Topic: Bitcoin value in January 2013 - page 2. (Read 16214 times)

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.

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?

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.

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

Is that stable? 

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

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.


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

"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

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.

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.