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Comment by swalsh | Hacker News Reader

I keep thinking about investing again, but I have a rule about investments. If I can't come up with a reasonable story to explain why supply and demand are the way they are. I don't invest. I can explain the supply side part... but the demand here baffles me. The best explanation I can come up with is "this thing is rising in price like a rocket, maybe I'll make some money"

That's not a good reason to invest in my opinion. Good gamble though.

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At this point, the demand for bitcoin is driven primarily by its value; anyone acquiring it with the intent to use it in transactions is being foolish. Almost certainly they would be better off holding the BTC and processing the transaction with another currency.

Why would that matter?

If you buy something with $100 instead of buying it with bitcoin, that's $100 less you could've put into bitcoin. Or thinking about it another way, if you spend bitcoin and feel like you have less than you'd like to hold, you can simply buy more.

Without making any judgement on whether it is a useful transactional "currency," I hear this sort of thing a lot, but I don't understand it. Surely either BTC is a good transaction mechanism or it isn't and the rampant increase in value is largely irrelevant.

You could convert USD to BTC and buy something while maintaining exactly the same held balance, no?

You're holding two currencies, one loses about 2.5% of its value a year, the other gains about 1500% (some huge factor) of its value in that same period.

Which one do you purchase the coffee with? The one that's losing value as you hold it, or the one that's going gangbusters?

I'd absolutely, without hesitation, dump the volatile one. If it can appreciate by 15 times in a year, then, clearly it can fall to a 15th of its value just the same.

I need to know that I can pay my mortgage and buy food at the end of the week, so stability is paramount.

Caveat: you are paid in the one that depreciates in value, and have to find other means to acquire the one that is volatile.

This is known as Gresham's Law: Good money drives out bad money. Smart people will trade away their bad money and hold onto their good money when they can.

The demand is that there are many people such as yourself who wonder if they should invest due to rising prices. It's speculative demand. :)

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