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Author Topic: What decide the market price of bitcoin  (Read 1163 times)
johnyj
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November 18, 2013, 06:43:46 PM
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Look at stocks:

Stocks are similar to bitcoin, they also have limited supply. The price is decided by the return of stocks. But even for Apple's stocks, if mass sold on the market during a panic, the price will still crash over 90% due to there are not enough fiat money to buy stocks. Historically, many stock markets were shorted to ground simply because there were not enough money to buy during a panic

So, the value of stock can not be only decided by the market force. The reason that stocks were not mass sold on the market is because majority of the investor's rational expectations: They expect to receive certain return from the stock. If the stock price dropped, it became more profitable to own that stock, they will buy, thus support the price


Then bitcoin:

Bitcoin does not have fixed return, it is just a medium of saving and transaction. Its value is also supported by the investor's rational expectation

Currently central banks around the world are pushing extremely loose monetary policy, people need medium of saving that can hedge the inflation risk. Bitcoin can be moved oversea instantly, thus superior than gold and housing. So certain amount of traditional savings will move into bitcoin from a diversification point of view, at least

Offshore tax heaven countries holding 30 trillion USD savings. But those savings are losing their value day by day because of QE infinite. Suppose that 1/10 of those savings will eventually convert towards bitcoin to hedge the inflation risk, and only 10 million bitcoins are available for sell, each coin will worth 300K USD

So this is one of the rational expectations from bitcoin investors. When coin price are lower than this level, investors will have the motivation to buy. At the same time, more and more merchants will start to accept bitcoin, thus further reduce the supply on market, and raise its value

However, there is always the option to invest in mining operations. So basically the speed of difficulty rise will limit the price appreciation speed. If price rise too fast, more money will run into mining operations, thus reduce the support for price, it will eventually stop to wait for the difficulty to catch up

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Mondy
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November 19, 2013, 01:04:54 AM
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Just like any other currency: demand

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November 19, 2013, 01:08:23 AM
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Just like any other currency: demand

Good.


Now what is fuelling demand?

a) Lots of people genuinely engaging with the cryptocurrency concept

b) The expectation of making quick and easy profits.


Once you answer that question you'll see why Bitcoin has a huge problem.
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November 19, 2013, 02:09:29 AM
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There are two different ideas here:  "Market Price" and "Value."

Identical, perhaps in theory, but not in practice.  "Value" is some kind of equilibrium point that, in the long run, "Market Price" driven by rational traders ought to converge on, or fluctuate around.  It is mainly determined by whether something is useful, how many people need to use it, how much of it they need to use, and how much there is.

Bitcoin ties some of these qualities in knots because "how much there is" and "how much people need to use" can be downward- rescaled arbitrarily due to its near-infinite divisibility.  If there were only half a bitcoin in the entire universe, it would *STILL* be "enough".  That said, it cannot be upward-rescaled.  The 21-million coin limit is a hard limit, and in actual fact it's probably more like a 15-million coin limit by now due  to the number of keys that have been lost.  Oh, make it 14-million because Satoshi's not likely to spend his.  

Bitcoin is useful because it is needed for sending payments across the internet more effectively and with less hassle than any other method now known.  I'm going to skip a lot of other things because honestly doing them via banks is not problematic enough to require bitcoin as a solution.  

So ask yourself:  What fraction of the total money spent is sent via the internet using bitcoin daily?  That's the market (you can include other things if you think those things really have a pressing need for bitcoin as opposed to some other means of doing them).  Now ask yourself; how much money is spent in a day, total?  That's the scale.  

Rationally speaking,  (market * scale) = the value of all bitcoin in circulation.

But as we all know, traders are not rational.  If half of bitcoin is held by speculators who do not use it to trade, then it's not "in circulation" and so the "Market Price" will exceed the value by a factor of 2.  if 90% of the bitcoin is held by speculators who do not use it to trade, then it's not "in circulation", and the "Market Price" will exceed the value by a factor of 10.  And so on.  

Such an excess over and above the market price is speculative, and will eventually either collapse or be justified by changes in market and scale.  If a collapse goes too far and the "Market price" actually drops below the value, then people will not be able to get enough bitcoin to do the internet money transfers they want to do and will be forced to use less efficient protocols to do those transfers until a correction drives the "Market Price" up to meet the value again.

Now, at this moment, Bitcoin is used to do a very very TINY amount of actual internet money transfers (ie, the market is ridiculously small which would give a correspondingly tiny value to bitcoin)  but it is overwhelmingly held by speculators, which multiplies that tiny value into a large Market Price.

On top of this you have to speculate about future market and scale numbers in order to know whether the current price is expected to become the rational value at any point in the future.  The price is completely unjustified relative to todays market, but the speculators are all betting that the rational value at some point in the future exceeds the current price, and that's why they're holding it.  There is some danger that they will drive the price *above* its eventual equilibrium point, but I don't believe that has happened yet.


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