Why bitcoin's exchange rate won't drop too much

[johnyj]

Bitcoin's exchange rate won't drop too much because existing holders can support it

One extreme example:

Suppose that one guy have 31 million dollars, he bought all the 21 million coins at $1, and sold 10 coins to others. Then, he still have $10 million at hand. Then he refuse to sell any coins below a market price of $1 million and are willing to buy any coin at a price of $1 million. Then bitcoin's market price will be $1 million, and his total net worth will be $21 trillion (By using only 31 million dollars, he raised his net worth to 21 trillion dollars)

If there are 21 million users, each of them bought 1 coin at $1, and refuse to sell any coin below a market price of $1 million, then bitcoin's market price will also be $1 million

So, when the price drops, the existing coin holders will have a good way to protect their wealth: They can simply refuse to sell the coin below a certain price and even step into exchange to buy (This is actually what central banks do on Forex market), it will easily break the downward trend

Of course that will not stop the inflow of daily mined coins, but today's miners all carry a very high cost, so they would also refuse to sell the coins below their cost

If the coin supply is unlimited, this strategy will not work

[Sindelar1938]

That's deflationary currency 101
However, note that collusion is tricky in a decentralised setting
One big whale liquidating can trigger a massive sell off, admittedly becoming less likely with every day thy passes without it happening

[EvilPanda]

Just look at what people post here. Most of them hold some, even those sceptical bears.

[JorgeStolfi]

One extreme example:

Suppose that one guy have 31 million dollars, he bought all the 21 million coins at $1, and sold 10 coins to others. Then, he still have $10 million at hand. Then he refuse to sell any coins below a market price of $1 million and are willing to buy any coin at a price of $1 million. Then bitcoin's market price will be $1 million, and his total net worth will be $21 trillion (By using only 31 million dollars, he raised his net worth to 21 trillion dollars)

So the guy did no productive work, but just by sitting on his Bitcoins he got so fabulously wealthy that he can buy the US Gross National Product wth only half his wallet.

Don't you feel that there must be something wrong with this scenario?

Being rich means that you own a disproportionate slice of the world's real wealth. You cannot increase your slice without reducing that of someone else.

The Bitcoin cabal cannot force people to use Bitcoin to buy things or services.  If doing so means giving their slice of the world to the Bitcoin cabal, people will use some other currency.

[porc]

One extreme example:

Suppose that one guy have 31 million dollars, he bought all the 21 million coins at $1, and sold 10 coins to others. Then, he still have $10 million at hand. Then he refuse to sell any coins below a market price of $1 million and are willing to buy any coin at a price of $1 million. Then bitcoin's market price will be $1 million, and his total net worth will be $21 trillion (By using only 31 million dollars, he raised his net worth to 21 trillion dollars)

So the guy did no productive work, but just by sitting on his Bitcoins he got so fabulously wealthy that he can buy the US Gross National Product wth only half his wallet.

Don't you feel that there must be something wrong with this scenario?

Being rich means that you own a disproportionate slice of the world's real wealth. You cannot increase your slice without reducing that of someone else.

The Bitcoin cabal cannot force people to use Bitcoin to buy things or services.  If doing so means giving their slice of the world to the Bitcoin cabal, people will use some other currency.

+1

[jonat3]

One extreme example:

Suppose that one guy have 31 million dollars, he bought all the 21 million coins at $1, and sold 10 coins to others. Then, he still have $10 million at hand. Then he refuse to sell any coins below a market price of $1 million and are willing to buy any coin at a price of $1 million. Then bitcoin's market price will be $1 million, and his total net worth will be $21 trillion (By using only 31 million dollars, he raised his net worth to 21 trillion dollars)

So the guy did no productive work, but just by sitting on his Bitcoins he got so fabulously wealthy that he can buy the US Gross National Product wth only half his wallet.

Don't you feel that there must be something wrong with this scenario?

Being rich means that you own a disproportionate slice of the world's real wealth. You cannot increase your slice without reducing that of someone else.

The Bitcoin cabal cannot force people to use Bitcoin to buy things or services.  If doing so means giving their slice of the world to the Bitcoin cabal, people will use some other currency.

This is wrong. This assumes that wealth is finite and that it's a zero sum game to determine marketshare of that wealth. This doesn't take into account how new value springs into existence.

Take the computer for example and assume that an economy only has 1000 dollars of coins circulating. In the past, we had no computers. The first time someone invented a computer, it was still $0 dollars, because new products always have a market value of 0 when they first enter the scene. It's only when people assess the utility of the product that they assign value to it. Assume for a moment that the computer is eventually valued as being worth $500. What is the worth of the entire economy? That would be $1500. Why? Because wealth is not only the coins that circulate. ASSETS are wealth as well. This is how economies grow and it's the reason why people advocate steady monetary inflation in order to match this growth of the economy (which is through the creation of new assets). If the money supply grows evenly with the growth of all the assets, you will have no inflation and no deflation.

Bitcoin is a new product as well and it too started at 0. But it's being assigned value based on its utility. It CREATES new wealth, it doesn't take away money out of the economy.

Value is subjective and essentially exists all in the mind. It's PSYCHOLOGICAL. If humans believe something to be useful, they create wealth through that perception. It's not a zero sum game and even Kenynesian economics wouldn't claim that the economy works this way.

[JorgeStolfi]

Value is subjective and essentially exists all in the mind. It's PSYCHOLOGICAL. If humans believe something to be useful, they create wealth through that perception. It's not a zero sum game and even Kenynesian economics wouldn't claim that the economy works this way.

Well, then, why do people worry so much about the economy?  We can just all change our perception and say that the dollar is worth a thousand euros, and problem is solved.  And and if people who own basebal cards agree to refuse to sell them for less than a quintillion dollars then they can buy the world with one card.

[jonat3]

Value is subjective and essentially exists all in the mind. It's PSYCHOLOGICAL. If humans believe something to be useful, they create wealth through that perception. It's not a zero sum game and even Kenynesian economics wouldn't claim that the economy works this way.

Well, then, why do people worry so much about the economy?  We can just all change our perception and say that the dollar is worth a thousand euros, and problem is solved.  And and if people who own basebal cards agree to refuse to sell them for less than a quintillion dollars then they can buy the world with one card.

Yeah, if you could do it, you would be a rich man. But humans aren't stupid enough to fall for such a trick. While value is purely psychological, that value assessment is still based on real world utility. Not to say that it's impossible to trick people into mistaking the utility of an object, because some people have that amount of skill, but it's no mean feat.

[johnyj]

So the guy did no productive work, but just by sitting on his Bitcoins he got so fabulously wealthy that he can buy the US Gross National Product wth only half his wallet.

Don't you feel that there must be something wrong with this scenario?

Being rich means that you own a disproportionate slice of the world's real wealth. You cannot increase your slice without reducing that of someone else.

The Bitcoin cabal cannot force people to use Bitcoin to buy things or services.  If doing so means giving their slice of the world to the Bitcoin cabal, people will use some other currency.

There are many wealth created by this way, and net worth is calculated by market price. Of course, whether you are able to cash out all of them for fiat money without a huge loss is another matter.

Take house for example, if you dump all the existing houses on the market, their price will drop to almost 0 since there is not enough money to buy all of them. In fact, just a small fraction of houses dumped on the market already created financial crisis and wiped out lots of paper wealth from those who holding a house. FED printed lots of money to artificially support the house price so that all those wealth counted by the form of house will not vaporize

[EvilPanda]

Suppose that one guy have 31 million dollars, he bought all the 21 million coins at $1, and sold 10 coins to others. Then, he still have $10 million at hand. Then he refuse to sell any coins below a market price of $1 million and are willing to buy any coin at a price of $1 million. Then bitcoin's market price will be $1 million

He can set a bid and ask price, but he can't force anyone to trade at those prices. Suppose nobody will buy at $1 million. There will be no trades so you don't know what the market price is.

Also, if he was able to buy up all the coins for $1 each, then obviously nobody values them any higher than that. In this case, the owners of the 10 coins will happily sell them all to the rich guy for $1 million each. They have $10 million and the rich guy who started with $31 million is left with 21 million coins that he can't sell.

In reality there are so many different people with different psychological qualities that there will be someone to buy and sell.  Just look at the variety of stuff people collect. And for people to trade in milions we would have to spend some time on 200k, 300k and so on. Which means a guy who traded the market at price range of 800k-900k for 10 years wouldn't be as startled of a 1 mil price as we are now.

[johnyj]

Suppose that one guy have 31 million dollars, he bought all the 21 million coins at $1, and sold 10 coins to others. Then, he still have $10 million at hand. Then he refuse to sell any coins below a market price of $1 million and are willing to buy any coin at a price of $1 million. Then bitcoin's market price will be $1 million

He can set a bid and ask price, but he can't force anyone to trade at those prices. Suppose nobody will buy at $1 million. There will be no trades so you don't know what the market price is.

Also, if he was able to buy up all the coins for $1 each, then obviously nobody values them any higher than that. In this case, the owners of the 10 coins will happily sell them all to the rich guy for $1 million each. They have $10 million and the rich guy who started with $31 million is left with 21 million coins that he can't sell.

That is just an extreme example, the principle is that you hold large amount of coins but using certain amount of fiat money to support the exchange rate of small amount of coins on the market, thus make your holding more valuable. Banks are doing this kind of operation frequently, they hold large amount of fiat money but never release them, otherwise there will be very strong hyperinflation and destroy the value of fiat money

[deisik]

Suppose that one guy have 31 million dollars, he bought all the 21 million coins at $1, and sold 10 coins to others. Then, he still have $10 million at hand. Then he refuse to sell any coins below a market price of $1 million and are willing to buy any coin at a price of $1 million. Then bitcoin's market price will be $1 million

He can set a bid and ask price, but he can't force anyone to trade at those prices. Suppose nobody will buy at $1 million. There will be no trades so you don't know what the market price is.

Also, if he was able to buy up all the coins for $1 each, then obviously nobody values them any higher than that. In this case, the owners of the 10 coins will happily sell them all to the rich guy for $1 million each. They have $10 million and the rich guy who started with $31 million is left with 21 million coins that he can't sell.

That is just an extreme example, the principle is that you hold large amount of coins but using certain amount of fiat money to support the exchange rate of small amount of coins on the market, thus make your holding more valuable. Banks are doing this kind of operation frequently, they hold large amount of fiat money but never release them, otherwise there will be very strong hyperinflation and destroy the value of fiat money

It doesn't make much sense unless you are going to use them on something else besides trading (which is simply impossible right now in any significant amount). Otherwise you inflict uninvited costs on yourself. Central banks are doing this because they have to defend their exports (as an example). They don't do it just for the sake of keeping exchange rate at certain level...

[johnyj]

It doesn't make much sense unless you are going to use them on something else besides trading (which is simply impossible right now in any significant amount). Otherwise you inflict uninvited costs on yourself. Central banks are doing this because they have to defend their exports (as an example). They don't do it just for the sake of keeping exchange rate at certain level...

If you mine bitcoin, you will be able to see things from the view of a central banker, since you issue money. It is very easy to understand why banks do this and do that if you issue money by yourself...

The first priority is always keep the value of their money stable, all the other things like full employment/price stability/international trade deficit are all trivial things compared to the value of their money. That's the reason they'd rather close their pocket and see people suffering instead of open their pocket and let inflation quickly destroy the value of their money

Of course, to protect the forex exchange rate of one type of money is not easy, especially if you issued too much money and do not have enough foreign currency reserve. That is the Asian financial storm when Soros shorted the currencies from those small countries and almost emptied their USD reserve when those governments desperately trying to support the exchange rate with their USD holding

[Impaler]

For the last time jonnyj, you need to stop polluting this forum with your posts, they are just terrible.

[johnyj]

For the last time jonnyj, you need to stop polluting this forum with your posts, they are just terrible.

Thanks for the praise 

[deisik]

It doesn't make much sense unless you are going to use them on something else besides trading (which is simply impossible right now in any significant amount). Otherwise you inflict uninvited costs on yourself. Central banks are doing this because they have to defend their exports (as an example). They don't do it just for the sake of keeping exchange rate at certain level...

If you mine bitcoin, you will be able to see things from the view of a central banker, since you issue money. It is very easy to understand why banks do this and do that if you issue money by yourself...

The first priority is always keep the value of their money stable, all the other things like full employment/price stability/international trade deficit are all trivial things compared to the value of their money. That's the reason they'd rather close their pocket and see people suffering instead of open their pocket and let inflation quickly destroy the value of their money

The problem with such logic is that it is not only you who mines bitcoins. Though a feeling of being involved at issuing "money" can inflate one's ego somewhat, I doubt it will be enough to actually go and try to stabilize bitcoin exchange value (since you would inevitably incur losses on yourself). If what you say were true, it would have been done so long ago by those who have big wallets. If they haven't already done this, why should they do it right now or later?

[johnyj]

The problem with such logic is that it is not only you who mines bitcoins. Though a feeling of being involved at issuing "money" can inflate one's ego somewhat, I doubt it will be enough to actually go and try to stabilize bitcoin exchange value (since you would inevitably incur losses on yourself). If what you say were true, it would have been done so long ago by those who have big wallets. If they haven't already done this, why should they do it right now or later?

I'm confident that there are many miners already doing this, include me (maybe even some mining companies). And it does not incur any loss, that's the reason after each bitcoin hype, it crashed to a new higher low

For example, I have sold 10 coins with an average price of $800, received $8000. Now if bitcoin price crashed to $400, I need only $4000 to buy back all the coins I sold, thus there will be no net sell pressure from me and I still made $4000. I can even spend $6000 to buy 15 coins thus both of my bitcoin holding and fiat money holding increased after the crash

Of course I might sold those coins too early, so the key is to keep selling small amount of coins when the price was rising, increase the fiat reserve and prepare for an exchange rate drop

In fact the central bankers may not have more confidence than a miner, since their money actually cost nothing to make, so it's value is even more uncertain than bitcoin on exchanges. You can study the Asian financial storm to discover how those central bankers failed to support the exchange rate of their currency

[RationalVoice]

OP, are you serious or just trolling?

This has to be the dumbest thing I have ever read on this forum. There are such concepts are liquidity, and fair market value. If you have no buyers for your widget/stock/coin you have no market and you have worthless commodity that you can't move. By your logic, if Enron/Worldcom stock holders just kept their shares listed for sale at ATH both companies would still be worth billions?

In commodity or securities market, the price is set by the buyers- not sellers. If you have buyers willing to take the widget/stock/coin off your hands than you have a working market. If there are no buyers for your product at the asking price, your only option is to lower the price to encourage the buying. If you keep the price where it is without significant catalyst of significant positive news, you have no liquidity and your widget/stock/coin will never get sold.

Because "you" believe something is worth a lot, does not make it worth that. There are millions of people who believe that their comic books, baseball cards, sneakers are worth thousands- but unless someone is willing to pay that money for their products, the products are worthless.

Your scenario is fundamentally flawed to the point of ridiculousness. If 21 million people people are all trying to sell the coin at $1MM, there have to be a BUYER at that price for the coin to be worth $1MM. If there are no buyers, than you have 21 millions of fools with NOTHING.

[johnyj]

Your scenario is fundamentally flawed to the point of ridiculousness. If 21 million people people are all trying to sell the coin at $1MM, there have to be a BUYER at that price for the coin to be worth $1MM. If there are no buyers, than you have 21 millions of fools with NOTHING.

Value of the money typically comes from the exchange rate. The traditional wisdom about market does not work when it comes to money itself,  please study central banks intervention on Forex market http://en.wikipedia.org/wiki/Currency_intervention

If you successfully supported the exchange rate of a currency, then its credibility and acceptance level will increase, a higher acceptance level will create larger demand for that currency thus raise the value of it, and your original support capital can be returned later without a loss

[greenlion]

This is all there is to it:



The supply and demand schedules are determined by underlying preference curves that we might not necessarily know with any kind of omniscience, but we can infer their behavior from the price signal.

There is no "won't drop too much" in any of this. The price holding actually has to happen for us to infer something about the underlying demand preference curves, we can't just assume that on an a priori basis because the only way we know anything about the demand function is through price discovery.