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Author Topic: Will bitcoin be the next Tulip Mania?  (Read 5232 times)
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February 10, 2011, 06:46:56 PM
 #21

None of us knows how many are being traded each day. MtGox is the biggest market, but there are others and there are surely off-the-exchange transactions happening all the time.

Would the US economy be more healthy if every dollar was being spent every week or day or faster? How much would I have to sell on the forex market to make the total value in EUR of all USD drop by $10B (what would this be .1% drop or less?) If I just slam it I bet it's less than $1B. This is a total guess, I really don't know. I just don't think Total Number * Price is meaningful in most context, and not this one in particular.
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ShadowOfHarbringer
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February 10, 2011, 06:54:07 PM
 #22

The exchange rate needs backing value to be real.

Just out of curiosity.

Can a currency be backed mostly or completely by another currency ? Has anything like that ever happened in history ?

I don't know, I'm seriously asking a question - this is not sarcasm or anything.

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February 10, 2011, 07:04:06 PM
 #23

The exchange rate needs backing value to be real.

Just out of curiosity.

Can a currency be backed mostly or completely by another currency ? Has anything like that ever happened in history ?

I don't know, I'm seriously asking a question - this is not sarcasm or anything.

Gold was being used as a currency then FRN were created and backed by that currency, then that backing was removed and they kept being used out of habit and/or force. Does that count? And now some nations currency are backed by FRNs.
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February 10, 2011, 07:15:17 PM
 #24

The exchange rate needs backing value to be real.

Just out of curiosity.

Can a currency be backed mostly or completely by another currency ? Has anything like that ever happened in history ?

I don't know, I'm seriously asking a question - this is not sarcasm or anything.

Gold was being used as a currency then FRN were created and backed by that currency, (...) Does that count? And now some nations currency are backed by FRNs.

I am not sure, but i guess yeah.
However that wasn't "clean case", because FRNs were also "legal tender" so that kind of adds purchasing power the the currency.

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February 10, 2011, 08:32:24 PM
 #25

The exchange rate needs backing value to be real.

Just out of curiosity.

Can a currency be backed mostly or completely by another currency ? Has anything like that ever happened in history ?

I don't know, I'm seriously asking a question - this is not sarcasm or anything.

I dont understand fully, but I've read that several other countries back their currency with the US dollar.

Do not waste your time debating whether Bitcoin can work. It does work.

"Early adopters will profit" is not a sufficient condition to classify something as a pyramid or Ponzi scheme. If it was, Apple and Microsoft stock are Ponzi schemes.

There is no such thing as "market manipulation." There is only buying and selling.
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February 10, 2011, 08:44:33 PM
 #26

The exchange rate needs backing value to be real.

Just out of curiosity.

Can a currency be backed mostly or completely by another currency ? Has anything like that ever happened in history ?

I don't know, I'm seriously asking a question - this is not sarcasm or anything.

I dont understand fully, but I've read that several other countries back their currency with the US dollar.

So it is possible for a currency to be strong without the need for a lot of goods to be traded with it ?

barbarousrelic
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February 11, 2011, 02:56:01 AM
 #27

The exchange rate needs backing value to be real.

Just out of curiosity.

Can a currency be backed mostly or completely by another currency ? Has anything like that ever happened in history ?

I don't know, I'm seriously asking a question - this is not sarcasm or anything.

I dont understand fully, but I've read that several other countries back their currency with the US dollar.

So it is possible for a currency to be strong without the need for a lot of goods to be traded with it ?
I suppose, if the currency is backed by another currency that does have a lot of goods traded with it.

Do not waste your time debating whether Bitcoin can work. It does work.

"Early adopters will profit" is not a sufficient condition to classify something as a pyramid or Ponzi scheme. If it was, Apple and Microsoft stock are Ponzi schemes.

There is no such thing as "market manipulation." There is only buying and selling.
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February 11, 2011, 11:30:43 AM
 #28

So it is possible for a currency to be strong without the need for a lot of goods to be traded with it ?
I suppose, if the currency is backed by another currency that does have a lot of goods traded with it.
Bitcoin is a medium (or currency) to trade hard private currencies with. So this is good for the private currencies, because they will be used more.
casascius
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February 11, 2011, 02:11:02 PM
 #29

So it is possible for a currency to be strong without the need for a lot of goods to be traded with it ?
I suppose, if the currency is backed by another currency that does have a lot of goods traded with it.
Bitcoin is a medium (or currency) to trade hard private currencies with. So this is good for the private currencies, because they will be used more.

When I first made the statement, what I meant (and probably should have said) is that it should be backed by a diverse base of goods and services so that the value doesn't just implode next time somebody sells a few.

It looks like we crossed parity just by someone making what looked like a $30k buy all at once.  Then somebody sold off a few, being past parity vanished just as quickly as it started.  A couple more sells like that would have the disastrous opposite effect, since nothing but hope is holding the value there, hope only gets you so far.  Look what hope is doing for real estate.

If someone sold as few as 80000 BTC today (well less than 2% of total BTC...somebody generating coins has GOT to have this in their couch, there's 5.3M of them out there!) they would capture that $30k for themselves, plus the few big buys others have made to bring the price so high.  And BTC would be trading under 50 cents again.  The only thing would bring it back up would be a line of suckers willing to put their $30k's on the table while the price was artifically high, where the same people could swipe it again...

It would be different if there were thousands of merchants all offering $1 worth of goods and services per BTC... someone liquidating 80000 BTC would be nuts, people would be snapping it up to turn around and get cheap groceries.  That's nowhere near the case today.  The true rate of growth of BTC is directly related to what you can buy with it... it's growing... but it's still mainly VPN's and porn.

On the one hand, I can see coin generators not wanting to liquidate their stash, as they too wouldn't mind the value of their coin going sky high.  But then, perhaps one of them sees there's a pretty sizeable pot out there, understands it's a mirage, and would like to be the first to take it in exchange for only a small percentage of their holdings.  To buy BTC right now is to leave money where someone can take it anytime and we just hope they don't.




Companies claiming they got hacked and lost your coins sounds like fraud so perfect it could be called fashionable.  I never believe them.  If I ever experience the misfortune of a real intrusion, I declare I have been honest about the way I have managed the keys in Casascius Coins.  I maintain no ability to recover or reproduce the keys, not even under limitless duress or total intrusion.  Remember that trusting strangers with your coins without any recourse is, as a matter of principle, not a best practice.  Don't keep coins online. Use paper wallets instead.
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February 11, 2011, 03:25:18 PM
 #30

It looks like we crossed parity just by someone making what looked like a $30k buy all at once.  Then somebody sold off a few, being past parity vanished just as quickly as it started.

Don't sweat the individual trades or the short-term moves. Look at the all-time chart and see that there's strong underlying interest in Bitcoin.
casascius
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February 11, 2011, 03:42:43 PM
 #31

It looks like we crossed parity just by someone making what looked like a $30k buy all at once.  Then somebody sold off a few, being past parity vanished just as quickly as it started.

Don't sweat the individual trades or the short-term moves. Look at the all-time chart and see that there's strong underlying interest in Bitcoin.

With all due respect, this is coming from someone who makes no secret of generating and holding Bitcoins as a major investment:

I have three Bitcoin wallets, of approximately equal size.

One wallet will sit untouched until I retire in a few years, then I'll sell the coins over time to provide some retirement income. Obviously I'm hoping that the value of this wallet will grow considerably.

Another wallet is for members of my family. I will give it to them when Bitcoin is easy enough (and safe enough) for non-technical people to use.

I agree that there is strong underlying interest.  Is the interest in Bitcoin in a concept, or the present block chain and distribution of coins as we know it?  How well placed is that interest if the value of one's coins can implode anytime an "investor" wants to cash out?

Compare to a Federal Reserve that somehow has a magic constraint and verifiably can't ever print money past a pre-defined limit.  That would be good for the USA right?  But then imagine this same Fed makes less than 2% of the currency accessible to the public, and those who created the Fed collectively save 98% for a rainy day.  If there is USD $14 billion out there, and tomorrow there is 1.5 or 2 or 4 or 50 times that, will it make any difference if the fed says, "We didn't just print this yesterday - we've just been saving it this whole time".

Don't get me wrong - I bought a small chunk of coins too, and I will be highly enthusiastic if I can sell them for 1.5x or 2x or 4x or 50x what I paid for them, though I doubt I'll be able to retire on them.

Companies claiming they got hacked and lost your coins sounds like fraud so perfect it could be called fashionable.  I never believe them.  If I ever experience the misfortune of a real intrusion, I declare I have been honest about the way I have managed the keys in Casascius Coins.  I maintain no ability to recover or reproduce the keys, not even under limitless duress or total intrusion.  Remember that trusting strangers with your coins without any recourse is, as a matter of principle, not a best practice.  Don't keep coins online. Use paper wallets instead.
ribuck
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February 11, 2011, 04:04:46 PM
 #32

I bought a small chunk of coins too ... though I doubt I'll be able to retire on them.

Well exactly. I don't know what you're imagining, but I just said "some retirement income", I didn't say I'd be able to retire on them alone. I also didn't say "major" investment; you made that up.

Sure, the price of a bitcoin varies a lot in the short term. So don't worry about the short term price, just look at the long term price trend.

There's no way to make the short term price more stable while Bitcoin is in its early phase. As you've pointed out, the short-term price fluctuations don't mean very much, so why worry about them?
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February 11, 2011, 04:25:11 PM
 #33

Casascius, let me return to your first post from this thread:

Each 10 cent change in the price supposedly changes the value of the whole Bitcoin economy by over $500k USD... which leads me to believe that something's just not right.  There is a huge disparity here. Someone should not be able to create or destroy $500k worth of "wealth" by moving only $15k.

Wealth is not created by moving money through an exchange. Wealth is created in the productive economy outside of the exchange. (Well, actually the percentage fee charged by the exchange is part of the productive economy, but that's beside the point.) So it is not the case that a 10 cent change in the price changes the value of the whole Bitcoin economy.

What the exchange rate provides is an approximation of the perceived value of the items being traded. It's an approximation because it only reflects the value as perceived by those who are carrying out the exchange. Nevertheless, it's a data point that can be useful for some purposes.

In addition, the bitcoin exchange rate depends on what the traders think will be the future value of the productive bitcoin economy, based on the time preference of the individuals carrying out the trade.

So if the "real" value of the bitcoin economy doesn't come from the exchange, but is just approximately reflected by the exchange, where does it come from?

Sure, some of that value comes from people who are trading in bitcoin today. There are some people using Bitcoin to pay for ads, tips, servers, hosting, Amazon purchases, gambling, porn, auctions etc. But the level of direct trade is not enough to account for the bitcoin exchange rate.

There are also a lot of Bitcoin-related assets being created. Every piece of software written to handle bitcoin transactions; every new service being designed and implemented; every new idea being tried out; these things are all building assets that can provide a bitcoin income in the future. And that's where the rest of the value comes from.

No doubt 90% of the Bitcoin business assets that are now being created will eventually fail. But some of the remaining 10% may become spectacularly successful. It's a "wild west frontier zone" for people who want to try out new and interesting business models.

When someone trades bitcoins, they (perhaps subconsciously) take into account many factors including the current level of the bitcoin economy, the potential future level, the psychology of others, and their own psychology (e.g. time preference and adversity to risk).

Every trade has a buyer and seller. So every time someone buys bitcoins (because they guess that the bitcoins will be worth more to them than the dollars), someone else is selling bitcoins (because they guess that the dollars will be worth more to them than the bitcoins).

Therefore the rising price of bitcoin on the exchanges doesn't mean that Bitcoin is a "sure bet". It just means that for the two people conducting that trade the agreed price is somewhere between the two people's estimation of the value.
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February 12, 2011, 04:17:24 AM
 #34

Maybe there is a bubble, maybe there isn't a bubble.  The best way to prevent a bubble is to use your own judgment and not listen to everyone else.
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February 12, 2011, 08:18:36 AM
 #35

Maybe there is a bubble, maybe there isn't a bubble.  The best way to prevent a bubble is to use your own judgment and not listen to everyone else.

There is always some bubble, smaller or bigger. Bubbles lies in the nature of speculation.
But i guess that it is normal and one trading bitcoin just needs to take the risk into account.

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