Three months in retrospect

[Revalin]

I'm not a technical analyst, so I won't speculate on the future.  This chart was just for my own education while considering the events of the last few months.

I'm comfortable calling Aug 6-9 a false break.  I think it was just MyBitcoin wallets getting dumped (and perhaps the stolen coins getting dumped; what ever happened to those?).  Then the trend resumes.

The resistance line is drawn in a bit optimistic.  I'd fix it but it doesn't really matter.  Just imagine it a few pixels down.

Aug 3-4 is interesting.  Was the memo released earlier than I have it marked?

[BubbleBoy]

Yup, the bubble is deflating. The only thing that could stop this elevator is a net cash influx large enough to withstand the daily 7200 BTC onslaught. At 5$/BTC, that's a net cash influx of 36K/day, over one million dollars a month.

Since the real net buy-in is much less than one million dollars/month, the equilibrium price is in the pennies range, as the market will eventually discover, trampled dreams and egos notwithstanding.

[senseless]

The thing about the price drop is that it makes GPU based mining not very cost effective in most countries with high energy resource costs. In some places if you mine you'll be mining at a loss even on the most cost effective gpu cards. The difficulty has already started to drop. It looks like there is a fair bit of lag time between miners quitting and the price drop. I would not be surprised to see difficulty fall to june/july 2011 levels.

http://bitcoin.sipa.be/

Not having as many mining-for-profit miners out there who dump their coins every chance they get should provide at least a small short term stabilizing force to the bitcoin price. It won't be enough on it's own. But should help. Check the goods area, there are tons of people currently dumping their rigs trying to sell them off while they can. I suspect it'll probably bottom out at 2$ for awhile before it starts a slower trend up (maybe a few pct per year). Stability is necessary if bitcoin is going to be accepted for transactions by retailers. They can't be repricing their products on a daily basis due to the wild swings of the market.

[BubbleBoy]

Not having as many mining-for-profit miners out there who dump their coins every chance they get should provide at least a small short term stabilizing force to the bitcoin price.

The causality line is: prices vary -> profitability varies -> miners join and leave the market -> difficulty varies. Difficulty does not determine price and miners can't "strike" to maintain a given price.

No matter how difficulty varies the daily number of 7200 generated coins does not change, it's just otherwise distributed. So there's no stabilizing force, in order to maintain a price of K USD you need to have a daily cash influx of K*USD dollars. The volume of MtGox is misleading since those are dollars moving around back and forth on already mined coins. But in order to maintain a high price you need high net cash injections like we saw early this year. I just don't see those coming.

It's rather irrelevant to say that some miners sell while others don't. The miners that hoard are paying for bitcoins with resources, and by the nature of the problem they can't accumulate too much inventory. Sure, there would will be some miners clinging to the get-rich-quick dream and refusing to sell at "this ridiculously low price", and who will continue to mine at a loss. That's a bit like people bankrupted by Amway/Quixtar types of MLMs continue to cling to the dream despite all rational evidence. But sooner or later they will be unable to subsidize the price out of their own pocket and the daily 7200 BTC will return to the market, with a vengeance.

[Brunic]

There's already 7.2 millions BTC in the market. I have a hard time believing that the 7200 BTC generated daily have more influence than those millions of BTC already in wallets over the world.

[Melbustus]

There's already 7.2 millions BTC in the market. I have a hard time believing that the 7200 BTC generated daily have more influence than those millions of BTC already in wallets over the world.

It inflates the currency by about 3% per month right now. That percentage obviously decreases a little as time goes by since the overall supply is greater. Anyways, while 3%/mo is indeed significant, it's clearly not the 1st-order factor in why the price has fallen by 70% in the past couple months.

[Revalin]

I'd like to fill in any other major events on this chart.  Does anyone know if something interesting happened on Jul 4 or Aug 25?

[indio007]

My personal opinion is that early adopters with boatloads of coin cashed out in since the $11 price range. Hopefully the BTC holder base was widened and this once a consolidation by a few parties.

I think there are some fundamental weaknesses in the BTC economy. Foremost being that everyone is trying to peg BTC to some other currency. If the peg is all that matters BTC value is dependent on something else. BTC needs to stand on it's own 2 feet. It's needs independence. This is tough because miners are dependent on dollars or euros to continue production. Maybe extra data whose value is directly tied to authenticity could be inserted into the blockchain thus adding value to it. The only other option is to get direct producers of real goods and services to use BTC exclusively. We need a stable base.

Secondly BTC needs to broaden it's user base.

[CA Coins]

I wonder if all 7.2 million BTCs are available in circulation.  Ie, if there are people hoarding large blocks of BTC.  If that's the case, the actual amount of BTC available for trade in the market would be smaller.  Then the influx of newly generated BTC will be a larger percentage of the actual market, ie higher inflation rate.  If my estimation is correct, is BTC increasing at about 35% even with 7.2 million BTCs in circulation?

[johnj]

That 7200 BTC/Day is going to be cut in half in ~358 days.  It'll be interesting to see how the market reacts before-during-after.

[enmaku]

Since we're posting interesting charts...



This is from http://tvori.info/bitcoin/charts/ - the historical data image.

Green line is mining profitability, yellow line is MtGox price. If we look at Bitcoin as a commodity rather than a currency it's not hard to imagine that it would go through the typical cycles of being over and under valued. I have no data to support this hypothesis (Bitcoin is just too young for there to be adequate data) but I believe that the relative positions of the yellow and green lines in this chart are as good a method as any to estimate the actual value of a bitcoin.



I've sort of freehand-drawn a smoothed line midway between the two to show where evidence suggests a proper valuation should have been this whole time - a semistable line between $2 and $4.

Pick a commodity and apply the same logic - it's profitable to grow wheat when it's over-valued, it's unprofitable to grow wheat when it's under-valued. The only difference is that the daily supply of bitcoins remains the same whether 1 person or 100 choose to mine. This is the predicament we're in - bitcoins were over-valued, which drew in a lot of new miners thus increasing the difficulty. Once the difficulty increased substantially it became unprofitable to mine - bitcoins were under-valued relative to their production cost and the market was unwilling to change its valuations simply because the miners asked it to. The value of a bitcoin has held somewhat stable for some time now, but difficulty lags these market dynamics substantially and so it has not yet self-corrected to the point where bitcoins are properly valued relative to their production cost.

That's my 2 bitcents anyway  

[Revalin]

The green line is daily profit per 100MH - the scale is arbitrary.  If I drew a graph of daily profit per 1MH, would you still draw your black line the same?  Shouldn't the scale also change when GPU mining took over and megahashes became an order or two cheaper?

ROI (dollars mined per dollar invested in electricity) would be a more interesting metric, but it's a lot harder to measure since there are so many variables.

Also, I don't really agree with the premise.  In the long run, the ROI will trend toward 1:1, but it will always lag changes to its fundamentals (mainly power efficiency of mining hardware and BTCUSD).  Assuming no disruptive technology (ASICs) comes along for mining, power efficiency will gradually improve as GPUs are upgraded.  So the ROI will just measure the rate of change of BTCUSD - when the price is rising, profitability will rise.  When the price is falling, profitability will fall.  When the price is steady, profit will trend toward 1:1.  In other words, it's just a goofy lagging indicator of price.

[enmaku]

OK so maybe the scale is arbitrary and perhaps I shouldn't have even drawn the black line, but you can still see my main point: When we started climbing into the $31 bubble, price was going up while profit was going down. As you said, ROI should increase when the price increases and yet here we are at some of the lowest ROI ever despite the fact that bitcoins are worth MORE at the end of the chart than at the beginning! As the spread between price and ROI increases in one direction, we MUST be over-valuing the commodity, and when it increases in the other we MUST be under-valuing it.

[senseless]

Not having as many mining-for-profit miners out there who dump their coins every chance they get should provide at least a small short term stabilizing force to the bitcoin price.

No matter how difficulty varies the daily number of 7200 generated coins does not change, it's just otherwise distributed. So there's no stabilizing force, in order to maintain a price of K USD you need to have a daily cash influx of K*USD dollars. The volume of MtGox is misleading since those are dollars moving around back and forth on already mined coins. But in order to maintain a high price you need high net cash injections like we saw early this year. I just don't see those coming.

I'm saying the mentality of the people who are leaving is one of "hey i can do this thing on my computer and make USD". They have no intention in participating in the market, only using it to generate USD, or whatever their local currency may be. You can take a look at the goods section to see what I mean.

[Revalin]

As the spread between price and ROI increases in one direction, we MUST be over-valuing the commodity, and when it increases in the other we MUST be under-valuing it.

You're mixing up the ROI of holding Bitcoins with mining Bitcoins.  If there was a rise in the ROI of Bitcoins you own, the price would clearly go up.

But there's no ROI on holding Bitcoins.  It's not like a stock that pays dividends.