Topic: Demand, fundamentals, or speculation (Read 1262 times)

It's run by pure speculation.

I have been watching for months now and have come to the conclusion that this market is even more illogical than what we see on the Dow.

I personally think there are more than three, but these three seem to be major. I'll list them and their effects, tending downwards or upwards here. Please make some corrections to this (I am not economically capable at all, so do not take these notes as anything serious).

Demand
Bitcoin advertises itself as a "supply and demand" currency. To obtain bitcoin, there are three major methods (ignoring gambling):

• Provide a marketable good or service priced in bitcoin
• Mine bitcoin
• Purchace bitcoin with other currency

I would argue that purchacing bitcoin with other currency has only a positive influence on the price, providing goods or services tends it up somewhat, and mining them tends it up slightly. The last one might be most difficult to understand, as many people blame miners for causing the recent 20% decreases in a single week. However, my justification for that is somewhat psychological and somewhat logical: an additional miner can only bring difficulty up, causing mining profits to go down on average for everyone. These profits decreasing will stop some people from shorting bitcoin, and instead placing higher asks. Similar to the advice you might recieve for auctioning: "Set the minimum price higher, and you will get a higher offer".

Fundamentals
Bitcoin is a rapidly inflating currency if money supply is used to measure inflation. As of 2011-08-26, the annualized money supply growth rate is 44.5%! This meets a certain definition of hyperinflation if money supply is used to measure it. Unfortunately, CPI is not available for Bitcoin as there does not exist enough commodities priced in bitcoin. So, instead of meauring inflation, we are forced to measure supply. In contrast, this year the US money supply will increase by approximately 4%. So, fundamentals are a heavy negative weight onto bitcoins price, but until recently have not seemed to surpass the combination of demand and speculation.

Speculation
There is no doubt that bitcoin was previously, and likely still is, traded as a stock or higher-risk investment. The market is very shallow, and small trades can affect the price signifigantly. A large rally to 30 USD and above occured not too long ago, promptly crashing as investors tried not to risk their entire investment. This seems to affect price both upwards and downwards.

So, what do you all think?