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...