The Fallacy of Having to "Absorb Bitcoins"

[GoWest]

There were a few posts on here, and on Reddit, that mentioned that the reason for the price drop over the last few months was that an amount of money equal to (x number of Bitcoins mined daily) x (market price) has to flow into the economy every day to sustain the price.

That is just plain false.  

EDIT: Yes, the money has to flow into the economy everyday.  What is false is that the market hasn't already priced this factor in; it has, therefore it's not a market driving factor.

The current market price already takes into account the fact that there will be 21 million Bitcoins; it assumes that the 21 million Bitcoins already exist.

This sort of thing happens all the time on the stock market.  For example, if there are currently 7.5 million shares of a company, but the company announces that, in six months from now, let's say, they will be selling another 13.5 million shares, the share price will immediately adjust to reflect the 21 million share total, even though 13.5 million of them don't yet exist.

So when you see a Bitcoin price of $4, that means that the future Bitcoin production is also worth $4 each, automatically.  The price change over time represents a change in the perceived value of 21 million Bitcoins.

[grod]

You wouldn't have had a difficulty growth of 400% over 2 weeks (as we did in June) if all the bitcoin value was already priced in.

Fact of the matter is: people invest and divest fiat money into bitcoin as of today, not as it will be in 2040.  People didn't  invest 200 million into bitcoin (as it was valued in June), they didn't invest 100m, and even now it was only a small % of the 37M the whole enchilada (existing coins, potential) was invested so far.

The bitcoin network takes $1000 an hour in power to run.  That has to be paid either in new cash injections or by people speculating on the future value of coins they mine.  75% of the mining power joined over less than 4 weeks.

If you don't think bitcoin price is affected by people who got in it for the money or free hardware and not some rosy future bitcoin ideal then you're delusional.

While not all miners sell each and every coin as fast as they mine it a big enough % do.  The rest still matter since they feel rich on paper and could still sell in the future.

[BubbleBoy]

The fact that a certain amount of cash must be dumped in the economy each month to sustain the price is beyond dispute, it's simple arithmetic. A certain price drives a certain difficulty, and imposes certain HW/electricity costs to the miners, so those miners either have to unload the coins on the market or foot the bill (it's the same thing, really). So if the cash influx stops unexpectedly, the price will certainly drop.

What you might mean is that the market has already priced in this daily cash influx. The all knowing hand of the market knows the future cash influx variations. Well, the hand of the market might have made a mistake, it might have overestimated the supply of su... errr investors. The market is not taken by surprise by the 7200 coins/day; the surprise is the low $ quantity seeking those coins, and the price reflects that discovery.

[GoWest]

You wouldn't have had a difficulty growth of 400% over 2 weeks (as we did in June) if all the bitcoin value was already priced in.

Fact of the matter is: people invest and divest fiat money into bitcoin as of today, not as it will be in 2040.  People didn't  invest 200 million into bitcoin (as it was valued in June), they didn't invest 100m, and even now it was only a small % of the 37M the whole enchilada (existing coins, potential) was invested so far.

The bitcoin network takes $1000 an hour in power to run.  That has to be paid either in new cash injections or by people speculating on the future value of coins they mine.  75% of the mining power joined over less than 4 weeks.

If you don't think bitcoin price is affected by people who got in it for the money or free hardware and not some rosy future bitcoin ideal then you're delusional.

While not all miners sell each and every coin as fast as they mine it a big enough % do.  The rest still matter since they feel rich on paper and could still sell in the future.

I'm not saying that the Bitcoin value is priced in.  Bitcoin's value fluctuates on a daily basis due to publicity, changes in the economy, and overall investor interest.  What's priced in is the total number of coins.  Everyone knows there will be 21 million Bitcoins, and that someone will have to pay the current price for the remaining Bitcoins to keep the price constant.  Anyone who doesn't sell their Bitcoins is assuming that the yet-to-be-mined coins will be snapped up at the current price or greater.  Anyone who thinks that the money won't be there will sell their coins at today's price, driving the price down to a new level which represents the value of each of the 21 million coins.

When I buy today for investment purposes, it's because I think that all 21 million coins are worth today's price.  If I thought they were worth less, I wouldn't buy today, because I would expect the price to drop as the remaining coins are mined.

[GoWest]

The fact that a certain amount of cash must be dumped in the economy each month to sustain the price is beyond dispute, it's simple arithmetic. A certain price drives a certain difficulty, and imposes certain HW/electricity costs to the miners, so those miners either have to unload the coins on the market or foot the bill (it's the same thing, really). So if the cash influx stops unexpectedly, the price will certainly drop.

What you might mean is that the market has already priced in this daily cash influx. The all knowing hand of the market knows the future cash influx variations. Well, the hand of the market might have made a mistake, it might have overestimated the supply of su... errr investors. The market is not taken by surprise by the 7200 coins/day; the surprise is the low $ quantity seeking those coins, and the price reflects that discovery.

Yes, the market has already priced in the daily cash influx.  That is what I'm getting at.  The market is assuming that there will be enough investors to buy all remaining coins at current prices.  When the price drops, it's because the market doesn't believe 21 million coins are worth the current price.

[zby]

The fact that a certain amount of cash must be dumped in the economy each month to sustain the price is beyond dispute, it's simple arithmetic. A certain price drives a certain difficulty, and imposes certain HW/electricity costs to the miners, so those miners either have to unload the coins on the market or foot the bill (it's the same thing, really). So if the cash influx stops unexpectedly, the price will certainly drop.

What you might mean is that the market has already priced in this daily cash influx. The all knowing hand of the market knows the future cash influx variations. Well, the hand of the market might have made a mistake, it might have overestimated the supply of su... errr investors. The market is not taken by surprise by the 7200 coins/day; the surprise is the low $ quantity seeking those coins, and the price reflects that discovery.

Yes, the market has already priced in the daily cash influx.  That is what I'm getting at.  The market is assuming that there will be enough investors to buy all remaining coins at current prices.  When the price drops, it's because the market doesn't believe 21 million coins are worth the current price.

So if there is not enough of this daily influx - then this means the market made a mistake.  What is that minimal daily influx - this is exactly the 7200 x current price - if this is not absorbed then this means the market made a mistake and bitcoins were overpriced - we are back at the same number.

[GoWest]

The fact that a certain amount of cash must be dumped in the economy each month to sustain the price is beyond dispute, it's simple arithmetic. A certain price drives a certain difficulty, and imposes certain HW/electricity costs to the miners, so those miners either have to unload the coins on the market or foot the bill (it's the same thing, really). So if the cash influx stops unexpectedly, the price will certainly drop.

What you might mean is that the market has already priced in this daily cash influx. The all knowing hand of the market knows the future cash influx variations. Well, the hand of the market might have made a mistake, it might have overestimated the supply of su... errr investors. The market is not taken by surprise by the 7200 coins/day; the surprise is the low $ quantity seeking those coins, and the price reflects that discovery.

Yes, the market has already priced in the daily cash influx.  That is what I'm getting at.  The market is assuming that there will be enough investors to buy all remaining coins at current prices.  When the price drops, it's because the market doesn't believe 21 million coins are worth the current price.

So if there is not enough of this daily influx - then this means the market made a mistake.  What is that minimal daily influx - this is exactly the 7200 x current price - if this is not absorbed then this means the market made a mistake and bitcoins were overpriced - we are back at the same number.

My whole point is that Bitcoin's value is not driven by the fact that 7200 coins have to be purchased (or not sold) each day.  This is a known.  It is the unknowns that drive its value.

[zby]

The number is known - the unknown is if it will be met.

[Mageant]

The fact that a certain amount of cash must be dumped in the economy each month to sustain the price is beyond dispute, it's simple arithmetic. A certain price drives a certain difficulty, and imposes certain HW/electricity costs to the miners, so those miners either have to unload the coins on the market or foot the bill (it's the same thing, really). So if the cash influx stops unexpectedly, the price will certainly drop.

What you might mean is that the market has already priced in this daily cash influx. The all knowing hand of the market knows the future cash influx variations. Well, the hand of the market might have made a mistake, it might have overestimated the supply of su... errr investors. The market is not taken by surprise by the 7200 coins/day; the surprise is the low $ quantity seeking those coins, and the price reflects that discovery.

Yes, the market has already priced in the daily cash influx.  That is what I'm getting at.  The market is assuming that there will be enough investors to buy all remaining coins at current prices.  When the price drops, it's because the market doesn't believe 21 million coins are worth the current price.

So if there is not enough of this daily influx - then this means the market made a mistake.  What is that minimal daily influx - this is exactly the 7200 x current price - if this is not absorbed then this means the market made a mistake and bitcoins were overpriced - we are back at the same number.

My whole point is that Bitcoin's value is not driven by the fact that 7200 coins have to be purchased (or not sold) each day.  This is a known.  It is the unknowns that drive its value.

The known unknowns or the unknown unknowns?
 

[grod]

Or, more importantly, how many of the new owners of the 7200 will be willing to sell at today's, tomorrows or yesterday's price.

The number of coins is known, but the new owners and their sentiment are not.  Nor is the price those owners paid to acquire those coins.  If a coin costs $1 to buy the owner may be far more willing to sell it for $32 than someone whose cost basis is $3.80 but market price being only $4.11.  I speak from personal experience here -- at the top I sold as soon as I got confirms, but the lower BTC goes the more I try to time peaks and valleys.

So we know the number of coins.   We don't know the value of the network (how secure is it next month?  next year? in 2040?), the cost of operating this network ($1000/hour now), nor whether there will ever be a revenue model capable of sustaining the first two.

[Shinobi]

GoWest clearly doesn't get it. It was awful nice of you guys to try to explainbit though.

[Minsc]

The price is set in the most ridiculous manner.  MtGox which is like 1% or 10% or something of all bitcoin trading sets the price for the other 99% or 90%.

[Elwar]

Only a small percentage is traded on the exchange. That small percentage is where the price is set.

It would be like me drawing a picture once per hour. I hand them out to my family members. Some hang them up, some stick it in a drawer somewhere, some give them to friends and one gets sold to a neighbor for $1.

With me making new pictures every hour, the price of those pictures will not decline by $1 per hour. There will be no need to have at least $1 worth of buyers for every picture in order to maintain that price.

I could give those pictures out to other family members or the same ones who put them up on more walls or toss them in the garbage and whatnot.

[JoelKatz]

The current market price already takes into account the fact that there will be 21 million Bitcoins; it assumes that the 21 million Bitcoins already exist.

It would if it had a large enough time horizon, but the Bitcoin market has a very short time horizon. People don't know if Bitcoins will be worth $1,000 each in three years or be worthless due to non-adoption and obsolescence. So while the next year or so of new coins is priced in, the time horizon keeps including more and more of the future mining. The fact that there will ultimately be 21 million Bitcoins has almost no effect on the market today because the probability that Bitcoin will remain relevant until they're all mined is unknown.

[Elwar]

Only a small percentage is traded on the exchange. That small percentage is where the price is set.

It would be like me drawing a picture once per hour. I hand them out to my family members. Some hang them up, some stick it in a drawer somewhere, some give them to friends and one gets sold to a neighbor for $1.

With me making new pictures every hour, the price of those pictures will not decline by $1 per hour. There will be no need to have at least $1 worth of buyers for every picture in order to maintain that price.

I could give those pictures out to other family members or the same ones who put them up on more walls or toss them in the garbage and whatnot.

That 'small percentage' sets the 'price' because it is much larger than the percentage of the exchange market for socks/BTC, web design/btc, MDMA/BTC... etc.

It is the case for every single monetary system. M0, the 'money' that is actually available to be 'spent' on goods and services is a small percentage of that in financial instruments.

Only about 1/6th of Bitcoins are located in the exchanges on a daily basis.

[Elwar]

Only a small percentage is traded on the exchange. That small percentage is where the price is set.

It would be like me drawing a picture once per hour. I hand them out to my family members. Some hang them up, some stick it in a drawer somewhere, some give them to friends and one gets sold to a neighbor for $1.

With me making new pictures every hour, the price of those pictures will not decline by $1 per hour. There will be no need to have at least $1 worth of buyers for every picture in order to maintain that price.

I could give those pictures out to other family members or the same ones who put them up on more walls or toss them in the garbage and whatnot.

That 'small percentage' sets the 'price' because it is much larger than the percentage of the exchange market for socks/BTC, web design/btc, MDMA/BTC... etc.

It is the case for every single monetary system. M0, the 'money' that is actually available to be 'spent' on goods and services is a small percentage of that in financial instruments.

Only about 1/6th of Bitcoins are located in the exchanges on a daily basis.

Um, no... That is just what you see in the order book.

1/6th is based on the calculation done in this thread:
https://bitcointalk.org/index.php?topic=45977.msg548650