A Bubble

[jed]

[I'd delete this post if I could. It doesn't say much now. I had a post here saying we weren't in a bubble but I had a mistake on my spreadsheet. It now looks like we are. ]

I would argue that BTC price is essentially determined by the number bitcoin users there are. In order to be a bitcoin user you must hold bitcoins. This means each additional bitcoin user creates demand. It is of course hard to determine exactly how many bitcoin users there are so I'll assume it is proportional to the number of forum users. (This isn't exactly true since the number of forum accounts is strictly increasing but the userbase isn't necessarily but I think since it is so new we can ignore this)
Anyway this is a chart of (BTC Price*# of coins)/(# of forum users)




(If someone has another metric to use other than forum membership I'd be glad to plug that in also)

[SgtSpike]

I can see what you're getting at (each person should aim to hold a specified value of bitcoins), but I think you also have to include the total number of bitcoins in circulation.  So use daily BTC overall value (the value of all BTC minted to that day) / # of forum users.

Maybe that's what you did.  I don't really understand the y-axis numbers and what they represent.  If you divided $7.10 by 20,000 forum visitors, you're obviously not going to come up with a number around 2000.

[jed]

Sure I should factor in the number of coins in existence. If I did all the points at the end would be slightly higher.
This isn't forum visitors this is forum accounts.

[rezin777]

A majority of the new forum users may be new miners who are only interested in Bitcoin as far as they can earn some in order to instantly convert them to fiat currency.

[FreeMoney]

Cumulative software downloads?
Do we have unique hits to bitcoin.org?

I also think it needs to be divided by coins in existence to give a clear idea. It won't be a slight effect.

[k]

i agree with your logic jed - more bitcoiners, each wants to hold some bitcoins, increased demand, price increases.

i've a feeling that the recent spike in press coverage (I think nearly every tech blog has had an article at this stage, slashdotted twice in a week etc.) has driven a lot of people to join the forum to check this bitcoin thing out. It's probably driven a lot of extra mining activity. But I feel less will have bought bitcoins - it's still not that simple. Buying using BTC-OTC or transferring funds to MtGOX is a bit too much hassle for someone who is curious but perhaps a bit skeptical. If coinpal was still in operation I reckon there would have been a much bigger spike in price.

[jed]

ok does someone have # of coins in existence by day?

[FreeMoney]

ok does someone have # of coins in existence by day?

I'm sure it's around here somewhere, but you can use 7200/day as a really good longterm aprox.

[jed]

oops. Sorry I messed up. we are in a massive bubble. I'll fix the chart in a second

[jed]

Well I think it isn't quite as bad as this chart makes it look since, a) people are willing to hold more value in BTC now and b) I think people just discovering bitcoin at this stage in the game are less likely to join the forum and c) some people are using it as an investment.

[jimrandomh]

BTC price/number of forum accounts should remain constant only if (1) the fraction of Bitcoin users that have forum accounts remains constant, and (2) the demographics of Bitcoin users doesn't shift. (1) seems unlikely, given all the recent press coverage outside this forum. (2) seems unlikely, given that hedge fund types wouldn't have gotten in until recently. And in light of all the talk about Bitcoin dethroning banks and governments, the current market cap of $43M is diddly squat, even if you assign only a small probability to that happening.

[FreeMoney]

When bitcoin was very rarely used the main thing to do was talk about it and this is the only good place so a very high % of users had accounts here. When bitcoin is very widely used (imagine whole world) a very very small % will have accounts here. We are closer to the beginning still, but moving away.

I think the point about older users becoming more comfortable and putting more value in makes sense too. Like someone who was just mining a little sees it in Forbes and decides to up the stakes a bit.

[pseudocode2]

please dont use the term "bubble", it is a stupid overused media word that has massively incorrect connotations that do not describe in any way whatever normal value fluctuations Bitcoin may be experiencing as it grows in waves.

Normal Bubbles pop and *vanish*.   Economic "Bubbles" pop and lose 90%+ of their "Value" in a very short period of time. 

Do you really believe that is likely to happen to Bitcoin with no competitors to what it does even on the playing field as far as I can tell so far ?   Do you know of anything "better" that could replace it in the short-medium term ?

If not, then I think your use of the word bubble is completely incorrectly sensational and needlessly emotive.  There may be corrections, adjustments, waves and so on.. but "Bubbles" ?  I doubt it.

[unk]

@jed: ah, i saw your chart and was going to correct it but was heading out to a meal. i see you've beat me to it. if you wouldn't mind, would you consider updating the 'public relations' discussion? more people there would benefit from your data.

of course, as others are saying, these particular data aren't conclusive either way. there are many potential confounding effects. for example, forum users are probably more likely than non-forum users to be miners, rather than speculators. and thus the chart could be explained in terms of supply-side dynamics. but who knows?

@pseudocode2: you ask 'Do you know of anything "better" that could replace it in the short-medium term'. the answer, which will be increasingly recognized over the next few weeks, is 'any other block chain that uses similar technology to the open-source bitcoin client'. the value on all the exchanges is not the value of 'a bitcoin' in the general sense. it's the value of a bitcoin in one specific speculative block chain. that chain has no special value to trade.

i do believe the 'pop' you're describing is likely to happen to the value of a bitcoin in the main block chain, and it may cause irreversible harm to bitcoin as a technology. that said, bubbles and all 'beauty-contest games' in game theory are very hard to predict, and i'm not making a specific prediction about what's going to happen. i'm just describing a legitimate fear.

[FreeMoney]

@pseudocode2: you ask 'Do you know of anything "better" that could replace it in the short-medium term'. the answer, which will be increasingly recognized over the next few weeks, is 'any other block chain that uses similar technology to the open-source bitcoin client'. the value on all the exchanges is not the value of 'a bitcoin' in the general sense. it's the value of a bitcoin in one specific speculative block chain. that chain has no special value to trade.
 

Why do you say that? There are only two things that differentiate a chain from others. It's difficulty and it's breadth of acceptance. I don't think any other chain will be able to bootstrap itself into value like this one. Why would someone who comes along choose a chain that had no double spend protection and no merchants accepting it when there is one that already has those things? Because they can get a higher number of them for the same cost? That's meaningless.

[unk]

difficulty in the current chain won't rise forever, and at some point not too far away, it's likely that there will be more idle (but easily deployed) capacity than active mining in that chain, just a result of the simple economics of mining.

and all bets are off once we're forced to settle upon an equilibrium after the block subsidy vanishes and we rely only on fees to secure the chain. developers' opinions on the result in that state range from 'it's not a problem' to 'bitcoin is fatally flawed and cannot survive in its current form'.

breadth of acceptance is indeed important, but (1) the main chain isn't actually accepted in that many places that anyone wants to use yet, and (2) it's not hard for an alternative chain, backed by someone with a budget, to overshoot the current one in relevant 'acceptance' very quickly, as far as the general public is concerned. and other block chains could have immediate potential advantages, depending on their rules and the public's perception of the current chain's history, to the current one.

[xanatos]

Could you superimpose your graph with a graph of downloaded bitcoin clients / value? The sourceforge has the number of downloads for each version.

[kiba]

Did someone say....bubble? 

http://bitcoinweekly.com/articles/comic-reaction-after-dramatic-rise-of-bitcoin-s-value

[ribuck]

The problem with Jed's methodology is that it will show a bubble for ANY new thing that starts with zero value but non-zero users. At some point in the adoption of the thing, it must move to its longer-term value.

This kind of chart doesn't actually show whether the longer-term value is above or below the current price.

Inevitably, if Bitcoin is to be successful, its price must grow faster than its rate of adoption, because its price started at nothing. We can't tell from this chart whether Bitcoin is moving towards its true longer-term value, or whether it has bubbled above it.

[jed]

ribuck: Yes I agree. I would delete this post if I could. I was making that chart while distracted and made a mistake which had it look way undervalued which is more interesting than this chart. So I posted about it clearly not being a bubble. But that was wrong so I had to edit the post.