Topic: For now, bitcoin only suitable as a store of value (Read 3170 times)

The price of BTC is quite stable now. However, can it be a suitable store of value when its market cap is just more than 1 billion USD? I believe that there are more than 100 people in the world whose assets exceeds 1 billion USD

Taking 2 poor countries in South East Asia into account, Vietnam and Mianmar, the trade volume in 2012 exceeds 1 billion USD

For one, merchants could hedge against the sudden sharp price drops that we have seen in the last months.  As soon as a lot of merchants are doing this, it would also dampen the sharp price increases, since a fraction of speculators who expect bitcoin to rise would bet against the hedgers instead of buying bitcoin.

I don't see how derivatives could help. Could you elaborate?

+1

The number of users needs to stabilize first before we can have stable prices.

Also, we don't have a well functioning derivatives market for bitcoin. Once that is the case, adoption as a medium of exchange will explode.

The price instability problem can be explained:

1. There are some people who understand what Bitcoin is and what is the value of a unit (the system as a whole).
These are miners and business owners mostly.

2. There are too many people who DON'T know what Bitcoin is ... at all !

3. There are a bunch of speculators.


So the ones who know either don't sell or sell at very high price.

The ones who don't know want to buy cheap, because they see no value there yet.

Speculators take advantage of this market disagreement.


The picture will change when more people know what Bitcoin is ...

For me the reasonable market cap of Bitcoin system is about 1 trillion USD (at current USD value).

I intend to sell some and SPEND MORE of my coins gradually upon the climb.
And never stop mining !

As a business owner, I agree that stable prices are preferable, but for the most part, Bitcoin is still a good currency. Things will work out.

I think the bolded part is false.  Consider if we just decide to talk and discuss microbitcoins (1/1,000,000) of a bitcoin.  Suddenly there are lots of monetary units. 

I recall in college working on a historical project, where Spanish gold was archived and stored.  It was basically, poured into depressions in the sand made with a dinner plate.  Each disk was worth a lot.  And there couldn't have been that many of them (hundreds or thousands).

You see the error in logic.  Both gold, and bitcoin are fungable.

What you are talking about is "exchange value", not real value of bitcoin

Let's back to the starting point: Now a new country has been established and there is a bidding for a new currency. There are two entities announced their proposal: One currency will be created by mathematical calculation and can be generated by everyone; the other currency is generated by a guy called DEF and he could issue as much as he will, based on his judgement of how much is needed by the country. Which solution will be more likely to be accepted?

I would, 100% is almost irrelevant in terms of what is at stake here.

Yes, but how many people want to suck up the variance of 100% swings in a day just because they know they may make money long term? Even that is far far far from certain. Another cryptocurrency comes up, a blockchain fork occurs, etc etc etc.

You're making a bold assumption that bitcoin wins in the long run.

I'll play devil's advocate here.

Imagine a scenario in which someone holds 10,000 or 100,000 bitcoins.  Let's say, an early adopter, who mined them all.  For the sake of argument, let's say bitcoin somehow magically reaches a value of 1,000USD per bitcoin.

You'll never convince the devil that such a person is better off keeping their "wealth" in bitcoin.  Playing by the rules of fiat currency is much more advantageous to this imaginary person.  To use basketball parlance, fiat currency is winner's outs.  When you score, you get the ball back to score again.  And when you have a shit load of cash, the rules are such that you AUTOMATICALLY make more money playing by fiat rules.  No risk involved.  Pretty genius, eh?  Go ahead, try to convince the devil it's a better move to keep the bitcoins.  Aside from TOTAL collapse of the fiat world (the devil knows this would have happened in 2009 if it ever was going to happen, and it didn't), there's much less risk in cashing out, because some other large stakeholder of BTC can cash out at a moments notice instead of you, screwing you out of millions or hundreds of millions in profit.

Truth be told, the devil knows the real issue is scale.  An individual needs a lot less than 100,000, or even 10,000, coins to control the market, cash out and drive the market into a downward spiral.  Cashing out slowly at first, then dumping the remainder at a particularly advantageous time to induce panic and intentionally tank the market.  The perfect time to execute this would be right after the majority of fiat on the exchanges buys in to pump the price (the devil selling on the way up at a rate that keeps resistance low enough for the upward trend to continue), as we saw play out last week.  There wouldn't be enough fiat on the exchanges (i.e. liquidity) to stop the downward trend.  The bitcoin seller gets a multimillion dollar payday, and can buy their coins back at 1/10 or 1/100th the cost at the same time.  And before you say that's not how it works, keep this in mind: we just saw this exact scenario play out, at a much smaller valuation, meaning there was a lot less money at stake than @ 1,000 per BTC.

The devil knows volatility rises as bitcoin exchange rate increases.  The chance of total collapse of the bitcoin economy increases the higher the per-BTC price goes.  There's way too much money at stake for that to not be the case.

The real value of bitcoin is determined by the amount of fiat sitting on the exchanges at any given point in time.  And moving fiat onto exchanges takes several orders of magnitude longer than selling large quantities of BTC.

We saw round two of this great transfer of wealth play out last week.  There will be many more, and the devil knows bitcoin is never more than a means to an end; big paydays for the whales.  There are too many whales in the ocean for BTC to ever reach a valuation "true believers" on this forum are predicting.

The only solution to this problem is making transfer into exchanges easier and faster.  And with unregulated exchanges, there's a snowball's chance in hell of enough fiat sitting at the ready to support large per-bitcoin values.

TL;DR - The real value of bitcoin is determined by the amount of fiat sitting on the exchanges at any given point in time.  And moving fiat onto exchanges takes several orders of magnitude longer than selling large quantities of BTC.  People aren't going to put millions or tens of millions of dollars on unregulated exchanges to support high per-bitcoin valuations.  Periods of stable and/or rising per-bitcoin prices are just the snake coiling up to strike, nothing more.

How that you know that, you can invest accordingly you can also follow the thought experiment to the conclusion that Bitcoin will become a store of value, before it becomes a currency.

That's what I mean, bitcoin is not suitable for use as a currency due to high appreciation potential. Of course you can invent many derivatives to hedge the exchange risk, but the price will never be stable due to limited supply

Modern money are all valueless digits but they hold their exchange value due to 2 things: Consensus and Trust. If bitcoin has gained enough consensus and trust, it will hold the exchange value. And if it has value, you can buy and sell anything with it

This game is different, the house advantage is at bitcoin side, e.g. who hold the bitcoin wins long term wise. Because the fiat is inflated all the time (now 85 billion per month) and bitcoin supply is limited, the bitcoin value will increase over time

johnyj:  Imagine a Roulette wheel, sometimes you win, sometime you lose but on average it all even out (well accept for 0 and 00, but lets pretend those aren't their and instead your paying 1% conversion fee at an exchange which has the same net effect).  Now would any sensible merchant agree to be payed with bets on a Roulette wheel?  No because you ALWAYS lose in the end, you hit a streak of losses and are eventually wiped out, business need their operating capitol if they loose it they can't make another set of products to sell just like you can't make another bet.  This is why stability is key.

wow i am amazed how blind investor mentality is! btw, that is not just towards you, there seems to be a lot of that blind mentality around; consumers and suppliers of goods and services are not concerned about the long term value of currency! what matters for that use, $->btc-> goods and services->btc->$, is that for successful trading (of goods and services), the $ at each end has to roughly match! y, sometimes, someone (with the volatility, rarely both) in that transaction will benefit but that is not much security for people whose only interest is $1=$1 within the lifecycle of the transaction. sure, this might not be applicable for all traders (of goods and services) but it represents a downhill direction where less and less people are using btc for exchange of goods and services. my question remains unanswered "how do you hold the exchange value of a currency that you can't buy or sell anything with?!"

Some time price is rising, you win, some time price is dropping, you lose, it evens out long term

I'm with Impaler on this; What is happening right now is; buyer purchases some BTC for a transaction, by the time the transaction occurs, his bitcoins drop in value so he can't afford what he was planning to get so buys less goods and services. the seller (of goods and services) gets his BTC but by the time he converts to $, BTC has lost value so he's not getting as much for his product. How long do you think that can continue before people stop buying and selling goods and services with BTC?? And when they do, how do you hold the exchange value of a currency that you can't buy or sell anything with?!

If half of the time you are holding no coin, you lose half of the appreciation potential, it means as soon as you spent, you must buy back, then why not just buy and hold bitcoin and spend fiat

I could play roulette 5 times putting my bet on red each time. This could win me a lot of money or lose me a lot of money or come close to even.

If I play roulette 5000 times putting my bet on red each time I will more closely get the result of being down 1-2% as the house advantage dictates.

If I buy and spend bitcoin every day/week for several years the result will be a slow climb as bitcoin is a depreciating currency.

So no, bitcoin is not only suitable as a store of value.

Good call, maybe merchants will provide some discount, but that is difficult due to high volatility, a merchant might not have so much freedom in timing

The gold rush actually shifted the US economy center towards west coast, many companies growed out of it, even lasted until today, how is that of no real value

Bitcoins are usable for speculating and trading stuff online.

That's it, a store of value implies inherent stability which bitcoin can not be, ever. It's an asset with high elasticity, the highest possible actually.

Merchants do not have the ability to pull currency away from people who wish to hoard it, the buyer determines the currency used in commerce because they make decisions on what money to spend (if any) before being presented with products.  In BTC economics their is only one thing a merchant could be selling that is attractive enough to part with the hyper-deflating money for anything that's not a drug, MORE MINING HARDWARE. 

It's an economy that resembles a wild-west gold-rush boom-town.  Miners hoard their gold and only spend it on Booze and Whores (SilkRoads), or buy more picks and Shovels (Avalon & ButterFly Labs) or try to play the commodity market (Mt.Gox).  It's basically a big circle-jerk that's not actually producing any real surplus value and which is completely dependent on it's own continued growth.

But if the mindset of everyone is that bitcoin will only go up, it is the case for retailers and merchants as well. They would rather get paid in bitcoins than in fiat, and could offer better prices that correlates to the expected price rise of bitcoins. The world you are describing is a world where consumers expect Bitcoin to rise, but merchants don't.

Yes, crossboarder transfer is another advantage, a store of value that can be send to anywhere on the planet quickly and safely

Bitcoin can be both a store of value and a medium of exchange. People will hoard many bitcoins but a bitcoin economy can exist with a small fraction of bitcoins in existence. The key to bitcoin succeeding is to first be used in functions with little exchange risk. A remittance is the first thing that comes to mind. A person can send bitcoin to an exchanger in a foreign country as collateral who thens quickly sells btc in the market and gives the proceeds to the recipient of the remittance.

People always raise the example of IT products (even you know you can buy same product with less money in the future, you will still buy it today) and claim there is no problem for a deflative currency to become a medium of exchange

That is the wrong way to look at the problem, since in this example you have no alternative payment method. If you have another inflative currency which lose its value as fast as IT products, you would definitely spend that currency to buy IT products and hold the deflative currency

And this is what will happen, people will spend fiat and hold bitcoin. Even if they ran out of fiat, they could possibly take a loan to spend, since the interest of the loan is much less than the value appreciation of bitcoin, they only need to sell small amount of the coin each year to pay back the loan when exchange price is favorable

It's just a disruptive, growth industry in its early penny stock stages. Penny stocks are volatile just like bitcoin. This doesn't mean they always will be.

Normally you can't have both. USD can not work as a store of value since it inflates continously, but it works as a medium of exchange. Gold do not work as a medium of exchange but they hold value

And, low liquidity does not mean no exchange value, if price greatly swing between 30-300, it's just high volatility, you have to either deleverage or buy some derivatives to hedge the risk, if you don't have the time to care about exchange. I have explained before that majority of people will not pay bitcoin for daily consumption, since fiat money already works enough good

A retirement saving medium is where bitcoin will succeed first, if you have started to save in bitcoin each month since last year, now your retirement saving account is worth many times more than a fiat money saving account, even after this crazy rally and crash

Catch-22

BTC is too volatiles to use for commerce so it has no exchange value.
BTC's store-of-value is based on its ability to be exchanged, it only has store-of-exchange-value
If it has not exchange value then it has no store or value.

This kind of large price swing will create huge uncertainty for the merchant and anyone who doing trade using bitcoin as a currency. For a currency, the most important character is stable exchange value

For a limited amount of supply, this kind of fast price swing is expected. So it will not be suitable for use as a transaction medium, if the merchant who receive the coins don't exchange the coin to USD immediately, he might lose 2/3 of it's exchange value overnight, it is clear none of the merchat will accept this kind of risk

So, currently the most possible use for bitcoin is act as a store of value, or the base currency. As a store of value, people tends to hold it for a long time, and in long term the price will always rise due to limited supply, the short term price swing will be irrelevant

Only when bitcoin first successfully established itself as a reputable digital asset, it price will stablize and then it can slowly becomes a widely used medium of exchange. Currently the people's confidence are still very weak and the large price swing is unavoidable