Topic: Why bitcoin's exchange rate won't drop too much (Read 5098 times)

Bitcoin does HAVE REAL value, it greatly reduces the transaction costs (frictions) on all transactions, never mind the blockchain being a real innovation for macro economics. If it greatly reduces tranaction costs on just %1 of transactions (is used for just %1 of transactions) then we're talking about much higher valuations than this. It costs energy, time, transportation, etc., to send and receive money, just ask the Spanish galleons going across the oceans. Or me trying to get enough money in Mexico to buy a golf cart last week (when my wife said no to paying in BTC even though the Mexican family who was selling the golf cart had never heard of BTC they were going to accept it). It cost me $50 with banks and credit cards, 4 hours over two days and $25 in gas just to get $2700 USD out in Peso here in Mexico. I could've easily ended the transaction in 20 minutes of the Mexican family setting up a wallet and me transferring 5 or so bitcoin.

And I agree with the original posters' calculations, and very much agree with the fact that all the small-medium miners still don't see a profitable price yet, not until $1350 do we miners selling in any real volume.

That's exactly how it works for speculators. Shortening is a risky business, the less time they take such a position, the better for them...

The time that market crashed is a very small part of the total bitcoin price history, means majority of the time the shorters were squeezed, unless they can call the top, but a top is only identified after a crash

Simple question, how do you know?

Easier said than done. Almost everyone who have ever tried to short bitcoin were wiped out since they can never predict how high the market will go before a crash

Speculators can earn on falling asset as much as on growing, unlike investors that have only faith remaining (if ever) in such a case. Don't have illusions on this account. All speculators need is volatility...

Investors have faith, speculators don't

That faith coming from the understanding of most of the bitcoin related technical aspects, and more importantly, understanding of the fatal flaw in today's fiat money system, that will take many years of independent research

For example, bitcoin keeps dropping towards $100 for 12 months, then all the speculators will run away, but investors will buy big

Some small change was absolutely asking for...

There were many gold mines opened in china recently and since last year it is the biggest gold producer in the world

Volatility is not a problem for investors, they can always adjust the exposure to reduce the volatility, but it will be a problem for daily spending

Gold already rose something like that within a decade, and I don't see gold mines opening everywhere. The answer is quite simple though. Gold volatility is somewhere in between bitcoin and dollar volatility, i.e. it is too volatile and those mines would be at a loss most time of their operating life...

Yes, the volatility will be high, maybe that will always be a character for bitcoin during its life time (The recent crash again proved this). So it is best suitable as a medium of long term saving and investment, not for daily transaction. If your exposure on bitcoin is 10% of the risk capital, then the yearly return will be 500% and the risk is 7%, still astonishing. Of course when current wave of mining equipment upgrade finished, the volatility will drop

If the gold price rise 5x in a year, then there will be gold mines opening everywhere and the gold supply will increase immediately

On the contrary, if you buy and hold coins, this diminishes liquidity and thereby increases volatility. How could you possibly stabilize the exchange rate through increasing volatility? It is liquidity that supports exchange rate, leveling off speculative component from it...

And gold supply is limited too (somewhere around 2-3% annually)

Time preference is already built into the preference curves that produce supply and demand. For example, we already see this in real life practice as far as Bitcoin payment accepting businesses offering goods at BTC discount. The asymptotic nature of supply in Bitcoin specifically is not necessarily relevant to the OP's point being discussed, because it does not really factor into price discovery in the sense of determining the equilibrium point. (I.e. the exact shape of supply and demand curves is immaterial to the underlying mechanism).


This is semantic nonsense based on how Alfred Marshall arbitrarily decided to draw the graph in the first place. There is no clear causal case for what represents the dependent and independent variable ("price" is just another kind of quantity, the supply and demand graph is actually a quantity graphed against a quantity). I'm gonna go ahead and take your comments with a grain of salt because you didn't know where the graph even comes from.

BTC's value is based more on market sentiment than any rational basis.

I always watch this chart: Although price crashed, the ASK sum is still in a downward trend, means less and less coins are for sell on the market, and this will continue

I think majority of the speculators can not sell high and buy low accurately. My example just showed that if they successfully did that, their action will support the exchange rate without incur a loss. And there are some experienced institutional traders, they are usually the driven power of price development

Unlike gold, bitcoin's supply is limited, for each coin you buy or hold, you reduce the sell pressure on the market by 1 coin permanently. It does not take too much fiat money to drain out the coin supply on market at today's exchange rate

If what you say were true, then any speculator selling high and buying low would be "supporting" price (bitcoin or no bitcoin) which is obviously not the case, since for every deal there are two parties, one selling and the other buying. The only direct way to support currency would be to buy it when prices are falling...

Since bitcoin's total supply is limited, if I do not create net sell pressure on the market, I would indirectly support its exchange rate

Of course I can't always sell high and buy low, I might even do it with a small loss, but the result is the exchange rate get supported and majority of the bitcoin's value kept high

If every bitcoiner realize this, that will be the biggest support behind bitcoin. Unfortunately most of the people are short sighted and only care about their own profit, so they are destined to be ruled by a few bankers who can see a larger picture

But this in no case means that you're "supporting" the value of bitcoin. If fact, I would even call such stance hypocritical to a degree, since you're in the first place undermining its value by selling coins at $800 and then pretending to support it by buying it at $400 . This is plain old speculation, nothing beyond that really...

If you only bought bitcoins when the price went down (and spent it on goods or services), that would go for support

This chart applies to any consumable goods/services, but not for capital goods (investments). For capital goods, usually the demand depends on the appreciation speed of the goods

In Bitcoin's case, it is even more special, since supply is fixed. S will be a horizontal line. And D will rise when price rise, and since D can never get higher than S, the end result is any increase in D will just raise the price, thus D will eventually going horizontal closer and closer to S



Maybe this is not a very good chart, I think a 3D chart might be better, you need another freedom to describe the speed of P's increase

Why those poor guys lost $4000? Because they want to sell the coin at a lower price, if they don't sell, I won't be able to buy coins at $400. So their loss purely comes from their lacking of confidence of their investment, if they never sell any coin, they won't have any loss, and I don't need to support the exchange rate either

From the view of the central bankers, they normally don't care about the loss or profit, those are trivial things comparing to their large holding of fiat money and foreign currency reserve, the exchange rate is the only concern

Sorry, but this doesn't work that way. If you sell something dear and then buy cheap, it is called speculation. If you sold some coins at $800 and received $8000 in return and bitcoin price then crashed to $400, it means that some poor wretch has lost $4000. I just can't fathom how this could possibly be called support for bitcoin price...

This is all there is to it:



The supply and demand schedules are determined by underlying preference curves that we might not necessarily know with any kind of omniscience, but we can infer their behavior from the price signal.

There is no "won't drop too much" in any of this. The price holding actually has to happen for us to infer something about the underlying demand preference curves, we can't just assume that on an a priori basis because the only way we know anything about the demand function is through price discovery.

Value of the money typically comes from the exchange rate. The traditional wisdom about market does not work when it comes to money itself,  please study central banks intervention on Forex market http://en.wikipedia.org/wiki/Currency_intervention

If you successfully supported the exchange rate of a currency, then its credibility and acceptance level will increase, a higher acceptance level will create larger demand for that currency thus raise the value of it, and your original support capital can be returned later without a loss

OP, are you serious or just trolling?

This has to be the dumbest thing I have ever read on this forum. There are such concepts are liquidity, and fair market value. If you have no buyers for your widget/stock/coin you have no market and you have worthless commodity that you can't move. By your logic, if Enron/Worldcom stock holders just kept their shares listed for sale at ATH both companies would still be worth billions?

In commodity or securities market, the price is set by the buyers- not sellers. If you have buyers willing to take the widget/stock/coin off your hands than you have a working market. If there are no buyers for your product at the asking price, your only option is to lower the price to encourage the buying. If you keep the price where it is without significant catalyst of significant positive news, you have no liquidity and your widget/stock/coin will never get sold.

Because "you" believe something is worth a lot, does not make it worth that. There are millions of people who believe that their comic books, baseball cards, sneakers are worth thousands- but unless someone is willing to pay that money for their products, the products are worthless.

Your scenario is fundamentally flawed to the point of ridiculousness. If 21 million people people are all trying to sell the coin at $1MM, there have to be a BUYER at that price for the coin to be worth $1MM. If there are no buyers, than you have 21 millions of fools with NOTHING.

I'm confident that there are many miners already doing this, include me (maybe even some mining companies). And it does not incur any loss, that's the reason after each bitcoin hype, it crashed to a new higher low

For example, I have sold 10 coins with an average price of $800, received $8000. Now if bitcoin price crashed to $400, I need only $4000 to buy back all the coins I sold, thus there will be no net sell pressure from me and I still made $4000. I can even spend $6000 to buy 15 coins thus both of my bitcoin holding and fiat money holding increased after the crash

Of course I might sold those coins too early, so the key is to keep selling small amount of coins when the price was rising, increase the fiat reserve and prepare for an exchange rate drop

In fact the central bankers may not have more confidence than a miner, since their money actually cost nothing to make, so it's value is even more uncertain than bitcoin on exchanges. You can study the Asian financial storm to discover how those central bankers failed to support the exchange rate of their currency

The problem with such logic is that it is not only you who mines bitcoins. Though a feeling of being involved at issuing "money" can inflate one's ego somewhat, I doubt it will be enough to actually go and try to stabilize bitcoin exchange value (since you would inevitably incur losses on yourself). If what you say were true, it would have been done so long ago by those who have big wallets. If they haven't already done this, why should they do it right now or later?

Thanks for the praise 

For the last time jonnyj, you need to stop polluting this forum with your posts, they are just terrible.

If you mine bitcoin, you will be able to see things from the view of a central banker, since you issue money. It is very easy to understand why banks do this and do that if you issue money by yourself...

The first priority is always keep the value of their money stable, all the other things like full employment/price stability/international trade deficit are all trivial things compared to the value of their money. That's the reason they'd rather close their pocket and see people suffering instead of open their pocket and let inflation quickly destroy the value of their money

Of course, to protect the forex exchange rate of one type of money is not easy, especially if you issued too much money and do not have enough foreign currency reserve. That is the Asian financial storm when Soros shorted the currencies from those small countries and almost emptied their USD reserve when those governments desperately trying to support the exchange rate with their USD holding

It doesn't make much sense unless you are going to use them on something else besides trading (which is simply impossible right now in any significant amount). Otherwise you inflict uninvited costs on yourself. Central banks are doing this because they have to defend their exports (as an example). They don't do it just for the sake of keeping exchange rate at certain level...

That is just an extreme example, the principle is that you hold large amount of coins but using certain amount of fiat money to support the exchange rate of small amount of coins on the market, thus make your holding more valuable. Banks are doing this kind of operation frequently, they hold large amount of fiat money but never release them, otherwise there will be very strong hyperinflation and destroy the value of fiat money

In reality there are so many different people with different psychological qualities that there will be someone to buy and sell.  Just look at the variety of stuff people collect. And for people to trade in milions we would have to spend some time on 200k, 300k and so on. Which means a guy who traded the market at price range of 800k-900k for 10 years wouldn't be as startled of a 1 mil price as we are now.

There are many wealth created by this way, and net worth is calculated by market price. Of course, whether you are able to cash out all of them for fiat money without a huge loss is another matter.

Take house for example, if you dump all the existing houses on the market, their price will drop to almost 0 since there is not enough money to buy all of them. In fact, just a small fraction of houses dumped on the market already created financial crisis and wiped out lots of paper wealth from those who holding a house. FED printed lots of money to artificially support the house price so that all those wealth counted by the form of house will not vaporize

Yeah, if you could do it, you would be a rich man. But humans aren't stupid enough to fall for such a trick. While value is purely psychological, that value assessment is still based on real world utility. Not to say that it's impossible to trick people into mistaking the utility of an object, because some people have that amount of skill, but it's no mean feat.

Well, then, why do people worry so much about the economy?  We can just all change our perception and say that the dollar is worth a thousand euros, and problem is solved.  And and if people who own basebal cards agree to refuse to sell them for less than a quintillion dollars then they can buy the world with one card.

This is wrong. This assumes that wealth is finite and that it's a zero sum game to determine marketshare of that wealth. This doesn't take into account how new value springs into existence.

Take the computer for example and assume that an economy only has 1000 dollars of coins circulating. In the past, we had no computers. The first time someone invented a computer, it was still $0 dollars, because new products always have a market value of 0 when they first enter the scene. It's only when people assess the utility of the product that they assign value to it. Assume for a moment that the computer is eventually valued as being worth $500. What is the worth of the entire economy? That would be $1500. Why? Because wealth is not only the coins that circulate. ASSETS are wealth as well. This is how economies grow and it's the reason why people advocate steady monetary inflation in order to match this growth of the economy (which is through the creation of new assets). If the money supply grows evenly with the growth of all the assets, you will have no inflation and no deflation.

Bitcoin is a new product as well and it too started at 0. But it's being assigned value based on its utility. It CREATES new wealth, it doesn't take away money out of the economy.

Value is subjective and essentially exists all in the mind. It's PSYCHOLOGICAL. If humans believe something to be useful, they create wealth through that perception. It's not a zero sum game and even Kenynesian economics wouldn't claim that the economy works this way.

+1

So the guy did no productive work, but just by sitting on his Bitcoins he got so fabulously wealthy that he can buy the US Gross National Product wth only half his wallet.

Don't you feel that there must be something wrong with this scenario?

Being rich means that you own a disproportionate slice of the world's real wealth. You cannot increase your slice without reducing that of someone else.

The Bitcoin cabal cannot force people to use Bitcoin to buy things or services.  If doing so means giving their slice of the world to the Bitcoin cabal, people will use some other currency.

Just look at what people post here. Most of them hold some, even those sceptical bears.

That's deflationary currency 101
However, note that collusion is tricky in a decentralised setting
One big whale liquidating can trigger a massive sell off, admittedly becoming less likely with every day thy passes without it happening

Bitcoin's exchange rate won't drop too much because existing holders can support it

One extreme example:

Suppose that one guy have 31 million dollars, he bought all the 21 million coins at $1, and sold 10 coins to others. Then, he still have $10 million at hand. Then he refuse to sell any coins below a market price of $1 million and are willing to buy any coin at a price of $1 million. Then bitcoin's market price will be $1 million, and his total net worth will be $21 trillion (By using only 31 million dollars, he raised his net worth to 21 trillion dollars)

If there are 21 million users, each of them bought 1 coin at $1, and refuse to sell any coin below a market price of $1 million, then bitcoin's market price will also be $1 million

So, when the price drops, the existing coin holders will have a good way to protect their wealth: They can simply refuse to sell the coin below a certain price and even step into exchange to buy (This is actually what central banks do on Forex market), it will easily break the downward trend

Of course that will not stop the inflow of daily mined coins, but today's miners all carry a very high cost, so they would also refuse to sell the coins below their cost

If the coin supply is unlimited, this strategy will not work