Bitcoin value in January 2013

[mckoss]

As most people know, the rate of production of Bitcoin mining drops in half sometime in January of 2013 (it goes to 150 BTC per hour, from the current 300 BTC per hour).

So, what will happen the the exchange value of a Bitcoin then?  Over the last 6 weeks, Bitcoin prices have been remarkably stable (at least compared to the previous crazy volatility exhibited over the last year); fluctuating in the narrow range between $2.00 and $3.00.  I find it interesting that this value is very close to the energy cost of mining (at $0.05 per kwh) - of course depending on how efficient your mining rig is.

So, in 2013, the cost of mining will double.  I could see one of two scenarios coming to fruition:

• The price of bitcoin would rise to meet the cost of mining (i.e., about $5/BTC)
• Enough miners drop out of mining, to reduce the difficulty to cost again about $2.50/BTC.

This will play out if the primary driving the the $/BTC rate is on the supply side; i.e., people are hoarding Bitcoin as speculators.  I think that's certainly in play today.  Buyers need to either buy Bitcoin on the open market, or mine for them.  So they switch between these two options, keeping the price at around $2.50 today.

The other alternative is that the price of BTC would switch to the demand side.  For this to occur, we'd have to have many more opportunities for using Bitcoin in real commerce, driving up the demand for Bitcoin as an instrument of exchange.  As it stands today, very few people NEED to use Bitcoin for anything.  I think that will have to change eventually or the speculative fad could crash the value of BTC as people lose interest in it.

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[evoorhees]

The cost of mining will always follow price. If the price shoots up, the cost of mining shoots up, and vice versa. But the inverse is not true, the price does not follow the cost of mining. When the reward cuts in half in 2013, the price will remain unaffected other than perhaps some short-term fluctuation. This is because when the reward falls in half, those miners who are least profitable will drop out, lowering the cost of production.

Again, mining cost always follows price, but not the other way around.

[mckoss]

"mining cost always follows price"

What's the argument for this statement?  I don't understand it as a forgone conclusion.  There could, for example, be a large number of miners that are insensitive to price fluctuations (e.g., they get their electricity for "free", or they are happy to pay for the waste heat through mining rather than an electric heater).

If that's the case, then someone who wants to accumulate Bitcoin, will look at the marginal cost of mining as an input to their decision to either invest in mining or buy outright at an exchange.  This would tend to increase the demand for bitcoin at exchanges as the cost of mining goes up.

What's wrong with my argument?

Mike Koss
Coinlab.com

[evoorhees]

"mining cost always follows price"

What's the argument for this statement?  I don't understand it as a forgone conclusion.  There could, for example, be a large number of miners that are insensitive to price fluctuations (e.g., they get their electricity for "free", or they are happy to pay for the waste heat through mining rather than an electric heater).

Every increase in BTC price means that the marginal profit of mining goes up. Thus, new entrants and marginal miners at the sidelines will enter. Hashrate then goes up, difficulty increases, and cost of mining thus catches up to price. When price falls, miners drop out, difficulty falls, and cost of mining falls back in line with price.

You are correct that a large number of miners may be completely insensitive to price fluctuations (free electricity)... so I suppose I should caveat my statement. There is a floor price under which if the price falls further the mining difficulty won't go down. In reality, you'd see an asymptotic relationship with the mining difficulty always approaching a floor level.

This would tend to increase the demand for bitcoin at exchanges as the cost of mining goes up supply of Bitcoins goes down.

With the above edit I think it's a true statement

[mckoss]

Good point.  The price is fundamentally a supply and demand issue.

While the supply side is pretty well defined, the mystery right now, is where is the demand coming from?  Who wants a Bitcoin and why?  I suppose for me, it the promise of future utility, and the belief that the future demand will be higher than the current demand.

But that thinking also underlies every economic bubble as well.

So, for the moment, it's a fun speculative game - but I wouldn't tie up a significant number of my own assets in it just yet (though I am spending the majority of my time trying to build a business around making Bitcoin more useful to more people).

Thanks for the thoughts!

- Mike

[Bitman_Began]

fluctuating in the narrow range between $2.00 and $3.00

Is that stable? 

[mckoss]

fluctuating in the narrow range between $2.00 and $3.00

Is that stable? 

Well, "stable" when compared to last last 12 months of price fluctuations! 

[thisguy]

isn't the production of bitcoins what produces them in the first place?

Then, if so, the marginal cost of running all those servers will double due to doubling the length the computers run per coin. Therefore, the price of coins should go up.

[ineededausername]

It is interesting to think about what the price will be... could be pennies, could be 3-digit.
As to your actual question: everyone on the market would anticipate the lower supply, wouldn't they?

[netrin]

Bitcoin monetary inflation (mining) has no significant impact on volatility, depreciation, nor appreciation. The bitcoin supply increases 0.1% daily, while bitcoin exchange rates fluctuate orders of magnitude above that. Since there is no multiplier effect (as far as I can imagine), a bitcoin supply of 0.05% will do nothing to stabilize bitcoin exchange rates.

I expect $/BTC will be triple digits in 2013, but it has nothing to do with reward rates.

[dree12]

Re: supply vs. demand:

A supply and demand market is not rocket science. The true law governing it is that the market will always try to equalize the supply and demand. If we know the value of the supply S, the value of the demand D, and the price P we can easily determine the target price via the formula:

Code:

T = D * P / S

or more commonly

Code:

T / P = D / S

Target is to current price as demand is to supply.

So because we know exactly what the price will become, the important part is estimating supply and demand. This task is not as simple as one would assume, because both parts are unpredictable. Notice that supply is not the same as money supply or money supply growth, because much of that is infungible.

Simple Demand Model: Demand is constant
To simplify things, we can assume that demand remains constant. This is untrue, but is the simplest approximation possible. Since we are not dealing with quantified prices, we do not need to know exactly what the demand is, only that it remains constant.

Supply Model 1: Fixed proportion of miners selling¹
The gross underestimation of supply, we assume that only miners sell their coins. The effect of the halving on this is that the price should spontaneously approach the doubling mark, because the effect is geometric.

Supply Model 2: Fixed proportion of money supply sold¹
This seems more of a overestimation of supply, and under our demand scenario will cause the price to drop in a manner looking like an exponential decay² trend, with drops slowing down the decline.

Supply Model 3: Custom model

Code:

S = T + cM

Effectively, this model is based on the amount moved as both a function of total money supply and mined supply. This hybrid can produce interesting price target models, some listed below:



Footnotes
1: This proportion can be greater than 1
2: Actually the multiplicative inverse (1/x), which mathematically is completely different from "exponential decay". The term "exponential decay" however is more common, and is used here. The term "reciprocal" is rarely if ever used to describe a trend.

[the joint]

"mining cost always follows price"

What's the argument for this statement?  I don't understand it as a forgone conclusion.  There could, for example, be a large number of miners that are insensitive to price fluctuations (e.g., they get their electricity for "free", or they are happy to pay for the waste heat through mining rather than an electric heater).

If that's the case, then someone who wants to accumulate Bitcoin, will look at the marginal cost of mining as an input to their decision to either invest in mining or buy outright at an exchange.  This would tend to increase the demand for bitcoin at exchanges as the cost of mining goes up.

What's wrong with my argument?

Mike Koss
Coinlab.com

I fit your description.

[nmat]

$2 - $3 is more unstable than $12 - $15. A drop from $3 to $2 means that I lost 1/3 my money while a drop from $15 to $12 means that I lost 1/5.

While it is true that difficulty follows price, it is also true that miners are a big part of the selling force at the markets. That selling force will halve in 2013, so this could create some upward pressure in the markets. But then again, there are so many things that affect price... We've seen a 90% drop and the bitcoins per block are still at 50.

[boonies4u]

$2 - $3 is more unstable than $12 - $15. A drop from $3 to $2 means that I lost 1/3 my money while a drop from $15 to $12 means that I lost 1/5.

While it is true that difficulty follows price, it is also true that miners are a big part of the selling force at the markets. That selling force will halve in 2013, so this could create some upward pressure in the markets. But then again, there are so many things that affect price... We've seen a 90% drop and the bitcoins per block are still at 50.

When the block return halves, theoretically we should see miners selling half of what they did when blocks gave 50 coins.

As for what non-miners do with their coins will depend heavily on the usefulness of coins at that point in time. I guess there is a lot of pressure on bitcoiners this year.

[BigCpuMiner]

I guess bitcoin value in 2013 will be around 0. Bitcoin is nice thing, but any huge company can (and some day will) start own fork of btc. If they don't than the price will be OK

[netrin]

I don't think any company can afford the liability associated with 'owning' a bitcoin fork. A company may use and integrate bitcoin or a future improvement, but any value a company 'adds' will likely be more of the same (credit card, paypal, online banking).

[BigCpuMiner]

I don't think any company can afford the liability associated with 'owning' a bitcoin fork. A company may use and integrate bitcoin or a future improvement, but any value a company 'adds' will likely be more of the same (credit card, paypal, online banking).

Bitcoin lacks demand. Any social network (like FB) can make huge demand on currency. And I don't see any reason they choose bitcoin over own fork.

[netrin]

Sure Facebook, Google, Apple, may be successful selling paypal-like tokens and they may be wildly popular and useful. They still will not match all of the properties of bitcoin. I strongly believe no US/EU registered company can produce a bitcoin killer without some revolutionary as-yet unfathomed idea.

Facebook will never produce anonymous cash. Never!

[BigCpuMiner]

Sure Facebook, Google, Apple, may be successful selling paypal-like tokens and they may be wildly popular and useful. They still will not match all of the properties of bitcoin. I strongly believe no US/EU registered company can produce a bitcoin killer without some revolutionary as-yet unfathomed idea.

Facebook will never produce anonymous cash. Never!

I am talking not about giant companies. I am talking about relatively small websites. User auditory of 10 million people is enough to launch bitcoin killer.

[Blind]

I am talking not about giant companies. I am talking about relatively small websites. User auditory of 10 million people is enough to launch bitcoin killer.

Why would they do that? What makes Bitcoin, would be destroyed in the process IMHO. First, probably centralized network, so, controlled. Two, being a company, they would have to play by big gov rules. Three, given one and two, how that creation would be different from dollars and make users jump on it? If you like getting screwed, there is PayPal there for you.

Part of appeal of Bitcoin comes from the fact that this is basically a guerilla network, uncontrolled, no masters, no fear, everyone is equal and has equal opportunity to profit from this system. Nobody can shut you off from your resources, nobody knows how much you have and how you spend it. Proprietary currency would have none of it.