Liquidity problem

[johnyj]

No matter how high the bitcoin value is, the coin supply on market will always be limited

Suppose that a new user who were attracted by bitcoin want to invest some of his money into bitcoin and hold it for some time, because the price is volatile short term wise but much more predictable long term wise

Then naturally after bitcoin value rised more than 5 times, he would like to spend 1/5th of his holding to enjoy the return, but still keep the majority of his coin holding as asset. Even one day, his holding are worth so much that he don't even need to worry about spending half of them, he would still spend little of it because the long term profit potential for the saved coins

If majority of people are doing this, for each new people join the bitcoin community, the amount of coins get saved are much more than the amount of coins get spended, this will continuously reduce the daily amount of coin supply, so that almost guarantee the value appreciation long term wise

[bitcoin44me]

What is the problem?

If everyone is going that, some day, the price will be reduced because new people won't want to spend that much money into bitcoin.
Correction will happen, and people will sell more than xx % of their bitcoin in order to get some profit.

[johnyj]

What is the problem?

If everyone is going that, some day, the price will be reduced because new people won't want to spend that much money into bitcoin.
Correction will happen, and people will sell more than xx % of their bitcoin in order to get some profit.

The problem is that the coin supply on the market will always be limited (long term perspective), and that will cause short term price volatitlity

And why new people won't want to spend that much money into bitcoin, if they saw this thing appreciated 10 times per year averagely

[Komodorpudel]

The volatility is not caused by limited coin supply. When there would be  21.000.000.000 BTC instead of 21.000.000 BTC the Volatility would still stay the same.

With higer value of a Bitcoin, there comes less volatility/more stability. When one BTC is worth 10.000 Dollar some can not move the market so easey with litte money.


Right now, with 500.000 Dollar you can move the market a lot.

Now imagine a single BTC is worth 10.000 Dollar: It is much harder, to move the market, which will provide stability. Even when less BTC get traded on markets than now(which is pretty unlikely), price will stay stable, because price goes up with a even more limited supply.

[tutkarz]

The volatility is not caused by limited coin supply. When theire would be  21.000.000.000 BTC instead of 21.000.000 BTC the Volatility would still stay the same.

With higer value of a Bitcoin, there comes less volatility/more stability. When one BTC is worth 10.000 Dollar some can not move the market so easey with litte money.


Right now, with 500.000 Dollar you can move the market a lot.

Now imagine a single BTC is worth 10.000 Dollar: It is much harder, to move the market, which will provide stability. Even when less BTC get traded on markets than now(which is pretty unlikely), price will stay stable, because price goes up with a even more limited supply.

price + more people who will be using bitcoins and trading them. And the higher the price, the more people attracted.

[bitcoin44me]

The problem is that the coin supply on the market will always be limited (long term perspective), and that will cause short term price volatitlity

And why new people won't want to spend that much money into bitcoin, if they saw this thing appreciated 10 times per year averagely

Because bitcoins is a beta stuff... And it is likely to disappear at any time.
You might want to give it a try, and spend 100 USD in bitcoins, but will you spend 1 000 USD or 10 000 USD for 1 bitcoin considering the fact that it can disappear and lost all his value?!

With an higher price, less people will buy, and the price will never increase linearly.

[tutkarz]

The problem is that the coin supply on the market will always be limited (long term perspective), and that will cause short term price volatitlity

And why new people won't want to spend that much money into bitcoin, if they saw this thing appreciated 10 times per year averagely

Because bitcoins is a beta stuff... And it is likely to disappear at any time.
You might want to give it a try, and spend 100 USD in bitcoins, but will you spend 1 000 USD or 10 000 USD for 1 bitcoin considering the fact that it can disappear and lost all his value?!

With an higher price, less people will buy, and the price will never increase linearly.

Sorry but what is the difference if bitcoin price is $100 or $1000000 if you want to spend $100 for something using bitcoins? None.

[tclo]

I don't see the limited supply as contributing to the volatility that much. It's good that it is limited to a finite amount eventually....it's much better than the US dollar where the gov't can print a theoretically infinite supply.

[DeathAndTaxes]

The problem is that the coin supply on the market will always be limited (long term perspective), and that will cause short term price volatitlity

And why new people won't want to spend that much money into bitcoin, if they saw this thing appreciated 10 times per year averagely

Because bitcoins is a beta stuff... And it is likely to disappear at any time.
You might want to give it a try, and spend 100 USD in bitcoins, but will you spend 1 000 USD or 10 000 USD for 1 bitcoin considering the fact that it can disappear and lost all his value?!

With an higher price, less people will buy, and the price will never increase linearly.

Then don't buy Bitcoins buy microBticoins (mBTC) they are only $0.10 ea.

(For the sarcastic impaired no this isn't a solution but the focus on nominal value isn't a problem either)

[joesmoe2012]

How about when he goes to sell them, and mtgox ends up holding onto his money forever, so he can't even use his initial investment to buy anything other than socks or drugs on silk road....

[Jutarul]

And why new people won't want to spend that much money into bitcoin, if they saw this thing appreciated 10 times per year averagely

This kind of thinking stems from the fallacy that consumers have no time preference. In fact it is the time preference which ultimately will lead the consumer to spend their bitcoins. They will spend less if they think bitcoin is undervalued - and more if they think it is overvalued. But the time preference is created by their consumption needs. Their spending behavior sends the correct signal to the merchants, which indicates the correct time preferences and lets them adjust the prices for goods and services.

On a similar note, some have argued that the paradigm of nominal price stability is coming to an end, because it can only be achieved by massive interventions in the money supply, which has negative effects on price discovery itself (prices have to fluctuate and change to reflect differences in productivity and time preferences of consumers). The inflation target of the FED is just a guidance for consumers to value consumption over investment (i.e. give the spending NOW a higher preference), but it corrupts the discovery mechanism in the process.

People who claim that bitcoin has a liquidity problem do not understand that the utility of a medium of exchange (money) does not depend on the overall supply, if you allow the pricing of goods and services to adapt.

Volatility is absolutely caused by supply inelasticity. Which is why we have not really seen the limits of volatility. The inevitable conclusion of that evolution is a bifurcated exchange market.  

Yes - the inelasticity causes the demand for money (capital) to translate directly into price fluctuations of goods and services. Albeit a feature, it can create strong oscillations and pricing confusion. Especially when preceded by strong misallocations of money. Debt based or fractional based instruments like bitcoin ETFs can act as a buffer for short term volatility and help stabilizing the price in the short term. It is important that those instruments are regulated properly, otherwise it is an invitation to do accounting fraud.

[yvv]

And why new people won't want to spend that much money into bitcoin, if they saw this thing appreciated 10 times per year averagely

This happens only because each year newcomers pay 10 times more to buy bitcoins from those, who bought them 10 times cheaper last year. This will not happen forever. When inflow of newcomers into the system will stop, the game will be over. This happens with all financial pyramids sooner or later.

[yvv]

You might want to give it a try, and spend 100 USD in bitcoins, but will you spend 1 000 USD or 10 000 USD for 1 bitcoin considering the fact that it can disappear and lost all his value?!

Believe it or not, there are idiots who invest all their savings into bitcoins.

[MonadTran]

This happens only because each year newcomers pay 10 times more to buy bitcoins from those, who bought them 10 times cheaper last year. This will not happen forever. When inflow of newcomers into the system will stop, the game will be over. This happens with all financial pyramids sooner or later.

Why would the inflow of newcomers stop, in any foreseeable future? Bitcoin has obvious advantages over fiat, its march can easily continue for as long as there is fiat currency left in the world.

[MonadTran]

Believe it or not, there are idiots who invest all their savings into bitcoins.

There are even smart people who invest all their savings into Bitcoin

[yvv]

This happens only because each year newcomers pay 10 times more to buy bitcoins from those, who bought them 10 times cheaper last year. This will not happen forever. When inflow of newcomers into the system will stop, the game will be over. This happens with all financial pyramids sooner or later.

Why would the inflow of newcomers stop, in any foreseeable future? Bitcoin has obvious advantages over fiat, its march can easily continue for as long as there is fiat currency left in the world.

You know, the number of people on the Earth is finite. And the number of anarcho-libertarians is even more finite.

Right now, capitalization of bitcoins is $1B. If it continues to appreciate 10 times per year, its capitalization would reach $1T in 3 years. To reach this number, every single person in developed world would need to invest $1K into bitcoins. An this is not going to happen, because 99.9% of people do not even know about bitcoins. And there are altcoins popping up every week.

Bitcoin market is going to reach saturation in couple of years maximum. And after that, depreciation in value is unavoidable, since millions of hoarders will want to sell their btc at same rate as they do now, because they need to pay their bills in fiat, but no newcomers will want to buy this btc at this rate anymore.

[joesmoe2012]

In what world do you live in, where any markets capital is based upon every person evenly contibuting...

We just need a few warren buffets of the bitcoin community, and then billions of people never will have to touch a bitcoin.

[yvv]

Of course, everybody contributes different amount. This does not change the fact that bitcoins can not continue to appreciate 10 times every year longer than couple of years more. 

[joesmoe2012]

Of course, everybody contributes different amount. This does not change the fact that bitcoins can not continue to appreciate 10 times every year longer than couple of years more. 

This i agree with, its unsustainable.

[MonadTran]

this is not going to happen, because 99.9% of people do not even know about bitcoins

That's a bit like, a guy from 1970 arguing that there can be no Internet, because 99% of the people do not even know what a computer is.
Why the hell does that 99.9% number have to remain static?