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Author Topic: Bitcoin not holding its value?  (Read 2769 times)
BitBuster
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August 06, 2011, 02:39:03 PM
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Hi All,

The bitcoin markets appear to be mirroring western markets in that the currency value has fallen. The dollar has almost perpetually decreasing value, and bitcoin is following it.

Surely when the dollar is taking a tumble, bitcoins should be worth more dollars than they were before the fall? And if not, how can bitcoin be tooted as a great way of protecting value (like gold, etc.) if it is tied to the dollar?

Grateful for your thoughts,


BB.
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August 06, 2011, 03:07:37 PM
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Its anyones guess why bitcoins are going down in price in respect with the dollar, but in my opinion the MyBitcoin.com scandal has been a big hit to the confidence in the Bitcoin project. Thats why bitcoins are going down.

I dont think Bitcoin is a big enough market to be affected very strongly by outside stuff.
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August 06, 2011, 03:19:41 PM
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The bitcoin markets appear to be mirroring western markets in that the currency value has fallen. The dollar has almost perpetually decreasing value, and bitcoin is following it.

Surely when the dollar is taking a tumble, bitcoins should be worth more dollars than they were before the fall?
Right now most of the money by individuals is part of their disposable income. When economic conditions deteriorate people generally have less dsposable income so some of the people who have money tied up in bitcoins will be forced to sell them in order to pay rent, buy food, etc. This may or may not be happening right now but until it becomes adopted widely enough that people can pay for the basic necessities of living with Bitcoins it will always be subject to this effect.
And if not, how can bitcoin be tooted as a great way of protecting value (like gold, etc.) if it is tied to the dollar?
Value can't be stored in a currency whether that currency is metallic, fiat or electronic. For the most part value is produced as it is needed just before being consumed. Currencies are means of exchange but can emulate the ability to store value under certain limited conditions.

dancupid
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August 06, 2011, 03:30:27 PM
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It's easier to sell bitcoins cheap than to buy them. If you have bitcoins, you send them to the exchange, wait for confirmation and you can sell them in half an hour. To buy bitcoin you have to wait 3 days at least (in the UK) for your money to clear. People who are worried will sell their bitcoins to the few buyers who have already transferred enough funds. I want to buy at these prices, but I have to wait.
Astrohacker
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August 06, 2011, 03:35:42 PM
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My interpretation: Speculation forms such a giant part of the bitcoin market that a change in people's psychology can radically change the price. There's not enough trade going on to provide resistance to strong fluctuations. This is what caused the huge price increases, and this is what is causing these gradual price decreases.

However, the fundamentals are still sound, so far as I am aware. Bitcoin still is everything it claims to be (a cryptographic currency with a limited supply). Which means I personally would not sell my bitcoins for anywhere near the present prices... I value it much more highly. But I bet a lot of people who buy bitcoins don't understand or don't appreciate the fundamentals. They think the MyBitcoin scandal says something bad about bitcoin itself, even though it says nothing about bitcoin itself. There are really people like this, and they are probably the ones selling their bitcoins. See this thread on reddit: http://www.reddit.com/r/Bitcoin/comments/j7cx9/why_ive_lost_faith_in_bitcoin/

I suppose the fluctuations in the IRL economy may also be causing the price decreases in bitcoins, because as AbelsFire pointed out, people have less disposable income. But all that says is is that people don't understand bitcoin. The fact that the world financial system based on fiat currencies is collapsing is a reason to buy bitcoins, not sell. People should not be using their disposable income to buy bitcoin. They should be using their savings.
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August 06, 2011, 03:36:10 PM
 #6

It's easier to sell bitcoins cheap than to buy them. If you have bitcoins, you send them to the exchange, wait for confirmation and you can sell them in half an hour. To buy bitcoin you have to wait 3 days at least (in the UK) for your money to clear. People who are worried will sell their bitcoins to the few buyers who have already transferred enough funds. I want to buy at these prices, but I have to wait.
+1 it's hard to get money into the system

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August 06, 2011, 03:41:18 PM
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People should not be using their disposable income to buy bitcoin. They should be using their savings.
Only a tiny minority of people have savings. The overwhelming majority either have no savings at all or debts that exceed their savings and debts need to be paid in legal tender.

When incomes drop more quickly than debt loads people will need legal tender so they'll sell Bitcoins to get it. Until they give up completely on trying to service their debts and maintain their previous lifestyle, but by this point it's too late and they won't have any currency to buy Bitcoins with anyway.
Bitcoin Swami
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August 06, 2011, 03:42:38 PM
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Hi All,

The bitcoin markets appear to be mirroring western markets in that the currency value has fallen. The dollar has almost perpetually decreasing value, and bitcoin is following it.

Surely when the dollar is taking a tumble, bitcoins should be worth more dollars than they were before the fall? And if not, how can bitcoin be tooted as a great way of protecting value (like gold, etc.) if it is tied to the dollar?

Grateful for your thoughts,


BB.

I think most of the problems we've been having are directly related to the hacks.  The confidence loss, plus the bastards dumping huge orders onto the markets isn't helping much either. Smiley.  Its ok, everything happens for a reason and bitcoins will be back up and running shortly.  Bitcoins needed that huge popularity surge so that more great minds could jump on the project.  It wasn't ready for the big time just yet.
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August 06, 2011, 03:47:38 PM
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People should not be using their disposable income to buy bitcoin. They should be using their savings.
Only a tiny minority of people have savings. The overwhelming majority either have no savings at all or debts that exceed their savings and debts need to be paid in legal tender.

When incomes drop more quickly than debt loads people will need legal tender so they'll sell Bitcoins to get it. Until they give up completely on trying to service their debts and maintain their previous lifestyle, but by this point it's too late and they won't have any currency to buy Bitcoins with anyway.

That's a good point. You're right that a lot of people don't have much savings and so that constrains their buying and selling of bitcoin. They have to sell when they need the money, and they can't buy when the price is low.
BookofNick
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August 06, 2011, 03:52:52 PM
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For the same reason why gold and silver take huge hits (traditionally) when the stock market plunges. You'd expect the opposite, but as people have said here, the theory is that people needs to liquidate assets to pay their bills.

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August 06, 2011, 03:56:15 PM
 #11

That's a good point. You're right that a lot of people don't have much savings and so that constrains their buying and selling of bitcoin. They have to sell when they need the money, and they can't buy when the price is low.
This rant isn't directed specifically at you, but I've seen this same thing played out with other alternative currencies - people want to get rich off of speculation and live off of passive income.

Well, it doesn't work that way for everybody.

Wealth is created by people transforming lower value inputs into higher value outputs. If you want to increase your wealth in a sustainable way then increase your ability to do this. Learn some kind of trade, put down the video games and go get your hands dirty. Bitcoins is superior to other means of exchange in many ways but having a better means of exchange doesn't benefit you if you don't produce anything worth exchanging.
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August 06, 2011, 04:06:53 PM
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That's a good point. You're right that a lot of people don't have much savings and so that constrains their buying and selling of bitcoin. They have to sell when they need the money, and they can't buy when the price is low.
This rant isn't directed specifically at you, but I've seen this same thing played out with other alternative currencies - people want to get rich off of speculation and live off of passive income.

Well, it doesn't work that way for everybody.

Wealth is created by people transforming lower value inputs into higher value outputs. If you want to increase your wealth in a sustainable way then increase your ability to do this. Learn some kind of trade, put down the video games and go get your hands dirty. Bitcoins is superior to other means of exchange in many ways but having a better means of exchange doesn't benefit you if you don't produce anything worth exchanging.

Agreed. It's interesting how different the economics are for bitcoin than for dollars. With dollars, banks create new money, and so the goal of many businesses is never to be profitable, but to always get new money in the form of loans and investments. This works so long as they can keep convincing the people with all the new money that their business is going to be worth more in the future. Many businesses are basically Ponzi schemes in that sense. But with bitcoin, no one can print new money. If you want to have a successful business, you cannot rely on continuous loans or investment. You must simply create a profitable business. And that is hard.
JCbit
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August 06, 2011, 10:52:05 PM
 #13

it'll balance by the end of the day.
and this will be nothing more then a distant memory   Grin
markm
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August 06, 2011, 11:04:39 PM
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I seem to recall having read elsewhere stuff about how great it is to have one's money go down in price in terms of  other types of money, it is supposed to stimulate people who have those other kinds of money into spending into your economy, apparently because when they think in terms of their currency instead of yours they perceive your economy as a bargain cornucopia in which they can buy everything your merchants are offering at what to them seems low prices.

Is that whole line of bull just a line of bull that tries to pretend there is no such thing as arbitrage?

Or is it basically saying that people who think in some other currency than yours will see the low price of your currency as an arbitrage opportunity so big and/or lucrative that even they the common folk who are not normally into arbitrage will buy your goods thus acting as arbitragers?

(Maybe we are screwing ourselves by being such efficient arbitragers that the outside world doesn't have time to notice our prices have fallen before our shopkeepers raise them?)

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indio007
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August 06, 2011, 11:40:17 PM
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It's easier to sell bitcoins cheap than to buy them. If you have bitcoins, you send them to the exchange, wait for confirmation and you can sell them in half an hour. To buy bitcoin you have to wait 3 days at least (in the UK) for your money to clear. People who are worried will sell their bitcoins to the few buyers who have already transferred enough funds. I want to buy at these prices, but I have to wait.
+1 it's hard to get money into the system


THIS ^^^^^


The liquidity is very asymmetric. I would postulate that that there is no "free market" in bitcoin yet.

I really can't understand why it takes 3 days for a dollar deposit into Dwolla from a bank account. I Don't have to wait 3 days for an ATM withdrawal do I.
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August 06, 2011, 11:43:22 PM
 #16

It's easier to sell bitcoins cheap than to buy them. If you have bitcoins, you send them to the exchange, wait for confirmation and you can sell them in half an hour. To buy bitcoin you have to wait 3 days at least (in the UK) for your money to clear. People who are worried will sell their bitcoins to the few buyers who have already transferred enough funds. I want to buy at these prices, but I have to wait.
+1 it's hard to get money into the system


THIS ^^^^^


The liquidity is very asymmetric. I would postulate that that there is no "free market" in bitcoin yet.

I really can't understand why it takes 3 days for a dollar deposit into Dwolla from a bank account. I Don't have to wait 3 days for an ATM withdrawal do I.

No, but as I recently learned when my fiancee's debit card was one of thousands skimmed at the Michael's craft store chain, ATM withdrawals are also reversible (that's how the scammers took the cash). The reversible nature of the transactions is the big stumbling point. The only way I can think to inject that kind of liquidity on the buy side is to simply take the risk of reversals, which isn't really acceptable.

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August 07, 2011, 01:21:59 AM
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There are some very good insights in this thread as to why Bitcoin's exchange rate is tumbling. I think the most prevalent issues are, in order of influence:

1. Lack of significant perceived relation to real value from tangible goods and/or services.
2. Difficulties in maintaining liquidity among diverse currencies and other conventional financial instruments.
3. Relatively inflexible expansion due to arbitrary base inflation, leading to a hard currency problem of meeting demand with stable price levels.
4. Liquidation by a substantial holder or holders which triggered large-scale breakdown at the $10-12/BTC level.
5. Confidence deterioration exacerbated by 4, periodic internal market disturbances (Mt. Gox, MyBitcoin, etc.) and global turmoil in established markets.

It is important to note that a BTC itself has little, if any objective or subjective value. The system is what is valuable. Until widespread understanding of that system takes root, the Bitcoin economy will be very fragile.


The bitcoin markets appear to be mirroring western markets in that the currency value has fallen. The dollar has almost perpetually decreasing value, and bitcoin is following it.

Surely when the dollar is taking a tumble, bitcoins should be worth more dollars than they were before the fall? And if not, how can bitcoin be tooted as a great way of protecting value (like gold, etc.) if it is tied to the dollar?

I also think the similarity to equity markets is strong, as suggested here. Bitcoin isn't tied to the dollar so much as correlated with it - a float, not a peg.

Currently, the USD is rising along with gov't debt in the form of treasuries. The same thing is happening to the Bitcoin economy as that of the rest of the world in that the markets have been propped up for far too long and are correcting. As several here have pointed out, assets are sold to cover margin calls (or pay bills), so funds flow out of many asset classes into bonds and cash (and increasingly gold/silver, other real assets).

Since Bitcoin is not viewed as a "safe haven" for assets by a significant percentage of the world's population, it will experience outflows during such times as these. However, I strongly suspect that Bitcoin will become much more desirable in the near future as capital controls tighten and restrict the flow of funds between markets globally.

With Bitcoin, there is no such restriction possible without completely shutting down the digital telecommunications infrastructure, and that is potentially fatal to any developed nation. Bitcoin is better than dollars or even gold in this respect because there is no physical medium to transport and central authority to prevent transfer.

I dont think Bitcoin is a big enough market to be affected very strongly by outside stuff.

You're on the right track, but to the contrary. Similar to silver, Bitcoin is so small of a market that it is heavily affected by external market forces. It cannot absorb inflows and outflows of capital while remaining stable, so volatility will be extreme.

The bucket analogy applies here: a 1 liter bucket (Bitcoin) cannot fill a swimming pool (USD) even if fully emptied (value -> 0), whereas a very small amount of the swimming pool volume can completely fill the bucket without a budge in its valuation. Meanwhile, the bucket is overflowing and becomes overvalued until it can be increased in size to accommodate the inflow or be emptied again.

Both participating markets must achieve similar magnitude in order to maintain relative price stability. A perfect example is the difference between the delta in the AUD/USD and EUR/USD percentage changes. The former has had in excess of 5% variability over the past week while the latter has held within 3% difference.

Right now most of the money by individuals is part of their disposable income. When economic conditions deteriorate people generally have less dsposable income so some of the people who have money tied up in bitcoins will be forced to sell them in order to pay rent, buy food, etc. This may or may not be happening right now but until it becomes adopted widely enough that people can pay for the basic necessities of living with Bitcoins it will always be subject to this effect.

Value can't be stored in a currency whether that currency is metallic, fiat or electronic. For the most part value is produced as it is needed just before being consumed. Currencies are means of exchange but can emulate the ability to store value under certain limited conditions.

Most likely, especially during the run-up to $30 or so. I doubt many of those new participants are experienced in trading currencies or any other markets. As soon as a drop occurs, anxiety and panic ensue.

If value can't be stored, how is gold still valued at a consistent amount? Gold is primarily money, not currency. In other words: a store of value, not a means of exchange (although it can be used as such when there are no viable alternatives). Of course, agreed-upon definitions are important here.

The liquidity is very asymmetric. I would postulate that that there is no "free market" in bitcoin yet.

I really can't understand why it takes 3 days for a dollar deposit into Dwolla from a bank account. I Don't have to wait 3 days for an ATM withdrawal do I.

Delay in funds transfer time doesn't delineate a free market. Transferring funds to/from a typical brokerage can take several days depending on the method of transfer.

In order to prevent fraud, there are time buffers to ensure that funds are actually in an account. For instance: I make an overnight deposit at my bank branch for $1,000 (assume total balance to be the deposited amount). Immediately after that, I initiate a transfer for $1,000 to XYZ business from the account I just made a deposit in. The business initiates a transfer request from my bank.

If the fund transfer were to be honored by my bank, then the bank is taking the risk that there may not be the full $1,000 as I claimed on deposit. Thus, the bank holds the funds until it can verify the $1,000. That may take a day. Then, the business has to trust the bank enough to accept the its backing of the $1,000 transfer. In allowing verification for that to clear, another day can pass.

When allowing for charge-backs, this delay can become even longer as the accepting party takes on magnified risk of the funds being denied even after initial approval. Spurious claims of fraud used as a way of getting something for nothing are taking on epidemic proportions as people realize they can order goods or services and then claim not to have ever done so.

Bitcoin transfer between BTC holders is accelerated without the need for such extensive delays or harmful charge-back potential. On the other hand, it requires greater responsibility when handling one's own assets because once you pay, the money is gone.

Agreed. It's interesting how different the economics are for bitcoin than for dollars. With dollars, banks create new money, and so the goal of many businesses is never to be profitable, but to always get new money in the form of loans and investments. This works so long as they can keep convincing the people with all the new money that their business is going to be worth more in the future. Many businesses are basically Ponzi schemes in that sense. But with bitcoin, no one can print new money. If you want to have a successful business, you cannot rely on continuous loans or investment. You must simply create a profitable business. And that is hard.

Exactly, and with increasing difficulty in creating profitable business, the entire Ponzi scheme falls apart. The human control aspect undermines any system, no matter how well-designed. There are ways even Bitcoin can be undermined through human factors (no need to control >50% of the processing power). For now, though, yes - Bitcoin is a huge shift toward a self-regulating system that doesn't rely on human control.


Bitcoin exists so long as there is even one participant in the network with a viable blockchain. Because of this, it will be extremely difficult to eradicate its existence. Since Bitcoins can be lost but not destroyed, their perceived value can only rise over time with increased adoption. Those growing pains will be incredibly painful, though.

Also, the current incarnation of Bitcoin might not be the dominant crypt-currency. Integration with Open Transactions, anyone? That would mostly solve points 1 and 2 listed at the top of this post.

Personally, I hope Bitcoin goes to $0.01 - I'll be buying a few thousand BTC and mining like a rabid ferret in heat at that point...
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August 07, 2011, 02:34:41 AM
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"Bitcoin not holding its price?"

Fixed
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August 07, 2011, 02:35:44 AM
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If value can't be stored, how is gold still valued at a consistent amount? Gold is primarily money, not currency. In other words: a store of value, not a means of exchange (although it can be used as such when there are no viable alternatives). Of course, agreed-upon definitions are important here.
Value is what people consume to satisfy their needs and wants.

If you reflect on the things that you consume on a daily basis you'll see that the overwhelming majority of it is either not capable of being stored (services) or is consumed a very short time after it is produced (food).

Currency is a claim on future production. If the number of currency units expands and contracts proportional to the expansion and contraction of the underlying economy then the currency appears to store value because the amount of production available to be bought with each unit of currency remains constant over time.

But now matter how much you believe that you are actually storing value it's not true in fact. No amount of gold can satisfy your need for a root canal if there's no dentist around. Nor will any amount of Dollars (or Bitcoins) spontaneously transform into a ribeye. Both of those things require someone else to produce them for you as you need them. Since it's not possible to store what hasn't been produced yet clearly currency is not storing value itself.

As mentioned above, a properly-managed currency will create the illusion of value storage and that's a perfectly useful abstraction just as long as you realize that it is an abstraction and not reality.
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August 07, 2011, 02:43:40 AM
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If value can't be stored, how is gold still valued at a consistent amount? Gold is primarily money, not currency. In other words: a store of value, not a means of exchange (although it can be used as such when there are no viable alternatives). Of course, agreed-upon definitions are important here.
Value is what people consume to satisfy their needs and wants.

If you reflect on the things that you consume on a daily basis you'll see that the overwhelming majority of it is either not capable of being stored (services) or is consumed a very short time after it is produced (food).

Currency is a claim on future production. If the number of currency units expands and contracts proportional to the expansion and contraction of the underlying economy then the currency appears to store value because the amount of production available to be bought with each unit of currency remains constant over time.

But now matter how much you believe that you are actually storing value it's not true in fact. No amount of gold can satisfy your need for a root canal if there's no dentist around. Nor will any amount of Dollars (or Bitcoins) spontaneously transform into a ribeye. Both of those things require someone else to produce them for you as you need them. Since it's not possible to store what hasn't been produced yet clearly currency is not storing value itself.

As mentioned above, a properly-managed currency will create the illusion of value storage and that's a perfectly useful abstraction just as long as you realize that it is an abstraction and not reality.

Well said, sir!

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