but if anything I suspect GPU miners had to sell more due to their high marginal electricity costs and the primary driver of current exchange rate declines are on the demand side.

This is a question that is amenable to study, just identify coins mined by ASIC miner and compare how many of them have passed through an exchange vs the remaining miners.

Another very informative post. Thank you so much Impaler.

[DavidBAL]

IMO, Bitcoin is like a living ecosystem.. it is so complex and interconnected that it is very difficult to make the correct analysis on any observation.. difficulty is probably correlated to price somehow, but I'm not impressed by any explanations I've read here as to why (mean that in a nice way, idk either!). I mean think about how much worthless analysis was done on flowers and bees before people understood their underlying connection.

Also I'd like to toss an idea out there: Shouldn't Bitcoin create a "backwards" moral hazard? Bitcoin users may act in ways that are not immediately as advantageous but long term help build bitcoin and thus insure the value and future worth of their holdings? Like pools purposely not hitting 51% because it would devalue bitcoin as a whole.. Maybe Mining manufactures are keeping the majority of their profits in bitcoin instead of converting to usd.. Thats what Yifu (Avalon) said in San Jose. That would mean the 10s of millions $ worth of bitcoin flowing into mining equipment hasn't left the system (yet?) What that means long term I have no idea.