Topic: please stop sating bubble unless you define/understand it (Read 4521 times)

That's my code underneath that calculator! It's all grown up, I feel so proud...

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

Finally, a parody of people who cries Bitcoin Bubble every time after dramatic rise of Bitcoin's value. 

This problem exists in the real economy too. Let's say I pay to build a car using euros and sell it in north america priced at a fixed price $9,900. The USD can go up or down in value. If it gets stronger I will get less money in euros and potentially lose money.

That's why we have Foreign Exchange options (FX). I pay a third party a small premium to guarantee me a certain exchange rate. We need this in BitCoin too.

Let's say 1 BTC is trading at $5 USD today. Then someone could charge me 0.1 BTC to issue an FX. The FX would guarantee that I within 3 months can exchange 1 BTC for $5 USD with them.

this thread got off topic, but oh well.  there are niche uses for bitcoin that make it superior to other payment methods, many of which I am sure are undiscovered at this point.  Maybe someday it will become stable, widely accepted, etc, etc, but the seed of this economy will come from bitcoin's edge over other currencies in niche areas.

Right. And that will be the point where the current "people to people" volume could be tested vs a business trying to constantly swap out currency. Who is going to be the counterparty at all times? Or, to put it differently, how are you going to deal with your margin evaporating if you get constantly lower requotes until all your desired BTC offers are filled?

I still see potential for huge financial risk in all of this, and the whole exercise boils down to bending over backwards to end up doing what you should have done in the first place: pay in real currency.
That's really the main point and the utterly nutty thing about all of this(an extra currency conversion step for what? Literally every bank in the whole world will exchange to and from the USD and accordingly CC companies, too. You're not opening up payment options to a formerly untapped market, you're really just catering to an idee fixe right now. Everyone who has bought BTC also has real hard currency as well and with those that have mined them it doesn't change much whether you or they exchange them back out first, they WILL get changed back to USD/whatever anyway).

As an online merchant who is trying to deal with these exact issues,   I would like to offer a few thoughts.

1.  I think it will be quite some time before items are priced ONLY in BTC.  I think most merchants will list their prices in USD, EUR, Yen, RMB etc and ALSO be willing to accept BTC at the current exchange rate at the time of sale.

2.  To deal with the wild exchange rate fluctuations merchants have three main options:
      A.  Hold onto the BTC in the hopes the value will increase further.
      B. Find another merchant to spend the BTC to.
      C. Exchange them immediately for a national currency.  

I suspect "C" will be the most common.  With a little programming a system can be setup to calculate the required amount of BTC required at the time of sale.
In fact,  bitcoincharts.com has a wonderful calculator that would allow a merchant to calculate how many bitcoins they would need to sell to receive the required amount of USD.
See here:



With a little programming,  I am sure an automated system can be setup where the merchant can sell their bitcoins for the expected amount of national currency as soon as they receive the payment.  The sooner people can develop software to do this for common shopping cart programs such as Magento and Open cart,   the sooner major merchants will begin accepting bitcoins as payment.

So, a Bitcoin economy can't exist because a Bitcoin economy doesn't exist. Therefor Bitcoin will only ever be a plaything for speculators.

I think that an infrastructure will be built (is being built) around whatever Bitcoin is used for, and people will use that infrastructure in other Bitcoiny ways.

In other words, it will expand. With size will come stability. With stability will come more merchants willing to price their goods in Bitcoins.

It all depends on whether or not people find Bitcoin useful (for whatever purpose), and use Bitcoin.   

My point was none of this is instantaneous and it would be impossible to make it instantaneous without a central force.

It's both hilarious and sad to see how little people really understand how anything really works.

It's a cart before the horse / hen-egg issue. BTC may be a speculative item, but a ccy, it is not.

If anyone took the time to think through the trouble a merchant is facing with something like BTC..

Okay, you value your stuff in BTC, but they have to correspond to the real world(because people need a price).
So if the value of BTC asked for item x has to constantly be readjusted to correspond to the current exchange rate(normally this is not "as needed" because A REAL ECONOMY EXISTS and a country/ECB behind it and things offset mostly internally, i.e. you know that 5 EUR aren't just 2 breads, but maybe a happy meal, two socks, 3 bags of chips etc pp and you could just get those for the same 5 EUR at any point in time).

So let's take the diapers someone else just bought. From say costing 5 BTC one day for a 5$ item at 1:1, to them costing 1 BTC the next at 5:1, the guy selling them is now faced with the dilemma that he may be sitting on 10 BTC from 2 sales in one week, but now only 2 BTC from 2 sales in the next. So he now has 12 BTC for a total item value sold of 20$.

If the BTC at this point fluctuates back below 1.66, he is effectively sitting on a loss.

Widen the proportions and increase the "bad timing" factor(make him sell 10 Diapers in week 2 and you now need BTC to stay >=3$ for him to break even/profit), and the shop owner is quite literally screwed if he keeps his BTCs and then needs real money at a bad point in time. (THIS is why you need a stable exchange rate)

Now, you can obviously circumvent this by immediately cashing out every single BTC purchase into real world currency as soon as it is processed/done, so as not to expose yourself to a risk of random losses of half or more of your capital.

But here the fun begins, as we have no CB(or any banks at all) or any other real liquidity provider guaranteeing rates, making price etc, so there is near to no liquidity.

The more you would try to build an economy by increasing vendors and sales made, the less likely it is, as they exponentially would require more liquidity to constantly re-change the BTCs as a sale is made.

So you are quite literally stuck with every single sale meaning being an unwilling participant in a huge speculation gamble, and that's just not something anyone not completely retarded businesswise would expose themselves to in a large scale.

So, uhm, yes. My core problem remains with the constant babble about economy and markets when there quite literally is no such thing INTERNALLY, because there can't be the way things are.

Feel free to -as always- "disprove" this with "great" other examples, but the issues of real world economy vs make-believe I-really-just-want-it-to-be-so still persist.
You need EITHER a stable exchange rate OR a deep enough liquidity before anything can really happen "big enough"(there are obviously vendors out there taking BTC in some way and for some reason, lord knows how their books look and how they offset it), and establishing either has not been solved nor does seem likely to be easily solved with the mentalities and participants described both here and in other discussions before.

But hey, as has been said..let's see what's what in 10 years.

The idea is to somewhat make it so demand is matched up almost perfectly with supply.  As more people want in, more coins are available to mine and that smooths things out.  Initially, not many coins are mined, but not many people want them, so it's not a big deal.  Then after a while, there aren't as many new users, so the economy should be more self-sufficient, so the demand to enter and exit is not as strong.

Of course, modelling that wrong could lead to just as many problems.  Should the mining period last 40 years?  Or 400?  It's all fairly arbitrary.  Widespread adoption of Bitcoin is definitely in the decade more than year range.  You could try to do it off of real-time data based on hash rate (the higher the hash rate, the more of a reward you get for finding a block), but at a certain point cut off.  You'd have to have very good estimates on the hash rate curve over time to do this effectively.  Obviously Satoshi's implementation is the cleanest and most predictable, so that has some advantages over such a system I am proposing.

I do predict we have some really ugly swings, much uglier than anything we've ever seen over the next few years.  Coins remain fairly scarce as people are convinced they will keep going up.  Once they are no longer convinced or want to cash in on their wealth, without sufficient demand, could see an ugly drop.  This could be followed by massive buying which would trigged the "bubble" again, followed by another crash.  As the actual Bitcoin economy grows and becomes more self-sufficient, the speculation bubble makes up less of the price.  Once things are based on fundamentals rather than speculation, we'll be fine.  Speculation isn't a bad thing, in that it gets us there faster.  But it's going to be a wild ride.  I could see as much as a 80% drop in value over a week at some points, or maybe even a 500% rise in value in a week.  When?  I wish I knew.

I'd love to have Satoshi's input on this (as with so many things...) I suspect the "front-loaded" approach was deliberate, and - as you say - to reward Satoshi and other early adopters (I think I've seen somewhere that Satoshi didn't benefit as much as others: Satoshi was mining with a fairly low-spec CPU). I also think that that's no bad thing: I think it was probably necessary to bootstrap bitcoin.

I did consider a bell-shaped distribution when replying earlier; I hadn't thought about Poisson however. Your idea intrigues me and I wish to subscribe to your journal :-) I suspect it may have resulted in a stable system becoming unstable, then ultimately stabilising again, so I'm still tending towards a Candide-esque "this is the best of all possible systems" belief. But I'll have a further think before discounting a Poisson distribution approach.

The problem is you have a very few number of people controlling a huge amount of wealth.  Due to decrease in incremental value (I'd rather have 100% chance at $1M than 1% chance of $100M), you have a lot of people ending up having to gamble an absolute fortune.  The distribution I'd like to see is more like a bell curve, with the total number of coins generated being based on the tan-1 function (shifted up by pi/2, and to the right by some arbitrary amount) with a linear start to it to get things going.

.

It might be a good exercise to try to figure out what % of users will be involved over the lifetime of a currency if it were successful.

For example:

Initially: .000001%
1 Year: .00001%
10 years: 1%
100 years: 100%

and fill in the places in between.  Then have mining somewhat mimic that.  The benefit in this is the number of coins closely resembles (total coins / number of users), which will keep a fairly stable value.  The downside to it is there is not as much an incentive for early adopters since they don't have as much potential to get huge gains.  I'm not sure that's a bad thing, but perhaps shift it a little bit to favor early adopters, but not by as much as the current system.  It surely seems intentional, as only a very few number of people were likely involved initially, and they could get a huge number of coins.  This was almost a reward for writing the system (not that it's a bad thing).


That's the key.  Figuring out where Bitcoin actually is superior, or could very easily become superior to currency.  Using bitcoins to buy groceries at a brick and mortar store is not something likely to be superior for quite some time.  Using bitcoins in internet grey markets (such as to gamble on the internet) is a fantastic idea where it's far superior.  Transfers between different countries is far superior to Western Union/Moneygram, etc... if the infrastructure is there.  Use Bitcoin where it is clearly superior, or break down barriers where it isn't.

I think you're broadly right, but I'm not too concerned. I see bitcoin as a long-term project, and right now we're at the very start of it. There aren't many goods or services priced in bitcoins (I know, this is a perennial complaint, and there are good people always working to address it, but right now - and, I suspect, for some time to come - that part of the bitcoin economy will lag behind the rest of the economy).

Regarding instability, again I'm not too concerned at this stage of the project's existence, and I see it continuing for some time yet. We saw it back in February, when we hit USD parity (and even hit the dizzy heights of $1.10!) and then watched as the rate declined to 0.56 USD. And you're quite right - this is due to the market being extremely thinly traded - forex has trillions of dollars being traded daily: there's no way bitcoin is going to even approach that for the foreseeable future.

I draw a different conclusion from you as regards the initial distribution: I see it as trying to get to a stable position as quickly as possible, and accepting instability as a means to that end. It's counter-intuitive, but I can't see the reverse (or a bell-shaped distribution of coins) as working better. Better to frontload the instability hit than risk instability just when the bitcoin economy seemed to be maturing.

tl;dr: Boot-strapping a disruptive technology is going to involve instability in the short- to medium-term.

Edit: sorry, I wanted to give a few example of the bitcoin economy's immaturity, and how I see it developing. Someone mentioned earlier today that forex markets shut up shop for the weekend. I totally see why MtGox and other exchanges don't do this, but I think as the bitcoin economy develops it needs to move in line with the wider financial system. Right now we're seeing dips at weekends (or rises that are less steep than they might be!), because it's not easy to get money in, but it is easy to get bitcoins out. That's not something that comes as a surprise to many forum regulars, but it is scary to someone watching from a newbie perspective.

The other "example" (OK, not so much an example as a theory) is Gavin's "we just can't predict what uses people are going to come up with" belief (which I share). I think right now we're trying to fit bitcoin around what we know - the familiar. I think that the real value for bitcoin is going to come when someone starts using bitcoin in ways we never considered before. Right now the userbase is tiny - as it develops, and particularly as it develops in the developing world, people are going to innovate like nothing we've seen before.

A currency gaining that purchasing power that quickly stops becoming a currency, though.  If you can predict something will rise, no one will sell it (or only very few will).  This drives the price up even higher, which is a positive feedback loop.  The loop breaks when those with the asset want to cash in on the gains finally are content with the rise.  You have a slightly unnatural amount of hoarding because a lot of people are holding on just hoping it will go up, rather than using it as a currency.  If there is a lack of trust that it will continue going up, you'll see a bunch of people dump to try to get in at the peak, or at least protect their investment before it drops.  That creates another positive feedback loop where everyone wants to sell and no one wants to buy.  Without stability, either no one wants to spend (it will go up a ton in the future!) or no one wants to accept it (it's going down in value, why do I want this?).  So it's value as a currency diminishes quite a bit.

BTC has extremely thin markets which is making the prices rise and fall.  Even though there are > 6 million BTCs in existence, a lot are held by true believers.  They won't sell until it hits $1000 or some crazy amount.  They got them for free or cheap, so there is no loss mentality (someone who starts gambling with $5, goes up to $1000, then loses it all will think he only lost $5).  So the supply is quite small.  The hoarded coins represent a huge threat to stability.  If they get sold off in a controlled manner, the price doesn't fluctuate too much.  If there is ever a panic, there is such a huge supply of them, it would be equivalent to hyper-inflation.

While not terribly exciting (but still way more volatile) as an investment, as a currency it's a big problem.  Having a more gradual rise in value would make it much more useful as a currency than speculation.  I feel that this is the biggest flaw in the BTC system, although it might have been intentional - such a huge number of coins were initially distributed to such a few number of people.  The mining curve where half are mined in the first 4 years seems very flawed to me and very much drives the problem we see with wild fluctuations.  It would be better to have distributed them more gradually over a longer period of time (perhaps start out small, ramp up, then slow down after a while), much similar to the expected user-base of the currency.  It's hard to predict what that might be, but it's certainly not the pattern we have now where 1/4 were released before even .0001% of the population even has heard of the currency.

It's a problem we can live with, but the result is that we have a speculators market and not a currency.  Eventually it should stabilize near some equilibriums when the value either goes up high enough or crashes completely.

I’ll nitpick even more: It was a bit under 2$ on April 23rd, so that’s a ~400% increase in three weeks. See here.

Anyway, I get your point. But what the hell do you expect? Bitcoin is a two years old obscure currency. It’s doing really well if you take this into consideration.

I know right! Silly Satoshi created a digital currency and forgot to force the entire world to adopt it immediately and completely. Relying on the market, what a noob...

Over 18 days or so it increased from 1.5 USD to a peak of 9 USD (approx). It then fell back 33.3% from 9 USD to around 6 USD.

I'm not quibbling over the 18 days, I'll grant 600% in (almost) two weeks, but I won't call it a 600% fluctuation, only a rise. For a fluctuation I'd want to see an actual fluctuation - a rise then a similar fall (say, to 2 - 2.5 USD). Otherwise this all seems fairly pedestrian - a dramatic rise, followed by a less than dramatic correction.

If you cannot calculate expected exchange rates within a discernable range, you cannot build an economy. Why do you think the BOJ intervenes in the market so often? At some point exporters run into trouble.


I knew there'd be nitpickers. I should have bet money on it with someone.


23rd April, $0.58ish trades
May 11th+ $8.45 trades
 
1456.89% (14.5689 * 0.58 = 8.45) in the huge timespan of 3, not two weeks. Aren't you glad I checked.

Well do I ever apologize profoundly for being so madly off the mark with my guess. It was 3 weeks after all.

And boy, if that isn't a stable, reliable outlook and not penny stock like at all.

Source: https://mtgox.com/trade/megaChart

Well said OP. Bitcoin is just an extremely volatile asset at the moment, and will keep like this for a while. Prices raise and fall fast. It's not the first time, it won't be the last. These are no bubbles, nobody is lending to invest in it, it goes up and down in days instead of years, people don't go massively bankrupt or unemployed after each price drop and so on.

Bubbles are a much more serious thing. They are the fruit of bad allocation of capital (malinvestments) over long periods. We should not mix the terms.

1) So Bitcoin is broken because the value is determined by supply and demand, and because you can’t control demand?

2) When did it fluctuate 600% within two weeks?

Find me a currency that is not broken that will fluctuate 600% within 2 weeks.