please stop sating bubble unless you define/understand it

[altoid]

It seems like every other post on this forum references bubbles or bursting bubbles or "it's definitely not a bubble" or "how is this not a bubble", etc.

Do you even know what you are discussing anymore?

First of all, a financial bubble has many meanings to different people.  If you're talking about credit fueled bubbles, then it's IMPOSSIBLE that there is a bubble in bitcoins because none are being lent into existence.

If you are talking about a speculative mania, I propose to use the term "blowoff"

This is common terminology in technical analysis and is much more descriptive because it describes super-parabolic rise at the end of a rising trend.

If I'm way off base on this, please correct me

[kiba]

I intend to commission a comic that parody said panics.

[zimpixa]

To make the long short:
bubble - when it grows faster than trend shows and price doesnt show real value.

[AtlasONo]

You're way off base.

Speculative Mania = Economic Bubble = A market phenomenon characterized by surges in asset prices to levels significantly above the fundamental value of that asset.

Now we argue about fundamental value and about how "bitcoin is the new gold!!".

[Justsomeforumuser]

You're way off base.

Speculative Mania = Economic Bubble = A market phenomenon characterized by surges in asset prices to levels significantly above the fundamental value of that asset.

Now we argue about fundamental value and about how "bitcoin is the new gold!!".

And how Gold in turn may stand to lose a bit of weight, akin to what Silver did?

Gold at least you can hang around your neck and make AK47 platings of, i.e. has fashion and symbolic use, whereas BTCs still remain intangible..

[N12]

Yeah. Bitcoins suck, you can’t do anything besides trading them! I recommend instantly selling all Bitcoins you can get hold of since they have zero intrinsic value and will eventually be worthless.

Money is worthless!

[PseudoCode]

"Bubble" is such a stupid word to apply in this this context. It has completely false connotations   

In the "real world", once a bubble pops, it is completely gone, leaving practically no visible trace (or value) behind.   

In the world of stored value, the likelyhood of *all* value going pop and vanishing completely in a short space of time is very small.. 

Its funny how just 2 weeks ago "People were saying "Rally ! $6 !!", and just 2 weeks later after a momentary surge and drop back many are now asking "has the bubble burst ?", Really ?  You're so short-sighted ? Hunh.

[Drifter]

Its funny how just 2 weeks ago "People were saying "Rally ! $6 !!", and just 2 weeks later after a momentary surge and drop back many are now asking "has the bubble burst ?", Really ?  You're so short-sighted ? Hunh.

You can't win that battle. To them, when the price is rising, a bubble is imminent, and when the price drops, their predictions are correct. They don't leave room for anyone else to be right.

[Justsomeforumuser]

Find me a currency that is not broken that will fluctuate 600% within 2 weeks.

[N12]

Find me a currency that is not broken that will fluctuate 600% within 2 weeks.

1) So Bitcoin is broken because the value is determined by supply and demand, and because you can’t control demand?

2) When did it fluctuate 600% within two weeks?

[caveden]

Well said OP. Bitcoin is just an extremely volatile asset at the moment, and will keep like this for a while. Prices raise and fall fast. It's not the first time, it won't be the last. These are no bubbles, nobody is lending to invest in it, it goes up and down in days instead of years, people don't go massively bankrupt or unemployed after each price drop and so on.

Bubbles are a much more serious thing. They are the fruit of bad allocation of capital (malinvestments) over long periods. We should not mix the terms.

[Justsomeforumuser]

1) So Bitcoin is broken because the value is determined by supply and demand, and because you can’t control demand?

If you cannot calculate expected exchange rates within a discernable range, you cannot build an economy. Why do you think the BOJ intervenes in the market so often? At some point exporters run into trouble.

2) When did it fluctuate 600% within two weeks?

I knew there'd be nitpickers. I should have bet money on it with someone.


23rd April, $0.58ish trades
May 11th+ $8.45 trades
 
1456.89% (14.5689 * 0.58 = 8.45) in the huge timespan of 3, not two weeks. Aren't you glad I checked.

Well do I ever apologize profoundly for being so madly off the mark with my guess. It was 3 weeks after all.

And boy, if that isn't a stable, reliable outlook and not penny stock like at all.

Source: https://mtgox.com/trade/megaChart

[LMGTFY]

Find me a currency that is not broken that will fluctuate 600% within 2 weeks.

1) So Bitcoin is broken because the value is determined by supply and demand, and because you can’t control demand?

2) When did it fluctuate 600% within two weeks?

Over 18 days or so it increased from 1.5 USD to a peak of 9 USD (approx). It then fell back 33.3% from 9 USD to around 6 USD.

I'm not quibbling over the 18 days, I'll grant 600% in (almost) two weeks, but I won't call it a 600% fluctuation, only a rise. For a fluctuation I'd want to see an actual fluctuation - a rise then a similar fall (say, to 2 - 2.5 USD). Otherwise this all seems fairly pedestrian - a dramatic rise, followed by a less than dramatic correction.

[rezin777]

If you cannot calculate expected exchange rates within a discernable range, you cannot build an economy. Why do you think the BOJ intervenes in the market so often? At some point exporters run into trouble.

I know right! Silly Satoshi created a digital currency and forgot to force the entire world to adopt it immediately and completely. Relying on the market, what a noob...

[N12]

23rd April, $0.58ish trades
May 11th+ $8.45 trades
 
1456.89% (14.5689 * 0.58 = 8.45) in the huge timespan of 3, not two weeks. Aren't you glad I checked.

I’ll nitpick even more: It was a bit under 2$ on April 23rd, so that’s a ~400% increase in three weeks. See here.

Anyway, I get your point. But what the hell do you expect? Bitcoin is a two years old obscure currency. It’s doing really well if you take this into consideration.

[tomcollins]

Find me a currency that is not broken that will fluctuate 600% within 2 weeks.

1) So Bitcoin is broken because the value is determined by supply and demand, and because you can’t control demand?

2) When did it fluctuate 600% within two weeks?

Over 18 days or so it increased from 1.5 USD to a peak of 9 USD (approx). It then fell back 33.3% from 9 USD to around 6 USD.

I'm not quibbling over the 18 days, I'll grant 600% in (almost) two weeks, but I won't call it a 600% fluctuation, only a rise. For a fluctuation I'd want to see an actual fluctuation - a rise then a similar fall (say, to 2 - 2.5 USD). Otherwise this all seems fairly pedestrian - a dramatic rise, followed by a less than dramatic correction.

A currency gaining that purchasing power that quickly stops becoming a currency, though.  If you can predict something will rise, no one will sell it (or only very few will).  This drives the price up even higher, which is a positive feedback loop.  The loop breaks when those with the asset want to cash in on the gains finally are content with the rise.  You have a slightly unnatural amount of hoarding because a lot of people are holding on just hoping it will go up, rather than using it as a currency.  If there is a lack of trust that it will continue going up, you'll see a bunch of people dump to try to get in at the peak, or at least protect their investment before it drops.  That creates another positive feedback loop where everyone wants to sell and no one wants to buy.  Without stability, either no one wants to spend (it will go up a ton in the future!) or no one wants to accept it (it's going down in value, why do I want this?).  So it's value as a currency diminishes quite a bit.

BTC has extremely thin markets which is making the prices rise and fall.  Even though there are > 6 million BTCs in existence, a lot are held by true believers.  They won't sell until it hits $1000 or some crazy amount.  They got them for free or cheap, so there is no loss mentality (someone who starts gambling with $5, goes up to $1000, then loses it all will think he only lost $5).  So the supply is quite small.  The hoarded coins represent a huge threat to stability.  If they get sold off in a controlled manner, the price doesn't fluctuate too much.  If there is ever a panic, there is such a huge supply of them, it would be equivalent to hyper-inflation.

While not terribly exciting (but still way more volatile) as an investment, as a currency it's a big problem.  Having a more gradual rise in value would make it much more useful as a currency than speculation.  I feel that this is the biggest flaw in the BTC system, although it might have been intentional - such a huge number of coins were initially distributed to such a few number of people.  The mining curve where half are mined in the first 4 years seems very flawed to me and very much drives the problem we see with wild fluctuations.  It would be better to have distributed them more gradually over a longer period of time (perhaps start out small, ramp up, then slow down after a while), much similar to the expected user-base of the currency.  It's hard to predict what that might be, but it's certainly not the pattern we have now where 1/4 were released before even .0001% of the population even has heard of the currency.

It's a problem we can live with, but the result is that we have a speculators market and not a currency.  Eventually it should stabilize near some equilibriums when the value either goes up high enough or crashes completely.

[LMGTFY]

A currency gaining that purchasing power that quickly stops becoming a currency, though.  If you can predict something will rise, no one will sell it (or only very few will).  This drives the price up even higher, which is a positive feedback loop.  The loop breaks when those with the asset want to cash in on the gains finally are content with the rise.  You have a slightly unnatural amount of hoarding because a lot of people are holding on just hoping it will go up, rather than using it as a currency.  If there is a lack of trust that it will continue going up, you'll see a bunch of people dump to try to get in at the peak, or at least protect their investment before it drops.  That creates another positive feedback loop where everyone wants to sell and no one wants to buy.  Without stability, either no one wants to spend (it will go up a ton in the future!) or no one wants to accept it (it's going down in value, why do I want this?).  So it's value as a currency diminishes quite a bit.

BTC has extremely thin markets which is making the prices rise and fall.  Even though there are > 6 million BTCs in existence, a lot are held by true believers.  They won't sell until it hits $1000 or some crazy amount.  They got them for free or cheap, so there is no loss mentality (someone who starts gambling with $5, goes up to $1000, then loses it all will think he only lost $5).  So the supply is quite small.  The hoarded coins represent a huge threat to stability.  If they get sold off in a controlled manner, the price doesn't fluctuate too much.  If there is ever a panic, there is such a huge supply of them, it would be equivalent to hyper-inflation.

While not terribly exciting (but still way more volatile) as an investment, as a currency it's a big problem.  Having a more gradual rise in value would make it much more useful as a currency than speculation.  I feel that this is the biggest flaw in the BTC system, although it might have been intentional - such a huge number of coins were initially distributed to such a few number of people.  The mining curve where half are mined in the first 4 years seems very flawed to me and very much drives the problem we see with wild fluctuations.  It would be better to have distributed them more gradually over a longer period of time (perhaps start out small, ramp up, then slow down after a while), much similar to the expected user-base of the currency.  It's hard to predict what that might be, but it's certainly not the pattern we have now where 1/4 were released before even .0001% of the population even has heard of the currency.

It's a problem we can live with, but the result is that we have a speculators market and not a currency.  Eventually it should stabilize near some equilibriums when the value either goes up high enough or crashes completely.

I think you're broadly right, but I'm not too concerned. I see bitcoin as a long-term project, and right now we're at the very start of it. There aren't many goods or services priced in bitcoins (I know, this is a perennial complaint, and there are good people always working to address it, but right now - and, I suspect, for some time to come - that part of the bitcoin economy will lag behind the rest of the economy).

Regarding instability, again I'm not too concerned at this stage of the project's existence, and I see it continuing for some time yet. We saw it back in February, when we hit USD parity (and even hit the dizzy heights of $1.10!) and then watched as the rate declined to 0.56 USD. And you're quite right - this is due to the market being extremely thinly traded - forex has trillions of dollars being traded daily: there's no way bitcoin is going to even approach that for the foreseeable future.

I draw a different conclusion from you as regards the initial distribution: I see it as trying to get to a stable position as quickly as possible, and accepting instability as a means to that end. It's counter-intuitive, but I can't see the reverse (or a bell-shaped distribution of coins) as working better. Better to frontload the instability hit than risk instability just when the bitcoin economy seemed to be maturing.

tl;dr: Boot-strapping a disruptive technology is going to involve instability in the short- to medium-term.

Edit: sorry, I wanted to give a few example of the bitcoin economy's immaturity, and how I see it developing. Someone mentioned earlier today that forex markets shut up shop for the weekend. I totally see why MtGox and other exchanges don't do this, but I think as the bitcoin economy develops it needs to move in line with the wider financial system. Right now we're seeing dips at weekends (or rises that are less steep than they might be!), because it's not easy to get money in, but it is easy to get bitcoins out. That's not something that comes as a surprise to many forum regulars, but it is scary to someone watching from a newbie perspective.

The other "example" (OK, not so much an example as a theory) is Gavin's "we just can't predict what uses people are going to come up with" belief (which I share). I think right now we're trying to fit bitcoin around what we know - the familiar. I think that the real value for bitcoin is going to come when someone starts using bitcoin in ways we never considered before. Right now the userbase is tiny - as it develops, and particularly as it develops in the developing world, people are going to innovate like nothing we've seen before.

[tomcollins]

I draw a different conclusion from you as regards the initial distribution: I see it as trying to get to a stable position as quickly as possible, and accepting instability as a means to that end. It's counter-intuitive, but I can't see the reverse (or a bell-shaped distribution of coins) as working better. Better to frontload the instability hit than risk instability just when the bitcoin economy seemed to be maturing.

The problem is you have a very few number of people controlling a huge amount of wealth.  Due to decrease in incremental value (I'd rather have 100% chance at $1M than 1% chance of $100M), you have a lot of people ending up having to gamble an absolute fortune.  The distribution I'd like to see is more like a bell curve, with the total number of coins generated being based on the tan-1 function (shifted up by pi/2, and to the right by some arbitrary amount) with a linear start to it to get things going.

.

It might be a good exercise to try to figure out what % of users will be involved over the lifetime of a currency if it were successful.

For example:

Initially: .000001%
1 Year: .00001%
10 years: 1%
100 years: 100%

and fill in the places in between.  Then have mining somewhat mimic that.  The benefit in this is the number of coins closely resembles (total coins / number of users), which will keep a fairly stable value.  The downside to it is there is not as much an incentive for early adopters since they don't have as much potential to get huge gains.  I'm not sure that's a bad thing, but perhaps shift it a little bit to favor early adopters, but not by as much as the current system.  It surely seems intentional, as only a very few number of people were likely involved initially, and they could get a huge number of coins.  This was almost a reward for writing the system (not that it's a bad thing).

The other "example" (OK, not so much an example as a theory) is Gavin's "we just can't predict what uses people are going to come up with" belief (which I share). I think right now we're trying to fit bitcoin around what we know - the familiar. I think that the real value for bitcoin is going to come when someone starts using bitcoin in ways we never considered before. Right now the userbase is tiny - as it develops, and particularly as it develops in the developing world, people are going to innovate like nothing we've seen before.

That's the key.  Figuring out where Bitcoin actually is superior, or could very easily become superior to currency.  Using bitcoins to buy groceries at a brick and mortar store is not something likely to be superior for quite some time.  Using bitcoins in internet grey markets (such as to gamble on the internet) is a fantastic idea where it's far superior.  Transfers between different countries is far superior to Western Union/Moneygram, etc... if the infrastructure is there.  Use Bitcoin where it is clearly superior, or break down barriers where it isn't.

[LMGTFY]

I'm not sure that's a bad thing, but perhaps shift it a little bit to favor early adopters, but not by as much as the current system.  It surely seems intentional, as only a very few number of people were likely involved initially, and they could get a huge number of coins.  This was almost a reward for writing the system (not that it's a bad thing).

I'd love to have Satoshi's input on this (as with so many things...) I suspect the "front-loaded" approach was deliberate, and - as you say - to reward Satoshi and other early adopters (I think I've seen somewhere that Satoshi didn't benefit as much as others: Satoshi was mining with a fairly low-spec CPU). I also think that that's no bad thing: I think it was probably necessary to bootstrap bitcoin.

I did consider a bell-shaped distribution when replying earlier; I hadn't thought about Poisson however. Your idea intrigues me and I wish to subscribe to your journal :-) I suspect it may have resulted in a stable system becoming unstable, then ultimately stabilising again, so I'm still tending towards a Candide-esque "this is the best of all possible systems" belief. But I'll have a further think before discounting a Poisson distribution approach.

[tomcollins]

I'm not sure that's a bad thing, but perhaps shift it a little bit to favor early adopters, but not by as much as the current system.  It surely seems intentional, as only a very few number of people were likely involved initially, and they could get a huge number of coins.  This was almost a reward for writing the system (not that it's a bad thing).

I'd love to have Satoshi's input on this (as with so many things...) I suspect the "front-loaded" approach was deliberate, and - as you say - to reward Satoshi and other early adopters (I think I've seen somewhere that Satoshi didn't benefit as much as others: Satoshi was mining with a fairly low-spec CPU). I also think that that's no bad thing: I think it was probably necessary to bootstrap bitcoin.

I did consider a bell-shaped distribution when replying earlier; I hadn't thought about Poisson however. Your idea intrigues me and I wish to subscribe to your journal :-) I suspect it may have resulted in a stable system becoming unstable, then ultimately stabilising again, so I'm still tending towards a Candide-esque "this is the best of all possible systems" belief. But I'll have a further think before discounting a Poisson distribution approach.

The idea is to somewhat make it so demand is matched up almost perfectly with supply.  As more people want in, more coins are available to mine and that smooths things out.  Initially, not many coins are mined, but not many people want them, so it's not a big deal.  Then after a while, there aren't as many new users, so the economy should be more self-sufficient, so the demand to enter and exit is not as strong.

Of course, modelling that wrong could lead to just as many problems.  Should the mining period last 40 years?  Or 400?  It's all fairly arbitrary.  Widespread adoption of Bitcoin is definitely in the decade more than year range.  You could try to do it off of real-time data based on hash rate (the higher the hash rate, the more of a reward you get for finding a block), but at a certain point cut off.  You'd have to have very good estimates on the hash rate curve over time to do this effectively.  Obviously Satoshi's implementation is the cleanest and most predictable, so that has some advantages over such a system I am proposing.

I do predict we have some really ugly swings, much uglier than anything we've ever seen over the next few years.  Coins remain fairly scarce as people are convinced they will keep going up.  Once they are no longer convinced or want to cash in on their wealth, without sufficient demand, could see an ugly drop.  This could be followed by massive buying which would trigged the "bubble" again, followed by another crash.  As the actual Bitcoin economy grows and becomes more self-sufficient, the speculation bubble makes up less of the price.  Once things are based on fundamentals rather than speculation, we'll be fine.  Speculation isn't a bad thing, in that it gets us there faster.  But it's going to be a wild ride.  I could see as much as a 80% drop in value over a week at some points, or maybe even a 500% rise in value in a week.  When?  I wish I knew.