Bitcoin was not a bubble

[hugolp]

Ive been quite inactive in the forums lately but the horrible reporting Ive seen lately has pushed me to post this. Bad reporting is nothing new for Bitcoin. I have not seen worse reporting in my life than with Bitcoin, but the last articles deserve an answer.

First, it should be clear to anyone that Bitcoin was not and is not a bubble. Its not a bubble bursting or at least it shows very little of a bubble pattern.

A bubble happens because investors missjudge an asset (or group of assets) and overinvest in it. The reason for this are bad signals by wrong monetary policy usually coupled with fiscal policy and press hype. Some economists blame "psicology" but thats like saying nothing, since everything humans does is due to "phisicologic causes".

When everybody sees that the investments are not performing there is a panic and the price collapses as investors try to get rid of the assets as quick as the can. Thats why we see this patter: "slow" build up and "quick" collapse. For example, the housing bubble:



With Bitcoin we have seen the opposite pattern, a "quick" build up and a "slow" downturn:



You can see the decline has been steady. Even after the MyBitcoin "situation" the price recovered quickly showing there was confidence in the currency. Maybe the collapse from $30 to $20 can be asigned to a bubble pattern, as you can see in the graph. The rest of the decline does not follow a bubble pattern. The reason is very simple and I really dont understand why the press does not mention it.

Bitcoin monetary inflation is huge, as Bitcoin is in distribution phase. Bitcoin monetary inflation is around 30%. That is huge. And the pattern of the steady decline shows that this huge supply is overpowering demand. Its that simple.

This is how it was designed and it will change in a year when the Bitcoin monetary creation halves.

[finway]

You are right!

[jjiimm_64]

Well said.  And I am looking forward to the point when we go from 50 to 25.  but it is hard to hold on to coins with the cost of elec outpacing the exchange rate.

[Are-you-a-wizard?]

Waiting for the production rate to be reduced is the carrot on the stick part to this elaborate scam. Suckers.

[netrin]

Bear the despair. "Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond."

"Wave 1: Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.

Bitcoin monetary inflation is huge, as Bitcoin is in distribution phase. Bitcoin monetary inflation is around 30%. That is huge. And the pattern of the steady decline shows that this huge supply is overpowering demand. Its that simple.

This is simply incorrect. Monetary inflation is 0.1% daily, while we've seen hyperinflation, 1-2% daily depreciation since June. Supply growth is insignificant compared to volatility and demand.

[hugolp]

Bear the despair. "Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond."

"Wave 1: Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.

Bitcoin monetary inflation is huge, as Bitcoin is in distribution phase. Bitcoin monetary inflation is around 30%. That is huge. And the pattern of the steady decline shows that this huge supply is overpowering demand. Its that simple.

I guess you are aware that even the defenders of Elliot Waves admit that there are market movements that do not follow and Elliot Wave pattern and it only works sometimes.

This is simply incorrect. Monetary inflation is 0.1% daily, while we've seen hyperinflation, 1-2% daily depreciation since June. Supply growth is insignificant compared to volatility and demand.

You are the one incorrect. There is not direct correlation between monetary inflation and price inflation since it has to go through the subjective valuation of the people, that also responds to other issues. A 1% increase in monetary inflation will not produce an automatic increase of 1% in the price and viceversa.

[netrin]

If any tech analysis were perfect, its secrets would be guarded and exploited, else worthless. None the less, on monthly charts, bitcoin has been a text book commodity market.

There is not direct correlation between monetary inflation and price inflation since it has to go through the subjective valuation of the people, that also responds to other issues. A 1% increase in monetary inflation will not produce an automatic increase of 1% in the price and viceversa.

Exactly. There is no direct correlation between monetary inflation and price inflation, particularly not when monetary inflation is 1/20th of price inflation. Bitcoin is overwhelmingly driven by speculative adoption rates. To deny that is madness.

[BitcoinPorn]

I hear you.  Let the people out who were in it for trading only.  Nice post.

[hugolp]

Exactly. There is no direct correlation between monetary inflation and price inflation, particularly not when monetary inflation is 1/20th of price inflation. Bitcoin is overwhelmingly driven by speculative adoption rates. To deny that is madness.

Yes, but nobody is denying it.

[netrin]

Well now I've botched up the history. Most of the OP is great. It is the bold text below that I am taking issue against. It was popular to complain about deflation before June and now inflation is en vogue. Both are nonsense.

Bitcoin monetary inflation is around 30%. That is huge. And the pattern of the steady decline shows that this huge supply is overpowering demand. Its that simple.

The bold text is false.

[tvbcof]

Bitcoin monetary inflation is huge, as Bitcoin is in distribution phase. Bitcoin monetary inflation is around 30%. That is huge. And the pattern of the steady decline shows that this huge supply is overpowering demand. Its that simple.

The bold text is false.

I actually don't think so (that the supply is huge I mean.)  7200 BTC/day does not seem like a huge supply to me considering that the market is global.  I think it is mostly a matter of

 - tiny tiny percentage of interested people (on a total population of earth basis.)
 - even worse store of value than most currencies
 - mainly good for corner-case uses (relative to more mainstream currencies.)
 - very significant concentrations and shifting of wealth.

most of these things are related to one another.  I suspect that it could blast off at some point for one of several reasons, and if that happens it's probably lucky for a majority of traders and speculators that it is relatively more difficult to short than other more established markets.  It's probably at least as likely to go to zero for one of several reasons though.

[hugolp]

Well now I've botched up the history. Most of the OP is great. It is the bold text below that I am taking issue against. It was popular to complain about deflation before June and now inflation is en vogue. Both are nonsense.

Bitcoin monetary inflation is around 30%. That is huge. And the pattern of the steady decline shows that this huge supply is overpowering demand. Its that simple.

I dont see how you can deny that supply is overpowering demand. Since the price is going down its obvious that supply is overpowering demand, its basic economics. You could argue about the reasons why supply is overpowering demand, but not that is happening.

[tvbcof]

Well now I've botched up the history. Most of the OP is great. It is the bold text below that I am taking issue against. It was popular to complain about deflation before June and now inflation is en vogue. Both are nonsense.

Bitcoin monetary inflation is around 30%. That is huge. And the pattern of the steady decline shows that this huge supply is overpowering demand. Its that simple.

I dont see how you can deny that supply is overpowering demand. Since the price is going down its obvious that supply is overpowering demand, its basic economics. You could argue about the reasons why supply is overpowering demand, but not that is happening.

Netrin's probably gone to bed (as I should) but let follow up on one thing.  My beef was with the 'huge' characterization of supply, and I unfairly took the liberty of taking that to mean the 7200 BTC/day in the system.  I would still argue that that is not necessarily 'huge', at least in a lot of plausible scenerios.

Supply and demand are impacting the price negatively at this time (as always) to be sure.  If we look at Mt Gox's numbers and do some back-of-the-envelope calcs, it looks like maybe 40,000 BTC/day change hands, so one could take such a number as a source of supply, and that dwarfs the 7200/day being injected by the system.  If a decent fraction of that supply dried up for whatever reason (e.g., the people panicing or whatever ran out of BTC), that could change the supply side significantly, and that is just one factor which could do so.  I'd be uncomfortable to be short at this point for that reason.

[hugolp]

Netrin's probably gone to bed (as I should) but let follow up on one thing.  My beef was with the 'huge' characterization of supply, and I unfairly took the liberty of taking that to mean the 7200 BTC/day in the system.  I would still argue that that is not necessarily 'huge', at least in a lot of plausible scenerios.

Supply and demand are impacting the price negatively at this time (as always) to be sure.  If we look at Mt Gox's numbers and do some back-of-the-envelope calcs, it looks like maybe 40,000 BTC/day change hands, so one could take such a number as a source of supply, and that dwarfs the 7200/day being injected by the system.  If a decent fraction of that supply dried up for whatever reason (e.g., the people panicing or whatever ran out of BTC), that could change the supply side significantly, and that is just one factor which could do so.  I'd be uncomfortable to be short at this point for that reason.

Then is a missunderstanding. Im not saying all the supply is only the 7200 bicoins/day that are being created. What I am saying is that they are having a huge impact, I am pointing at it as the main reason of the decline. But of course there are other sources of supply.

[BubbleBoy]

A bubble happens because investors missjudge an asset (or group of assets) and overinvest in it.

And the pattern of the steady decline shows that this huge supply is overpowering demand.

Oh, oh ! I get it now, that makes perfect sense! Thanks for setting the record straight.

BTW, I'm still waiting for demand to pick up to the normal levels for my Japanese stock and property. Anyone in the market for a 3 million $ Tokyo flat ?

[hugolp]

I have to thank BubbleBoy for providing another example of what I said (sometimes trollas are useful). A bubble builds slow and collapses fast, exactly the opposite of what Bitcoin has done.

[BubbleBoy]

What are you talking about ? The Japanese stock bubble took 5 years to inflate and 12 years to reach pre-bubble levels, and that's patently clear form the graph. A similar shape can be seen for Japanese real estate, fast upside, long and drawn-out downside:



Notwithstanding, your definition of a bubble is arbitrary and wrong - the slopes of the upside/downside are irrelevant. A bubble is defined by speculative overvaluation of the fundamentals driven by herd behaviour, and we had and still have plenty of that in Bitcoin.

You can change your own definition, but that won't stop everybody else to call the bitcoin price evolution what it is: a speculative bubble.

[cypherdoc]

What are you talking about ? The Japanese stock bubble took 5 years to inflate and 12 years to reach pre-bubble levels, and that's patently clear form the graph. A similar shape can be seen for Japanese real estate, fast upside, long and drawn-out downside:



Notwithstanding, your definition of a bubble is arbitrary and wrong - the slopes of the upside/downside are irrelevant. A bubble is defined by speculative overvaluation of the fundamentals driven by herd behaviour, and we had and still have plenty of that in Bitcoin.

You can change your own definition, but that won't stop everybody else to call the bitcoin price evolution what it is: a speculative bubble.

your problem is that you're calling victory way too soon.  we're only 6 mo into the rise and decline of this story.  what other type of price action would you expect from a fledgling currency that aims to change the world of finance?

it could take less than another 6 mo for you to be eating your words.  i hope you're short.

[netrin]

Hugolp, I agree with your basic premise, that $20-$32 was the bubble, but that only lends some confidence to the 'commodity' nature of bitcoin (wave v greater than wave iii). I believe bitcoin is seeing a recession in the business cycle (wave II). I also believe Japan is experiencing the fall from a business cycle, in fact the entire fiat monetary system is experiencing the unavoidable decline of a century scale cycle. In the July thread "The Dichotomy Of a Bubble - Why Bitcoin Will Endure", I/we made the same argument that bubbles have symmetry and it stands.

Mt. Gox Bitcoin May to today (late July 2011) vs.
Nasdaq Composite 1994 to 2008

However, regarding the nit-picking, obviously nominal supply is greater than demand. That's 101. My assertion is that the supply GROWTH (0.1% daily) is insignificant compared to the swings in demand and speculative exuberance and despair, which have averaged 1.5% depreciation since June, but with daily swings of 25-50% not uncommon.

One MIGHT argue, though he'd be hard pressed to prove it, that miner supply triggers an avalanche of selling in a declining market, but that would only lend weight to a bubble/ponzi argument.

[BubbleBoy]

it could take less than another 6 mo for you to be eating your words. 

Bitcoin is not going anywhere because it's economically and technically flawed. That being said, a new bubble can very well re-emerge after the current one cools-off, successive bubbles are historically documented. The bubbly appeal is certainly still there: revolutionary, this time is different, game changer, paradigm shift etc.  Maybe we can see re-ignition in the pennies range, 0-20c, but that price will not be hit very soon, judging by the subjective interest I see a bull trap is long overdue.

However a second bubble with gentler slopes will not in any case comfort the owners of the 1 million or so coins sold in the 15 - 30$ range. Those are millions of dollars of wealth destroyed through mining overvalued bits, and millions of dollars into the pockets of a hand full of "early adopters" pushing the scheme.