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Author Topic: Why the price of bitcoin *does* matter  (Read 1189 times)
notig
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January 20, 2014, 08:27:05 PM
 #1

The price of bitcoin matters for several reasons. A higher price means that the the price itself is more stable. Price is also linked to volume so the amount of value flowing through bitcoin would be higher. This makes it easier to do things like buy a car for instance. Imagine if you used litecoin and tried to buy a 300k lamborghini and the dealership accepted litecoin with a processor like bitpay. There isn't enough volume to lock in a good deal so you would  be forced to pay a price far below what the going rate is.  A higher price means more market depth which means the spread between the bid price and the ask price is small. That is actually very important because it makes bitcoin cheaper to use. Want to do remittance from one currency > bitcoin > another currency? Then the price matters. A higher price will ultimately make things cheaper. Want to pay for porn but not give up private info? Then it would actually be cheaper to do if bitcoin was 10k vs 1k because the market depth would be greater and the spread between the bid price and ask price would be less. You would save value.  Gold has really deep markets and the spread between the bid price and ask price is small.... so if you bought gold and could turn right around and electronically spend it somewhere then you wouldn't lose much at all.

There are also other benefits to a higher price.... it means it would be even more attractive to instiutional investors (who would not bother with something that is too small). It also would mean the ecosystem is larger because of potential profits so there would be more competition between exchanges and atms... which means there would be lower fees for using them.
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January 20, 2014, 10:42:39 PM
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The deeper more liquid market is the result of the amount of USD on the BTC exchanges, not the exchange rate of the coins.  If their were only $100 on exchanges then that would be the liquidity (in terms of dollars) irregardless of the exchange rate.  You tend to THINK of liquidity being caused by exchanges rates because the USD depth is the main driver of the exchange rate, so they move in sync most of the time.  But falling depth of BTC has also been a significant factor in the last year and at certain times is the primary driver of exchanges rates, at times the coin and dollar depth can be dropping (meaning less liquidity) but because coins are dropping faster it means exchange rates rise even as liquidity drops so the two things are not hard-correlated, only soft-correlated.

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notig
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January 20, 2014, 11:19:58 PM
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The deeper more liquid market is the result of the amount of USD on the BTC exchanges, not the exchange rate of the coins.  If their were only $100 on exchanges then that would be the liquidity (in terms of dollars) irregardless of the exchange rate.  You tend to THINK of liquidity being caused by exchanges rates because the USD depth is the main driver of the exchange rate, so they move in sync most of the time.  But falling depth of BTC has also been a significant factor in the last year and at certain times is the primary driver of exchanges rates, at times the coin and dollar depth can be dropping (meaning less liquidity) but because coins are dropping faster it means exchange rates rise even as liquidity drops so the two things are not hard-correlated, only soft-correlated.

By "at times" do you mean temporary moments in time? If so that is irrelevant.  

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The deeper more liquid market is the result of the amount of USD on the BTC exchanges, not the exchange rate of the coins.

It's impossible to escape that the two are linked. The profit incentive is too great to not have an amount of liquidity on an exchange that is in some proportion with the price. One only needs to take a cursory look at gold markets to see that. The higher price attracts not only more money but it involves more people. People who are willing to undercut each other so instead of being out of bitcoin and buying back in at 10% less someone will buy back in at 8% and 7% and so on.
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January 21, 2014, 04:46:03 AM
 #4

I regularly check this chart to see the order depth trend for USD and BTC, and since now we have more exchanges popping up every week, the overall depth in bitcoin economy is growing for sure. But the price for bitcoins are mostly driven by mining cost, which defined the lowest possible cost to acquire coins without buying on exchanges


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January 21, 2014, 06:55:12 AM
 #5

That's a picture of fiat getting desperate to escape the gox box.  Stamp would tell you much more about the state of the exchange market. 

Give a man a fish and he eats for a day.  Give a man a Poisson distribution and he eats at random times independent of one another, at a constant known rate.
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January 21, 2014, 07:02:28 AM
 #6

But the price for bitcoins are mostly driven by mining cost, which defined the lowest possible cost to acquire coins without buying on exchanges

That's odd because it is currently cheaper to buy BTC than it is to mine it.

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January 21, 2014, 07:13:28 AM
 #7

But the price for bitcoins are mostly driven by mining cost, which defined the lowest possible cost to acquire coins without buying on exchanges

That's odd because it is currently cheaper to buy BTC than it is to mine it.

Not really.  It defines the minimum price at which new supply will hit the exchanges.  Any miner who sells for less than cost quickly goes bankrupt, leaving only profitable miners in operation.  Profitable miners don't sell when prices are below cost.

Give a man a fish and he eats for a day.  Give a man a Poisson distribution and he eats at random times independent of one another, at a constant known rate.
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January 21, 2014, 04:30:05 PM
 #8

But the price for bitcoins are mostly driven by mining cost, which defined the lowest possible cost to acquire coins without buying on exchanges

That's odd because it is currently cheaper to buy BTC than it is to mine it.

Not really.  It defines the minimum price at which new supply will hit the exchanges.  Any miner who sells for less than cost quickly goes bankrupt, leaving only profitable miners in operation.  Profitable miners don't sell when prices are below cost.

I don't think that a small amount of coins withheld from the market is enough to set a floor on the market price. Furthermore, when the price drops below a miner's cost, the miner will stop mining, essentially giving the coins to the more profitable miners who will sell them.

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January 21, 2014, 04:42:48 PM
 #9

I regularly check this chart to see the order depth trend for USD and BTC, and since now we have more exchanges popping up every week, the overall depth in bitcoin economy is growing for sure. But the price for bitcoins are mostly driven by mining cost, which defined the lowest possible cost to acquire coins without buying on exchanges



I agree with an above poster.  Anything from Mt Gox is not considered viable anymore.  Their volume is slowly decreasing, even with their (most likely) bots doing a lot of auto trading.  The news outlets will still quote them of course simple because its a higher price.  People are trying to get funds out of Gox but until they can't do withdrawals I wouldn't use them as a chart for a bid ask depth charts.

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An amorous cow-herder
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January 21, 2014, 05:10:45 PM
 #10

Any miner who sells for less than cost quickly goes bankrupt, leaving only profitable miners in operation.  Profitable miners don't sell when prices are below cost.
In other words, if you dont sell anything you can continue mining? So, you just pump more and more fiat into mining gear and hope that you will actually make a profit? Or do you mean that only batch 1 preorders make profit and buy more preorders?
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January 21, 2014, 07:16:07 PM
 #11

I don't think that a small amount of coins withheld from the market is enough to set a floor on the market price.

That's not what he said, and also wasn't really the point he was trying to make.

Furthermore, when the price drops below a miner's cost, the miner will stop mining, essentially giving the coins to the more profitable miners who will sell them.

Except that in Bitcoin Land, things cannot be so simply defined. Because the network hashrate can potentially skyrocket by the time the next difficulty is recalculated, leaving "the more profitable miners" in the same boat as the unprofitable ones.

And as (read: if) the price to mint a Bitcoin goes up, the downward selling pressure exerted on the market becomes greater. This is the dance that's starting to become so intriguing.
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January 22, 2014, 06:42:13 PM
 #12

I thought the mining cycle went like this:

Alex: "I'm going to mine bitcoins!"
Bob: "Why don't you just buy them instead?"
Alex: "Because...free!"
Bob: "Whatever"

Alex buys the latest and greatest mining rig for $5000 and joins a mining pool.

Alex gets $3000 the first month, $1000 the second month, $500 the third month, $5 the fourth month.

Bob: "How's your mining going?"
Alex: "Good I'm breaking even but did you see the latest and greatest GigaCrypt Blockminer 3000?  I can get it for only $5000..."

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January 22, 2014, 07:26:58 PM
Last edit: January 22, 2014, 07:56:03 PM by skivrmt
 #13

I thought the mining cycle went like this:

Alex: "I'm going to mine bitcoins!"
Bob: "Why don't you just buy them instead?"
Alex: "Because...free!"
Bob: "Whatever"

Alex buys the latest and greatest mining rig for $5000 and joins a mining pool.

Alex gets $3000 the first month, $1000 the second month, $500 the third month, $5 the fourth month.

Bob: "How's your mining going?"
Alex: "Good I'm breaking even but did you see the latest and greatest GigaCrypt Blockminer 3000?  I can get it for only $5000..."

This is accurate on so many levels.  But people forget the outlay when they are getting something for "free".  Hey, let's go skiing today because I have season pass, it's free to go! 

And of course people are making money when mining, but the electric outlay is another to factor in.  If Bitcoin drops to $400, I'm betting almost no one can mine and make a profit.  The problem is if Bitcoin goes to $2,000 people can be profitable initial, but then the difficulty will generally rise very quickly also.  Price does matter.

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January 22, 2014, 07:52:04 PM
 #14

This is accurate on so many levels.  But people forget the outlay when they are getting something for "free".
I dont even think people forget that. Some are just in "gold rush" mode and by shovels without calculating. Other actually calculate and decide to take the chance, e.g. i preordered a bfl single in 2012. It would have been profitable at $10/BTC IF it had been delivered as promised. Even at the $100/BTC at time it was delivered it wouldnt have been profitable. Thanks to the rise to ~1000$ it actually turned out to be profitable, but then again i have to ignore the fact how profitable it would have been to buy BTC instead ...
And while i considered $10 undervalued and actually expected a rise to 20-50$ by now i wouldnt pre order anything more.

If Bitcoin drops to $400, I'm betting almost no one can minor from profitably.
Yeah, and then BOOM, chain reaction. Hardware vendors go bust. Stink of fail.
I´m sticking to scrypt currencies for now. Less centralisation also means people dont have to reinvest earned coins but can actually spend coins with gear they have anyways. Wouldnt be surprised if LTC trade volume (not market cap, the money actually spent in the normal markets) will exceed BTC in a year or two.
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January 23, 2014, 01:22:39 AM
 #15

If you BUY bit coin you will make more than if you mine. It's a great investment but not always trustable you never know what stocks will do
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