Potential problem with Bitcoin investments

[Anders]

Hi,

I learned about Bitcoin today. Absolutely fascinating concept. One thing I thought could potentially be a problem though is if many people will start to hoard bitcoins for investment purposes. Since the bitcoins already are a scarce resource, a lot of hoarding will make them even more scarce. This will make the bitcoin value increase. Large investors can collect a huge number of bitcoins, wait a while until the value goes up, and then quickly sell all their bitcoins at a high value which in turn will cause the bitcoin value to go down. Then they buy a large amount of bitcoins again at the lower value and repeat the cycle. In this way large investors, or crowdsourcing of investors can 'pump' money out of the bitcoin market.

[1713499983]

1713499983

[1713499983]

1713499983

[cloud9]

Hoarding for the past 5000+ years has done a scarce resource like gold only good.  Wheat or other limited supply commodities may also be compared.  Eventually the hoarder will swap his hoard for something else he needs.  And the new person who swapped will then be the hoarder for as long as he can save that which he hoards, before he needs to swap it for something he needs to fulfill in his more immediate needs.  Due to defined scarcity, Bitcoins (when stable over the long term, like other scarce commodities of finite quantity) is a good savings mechanism with a good yield in the most recent past.

[FreeMoney]

Hi,

I learned about Bit today. Absolutely fascinating concept. One thing I thought could potentially be a problem though is if many people will start to hoard bitcoins for investment purposes. Since the bitcoins already are a scarce resource, a lot of hoarding will make them even more scarce. This will make the bitcoin value increase. Large investors can collect a huge number of bitcoins, wait a while until the value goes up, and then quickly sell all their bitcoins at a high value which in turn will cause the bitcoin value to go down. Then they buy a large amount of bitcoins again at the lower value and repeat the cycle. In this way large investors, or crowdsourcing of investors can 'pump' money out of the bitcoin market.

If people realize, as you did, that bitcoins have value then they will want to hold them. That much is right.

It is a convenient abstraction to think of there being 'a price' for something, but actually there are just offers to buy and sell. In markets with lots of players and good liquidity the highest bid and lowest ask are close together. This is often true of the Bitcoin market at MtGox now. However, when a large sale is made these diverge. You cannot sell an unlimited amount without dropping the price, and you cannot buy back automatically at this low price, new offers will need to be made.

Manipulating markets is costly. It can be very profitable if you can pay the price with someone else's money and profit with your own, but there is no magic riskless money to be made outside of that.

[FreeMoney]

Hoarding for the past 5000+ years has done a scarce resource like gold only good.  Wheat or other limited supply commodities may also be compared.  Eventually the hoarder will swap his hoard for something else he needs.  And the new person who swapped will then be the hoarder for as long as he can save that which he hoards, before he needs to swap it for something he needs to fulfill in his more immediate needs.  Due to defined scarcity, Bitcoins (when stable over the long term, like other scarce commodities of finite quantity) is a good savings mechanism with a good yield in the most recent past.

Yes, every bitcoin is always hoarded. And if you want a neutral word instead of a loaded one then every bitcoin is always saved.

[Anders]

Hoarding for the past 5000+ years has done a scarce resource like gold only good.  Wheat or other limited supply commodities may also be compared.  Eventually the hoarder will swap his hoard for something else he needs.  And the new person who swapped will then be the hoarder for as long as he can save that which he hoards, before he needs to swap it for something he needs to fulfill in his more immediate needs.  Due to defined scarcity, Bitcoins (when stable over the long term, like other scarce commodities of finite quantity) is a good savings mechanism with a good yield in the most recent past.

I'm not so sure. When we have fluctuations up and down in the gold market today, that may to a large extent be big investors 'pumping' the gold price up and down. When they buy huge chunks of gold, the price will go up, but that takes a bit of time, long enough time for the large investors to be able to buy at the low price. The same thing when they sell huge chunks of gold: the price will be high when they sell and in a short time after that the price will fall. So it's the small gold investors who will be the losers, because they don't know when the big players make their massive moves.

[Anders]

Hi,

I learned about Bit today. Absolutely fascinating concept. One thing I thought could potentially be a problem though is if many people will start to hoard bitcoins for investment purposes. Since the bitcoins already are a scarce resource, a lot of hoarding will make them even more scarce. This will make the bitcoin value increase. Large investors can collect a huge number of bitcoins, wait a while until the value goes up, and then quickly sell all their bitcoins at a high value which in turn will cause the bitcoin value to go down. Then they buy a large amount of bitcoins again at the lower value and repeat the cycle. In this way large investors, or crowdsourcing of investors can 'pump' money out of the bitcoin market.

If people realize, as you did, that bitcoins have value then they will want to hold them. That much is right.

It is a convenient abstraction to think of there being 'a price' for something, but actually there are just offers to buy and sell. In markets with lots of players and good liquidity the highest bid and lowest ask are close together. This is often true of the Bitcoin market at MtGox now. However, when a large sale is made these diverge. You cannot sell an unlimited amount without dropping the price, and you cannot buy back automatically at this low price, new offers will need to be made.

Manipulating markets is costly. It can be very profitable if you can pay the price with someone else's money and profit with your own, but there is no magic riskless money to be made outside of that.

It's true that when selling huge amounts of a scarce commodity, the price will fall, BUT with a time delay, long enough for the big players to be able to pump the price up and down at their own will and catch the right peaks and dips in the price.

[FreeMoney]

Hi,

I learned about Bit today. Absolutely fascinating concept. One thing I thought could potentially be a problem though is if many people will start to hoard bitcoins for investment purposes. Since the bitcoins already are a scarce resource, a lot of hoarding will make them even more scarce. This will make the bitcoin value increase. Large investors can collect a huge number of bitcoins, wait a while until the value goes up, and then quickly sell all their bitcoins at a high value which in turn will cause the bitcoin value to go down. Then they buy a large amount of bitcoins again at the lower value and repeat the cycle. In this way large investors, or crowdsourcing of investors can 'pump' money out of the bitcoin market.

If people realize, as you did, that bitcoins have value then they will want to hold them. That much is right.

It is a convenient abstraction to think of there being 'a price' for something, but actually there are just offers to buy and sell. In markets with lots of players and good liquidity the highest bid and lowest ask are close together. This is often true of the Bitcoin market at MtGox now. However, when a large sale is made these diverge. You cannot sell an unlimited amount without dropping the price, and you cannot buy back automatically at this low price, new offers will need to be made.

Manipulating markets is costly. It can be very profitable if you can pay the price with someone else's money and profit with your own, but there is no magic riskless money to be made outside of that.

It's true that when selling huge amounts of a scarce commodity, the price will fall, BUT with a time delay, long enough for the big players to be able to pump the price up and down at their own will and catch the right peaks and dips in the price.

I guess you've got some money coming your way then. I wish I was smart enough to understand how markets worked.

I just moved the price down from 7.0125 to 7.011, but unsurprisingly the cheapest I can buy back for is still 7.0699. I'm going to have to wait for someone to put an ask out below 7.011 in order to make any money, and that is completely out of my control. The lowest ask could fall or it could go to 8.013 for all I know.

[markm]

Pump and dump might work a whole lot better when there are more such currencies on the markets, not only because it might be easier/cheaper to aquire a big enough chunk of any one currency but also because one could  invest in mining rigs too and hint about which currency huge amounts of hashing power is "thinking of moving to" and other such rumour-mongering.

For people who like playing markets, a bunch of currencies all based on bitcoin code/concepts would be really great, allowing much scope for playing among them without the current constant recourse to old school fiat currencies and pecunix and liberty reserve and such.

-MarkM-

[Anders]

Hi,

I learned about Bit today. Absolutely fascinating concept. One thing I thought could potentially be a problem though is if many people will start to hoard bitcoins for investment purposes. Since the bitcoins already are a scarce resource, a lot of hoarding will make them even more scarce. This will make the bitcoin value increase. Large investors can collect a huge number of bitcoins, wait a while until the value goes up, and then quickly sell all their bitcoins at a high value which in turn will cause the bitcoin value to go down. Then they buy a large amount of bitcoins again at the lower value and repeat the cycle. In this way large investors, or crowdsourcing of investors can 'pump' money out of the bitcoin market.

If people realize, as you did, that bitcoins have value then they will want to hold them. That much is right.

It is a convenient abstraction to think of there being 'a price' for something, but actually there are just offers to buy and sell. In markets with lots of players and good liquidity the highest bid and lowest ask are close together. This is often true of the Bitcoin market at MtGox now. However, when a large sale is made these diverge. You cannot sell an unlimited amount without dropping the price, and you cannot buy back automatically at this low price, new offers will need to be made.

Manipulating markets is costly. It can be very profitable if you can pay the price with someone else's money and profit with your own, but there is no magic riskless money to be made outside of that.

It's true that when selling huge amounts of a scarce commodity, the price will fall, BUT with a time delay, long enough for the big players to be able to pump the price up and down at their own will and catch the right peaks and dips in the price.

I guess you've got some money coming your way then. I wish I was smart enough to understand how markets worked.

I just moved the price down from 7.0125 to 7.011, but unsurprisingly the cheapest I can buy back for is still 7.0699. I'm going to have to wait for someone to put an ask out below 7.011 in order to make any money, and that is completely out of my control. The lowest ask could fall or it could go to 8.013 for all I know.

Only if I was a large investor.   It's only those with huge financial resources (like $trillions) that can control the markets like that.

[FreeMoney]

Only if I was a large investor.   It's only those with huge financial resources (like $trillions) that can control the markets like that.

Ah, right. Everything is different for the rich, none of my explanations or examples apply to them. I think the rich must be level 80 wizards or something.

[Anders]

Only if I was a large investor.   It's only those with huge financial resources (like $trillions) that can control the markets like that.

Ah, right. Everything is different for the rich, none of my explanations or examples apply to them. I think the rich must be level 80 wizards or something.

The key is the time delay. Small investors don't know when the price will go up or down. The mega large investors on the other hand can MAKE the price go up and down, and are able to sell at a high price BEFORE the price drops as a consequence of selling a huge amount of the commodity. The same thing when they buy huge amounts where the increase of the price happens with a certain time delay.

[FreeMoney]

Only if I was a large investor.   It's only those with huge financial resources (like $trillions) that can control the markets like that.

Ah, right. Everything is different for the rich, none of my explanations or examples apply to them. I think the rich must be level 80 wizards or something.

The key is the time delay. Small investors don't know when the price will go up or down. The mega large investors on the other hand can MAKE the price go up and down, and are able to sell at a high price BEFORE the price drops as a consequence of selling a huge amount of the commodity. The same thing when they buy huge amounts where the increase of the price happens with a certain time delay.

Christ, I just told you that I made the price go down by .0025. There was no profit opportunity. Small players make the price go down by small amounts, and there is no small profit made thereby. Big players make it go down by big amounts, and there is no big profit made thereby.

[Anders]

Only if I was a large investor.   It's only those with huge financial resources (like $trillions) that can control the markets like that.

Ah, right. Everything is different for the rich, none of my explanations or examples apply to them. I think the rich must be level 80 wizards or something.

The key is the time delay. Small investors don't know when the price will go up or down. The mega large investors on the other hand can MAKE the price go up and down, and are able to sell at a high price BEFORE the price drops as a consequence of selling a huge amount of the commodity. The same thing when they buy huge amounts where the increase of the price happens with a certain time delay.

Christ, I just told you that I made the price go down by .0025. There was no profit opportunity. Small players make the price go down by small amounts, and there is no small profit made thereby. Big players make it go down by big amounts, and there is no big profit made thereby.

If a large gold investor for example suddenly would sell a huge amount of gold, then the gold price only drops after the transaction. Of course, it would have to be a large change in the price for it to become a profit, and that's why only the biggest players can play that game. Small investors can hardly budge the gold price at all.

With the Bitcoin system today it's perhaps easier for even small investors to change the price, since the market still is small. But to make a change of say 10% then even in the Bitcoin system there would have to be fairly large transactions needed I assume.

[FreeMoney]

When do you imagine that the price changes? After Richee McGee has sold all he wants at the high price or as he is selling?

The price always moves against you. More if you do large, less if you do small. There is no profit here, only paying more or getting less as you go. When you try to go the other way afterwards, same thing happens.

[Anders]

When do you imagine that the price changes? After Richee McGee has sold all he wants at the high price or as he is selling?

The price always moves against you. More if you do large, less if you do small. There is no profit here, only paying more or getting less as you go. When you try to go the other way afterwards, same thing happens.

I'm not convinced that it is entirely safe. Imagine for a moment huge investor A and huge investor B. Neither of them will be fooled by the other large investor, but they can cooperate. Let's say that investor B is a bank with millions of suckers, eh...excuse me, millions of customers who they manage investments for. Investor A sells an enormous amount of gold to investor B who knows that the price will drop after the transaction since the gold will become spread out and dilute the small investors' gold. Why? Because investor B buys the gold at the high price for the millions of its customers! Then after the transaction, both investor A and B wait a while (hours, days or whatever it takes) for the effect to be reflected in the gold price, and when the price is low enough they both buy gold. Both investor A and B become winners, and the millions of customers losers.

I don't trust current markets for a millisecond.

[Anders]

I guess the Bitcoin system could be vulnerable to what is called cornering of the market:

"In finance, to corner the market is to purchase enough of a particular stock, commodity, or other asset to allow the price to be manipulated, by analogy to the general business jargon where a company described as having "cornered the market" has a very high market share. The cornerer hopes to gain control of enough of the supply of the commodity to be able to set the price for it.

This can be done through several mechanisms. The most direct strategy is to simply buy up a large percentage of the available commodity offered for sale in some spot market and hoard it. With the advent of futures trading, a cornerer may buy a large number of futures contracts on a commodity and then sell them at a profit after inflating the price." -- From: http://en.wikipedia.org/wiki/Cornering_the_market

In practice however there is perhaps not a real problem:

"Although there have been many attempts to corner markets in everything from tin to cattle, to date very few of these attempts have ever succeeded; instead, most of these attempted corners have tended to break themselves spontaneously. Indeed, as long ago as 1923, Edwin Lefèvre wrote, "very few of the great corners were profitable to the engineers of them."[1] A cornerer can become vulnerable due to the size of the position, especially if the attempt becomes widely known. If the rest of the market senses weakness, it may resist any attempt to artificially drive the market any further by actively taking opposing positions. If the price starts to move against the cornerer, any attempt by the cornerer to sell would likely cause the price to drop substantially. In such a situation, many other parties could profit from the cornerer's need to unwind the position." -- From the same Wikipedia article above

[BitterTea]

Attempting to corner the bitcoin market would just make the current holders very rich. A problem I'm happy to deal with.

[Anders]

Another potential problem is that hoarding bitcoins for long-term investment is so attractive that the flow of bitcoins becomes clogged up with very few people actually willing to use their bitcoins since the long-term investment prospect is so formidable.

Early on the cost of one bitcoin was 1 dollar. Today it's around $7 if I remember correctly. In the future, with billions of users, the price of a single bitcoin could be $100,000! So people today may want to hoard bitcoins like crazy.

[Anders]

Attempting to corner the bitcoin market would just make the current holders very rich. A problem I'm happy to deal with.

I feel tempted to hoard a few bitcoins myself. I have stopped making investments with real money, but the bitcoin concept is so cool that it would be fun to save some bitcoins now just to see what will happen with the price in the future, not out of greed, but as a game sort of.

[gsan]

Another potential problem is that hoarding bitcoins for long-term investment is so attractive that the flow of bitcoins becomes clogged up with very few people actually willing to use their bitcoins since the long-term investment prospect is so formidable.

Early on the cost of one bitcoin was 1 dollar. Today it's around $7 if I remember correctly. In the future, with billions of users, the price of a single bitcoin could be $100,000! So people today may want to hoard bitcoins like crazy.

It certainly has an effect but in my opinion it's not as dangerous as it seems. When the BTC exchange value goes up, you can consolidate your profits by spending your money. That happened to me many times, the offers become more and more irresistable. You don't know if the value will go higher, maybe the market will crash soon. On the other hand, you can buy that diamond necklace with the bitcoins you've bought for only 100 bucks. Save some, spend some. At best, the deflation will make people more careful with their expenditures.