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Comment by josh2600 | Hacker News Reader

I don't understand bitcoin.

The number of bitcoins on the market is increasing and so is the value of each bitcoin. I understand that bitcoin has to be mined and that mining is becoming harder and harder, but what is causing the value of each coin to increase? One would expect that supply and demand would not increase together for any significant period of time.

Is this an aberration or is Bitcoin going to stay at these pricing levels? Wasn't there a big Bitcoin heist last month due to the Rails vulnerability?

Some insight would be lovely.

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One would expect that supply and demand would not increase together for any significant period of time.

Why would one expect that? The demand is increasing, and given the fact that the supply is increasing at a much slower rate, then it's quite normal for the value to increase.

That being said, I don't know what caused the "sudden" (few weeks) increase from $14 to $18, as I don't read about Bitcoin that often. But I do expect the value to keep rising as more companies start adopting Bitcoin payments and more people then get interested in it. And I also expect Bitcoin to remain relatively volatile at least until its market value is counted in billions or tens of billions of dollars, when each individual transaction will have a much smaller impact on its value, in either direction.

Stuff just goes up in January, people are optimistic. https://ssl1.washingtonpost.com/opinions/why-do-stock-prices... Markets aren't rational. I bought in December & exited about a week ago on this strategy.

I think short term (1-3 years) there is a real issue with liquidity in the Bitcoin market (moving between currencies) & acceptance. I suspect to see a dip dropping below November prices March-July as people need access to cash later in the year (due to January optimism wearing & credit bills to pay) and in the process of trying to make liquid their bitcoin reserves discover the problems with liquidity, which have to do with shady exchanges: causing further dip. In person cash transactions are best at this stage, but require effort. Bitcoin has solid value though and isn't going anywhere.

Basically: what places that do accept bitcoin for currency are shady and uncertain, and few accept for goods.

While I agree it used to be very difficult to move between USD and bitcoins, https://coinbase.com (YC S12) has made this pretty easy at this point.

It is crashing.

$16.65 right now, from $19.2 three hours ago.

http://bitcoin.clarkmoody.com/

what is causing the value of each coin to increase?

Anything that makes bitcoins more desirable will increase their value. This trivially includes anything that makes BTC more useful, like being accepted at more stores. Also services that make it easier to buy and sell BTC increase liquidity, so more people are interested in having them. But also, anything that increases the value bitcoins will have in the future (as trends in acceptability and ease of use increase) attract speculators. They basically gamble that the value of bitcoins in the future will be higher than their price right now. This drives up the price of BTC near the speculated future value.

There are other things that could increase their value, like if people start to trust their security more than other forms of transactions. Or if someone finally gets around to writing a cool application that uses more features of the protocol.

> Or if someone finally gets around to writing a cool application that uses more features of the protocol.

What features would you like?

Well, there's a whole scripting language in there: https://en.bitcoin.it/wiki/Script Also bloom filters are not finished yet but they will reduce the amount of data a client has to download. https://en.bitcoin.it/wiki/BIP_0037 Currently it takes a long time to synchronize with the network.

Many of the analogies used to explain Bitcoin are, unfortunately, misleading. Saying 'each bitcoin', for example, as if it were a tangible collectable, introduces a bunch of associations that aren't helpful for understanding.

Instead, think of Bitcoin as a giant consensus accounting ledger. Everyone can see which crypto-signing-keys have the right to spend which balances. (The balances happen to be measured in an integral unit called a 'satoshi', and 100,000,000 of these satoshis equal "1 BTC"... but these are tallies in a ledger mapping key-identities to available-spending-balances, not rare collectables.)

Given that, a person's Bitcoin holdings are simply numerical totals which, at the direction of their signing keys, can be handed in full or part to other signing keys. But it works like having a bank balance at a shared "bank in the cloud", massively replicated, with no single authority or point-of-failure, where everyone can see every transfer. (Balance transfers are public announcements, not the secure sending of a rare secret.)

So bitcoin balances are valued with regard to $USD (or other currencies) like other foreign-currency bank balances - who's willing to buy it, for how much, compared to who's willing to sell, for how much. That is, yes, "supply and demand", but based directly on the willingness of holders/seekers to transact, and only indirectly on the total 'supply' in existence.

That the price has run up indicates that holders of current bitcoin balances want more $USD to give it up, and that seekers are offering more $USD to get it. Every day more people hear about Bitcoin, and slowly and slightly (because it's pretty complicated and different) come to understand it better. Also, using a heuristic common for new technologies, people only believe something new will survive after seeing it survive for a while. [1]

From my perspective, heists and scams are good for Bitcoin, because they're providing a trial-by-fire and accelerated-education in various economic, security, and usability topics for anyone involved (or just watching from the sidelines). Things that took decades or centuries to work out in traditional economic systems will be resolved in months or years, and with countermeasures optimized for today, not the 18th/19th/20th centuries.

[1] See for example Nassim Nicholas Taleb on the 'Lindy Effect': http://www.wired.com/opinion/2012/12/worlds-not-ending-but-t...

Great comment. I love Nassim's writings.

This is fascinating. So you're saying that bitcoin doesn't have any inherent value (like real currency) and that the value of bitcoin is essentially in security and openness? Is that a fair analysis.

Many of the points you make would apply to traditional currencies if the systems were less obfuscated, which is where I'm beginning to see a niche for bitcoin.

Yes, I believe it was consciously designed to emphasize a few key dimensions that could make its balances uniquely useful as a circulating currency.

So rather than being useful because of some physical and traditional qualities (like gold) or other practical consensus qualities (like state-backed fiat money), it bootstraps the necessary portability/divisibility/non-counterfeitability from cryptography and computer networking.

On the other hand, Bitcoin has much less anonymity than is usually assumed (and often asserted, with hand-waving). So it's not a perfect mapping to traditional cash, or other idealized descriptions of cash/money. It's a new species of specie!

This is almost certainly a bubble at the moment. I for one have sold all of my bitcoins in anticipation of a crash.

EDIT: And within an hour of me posting that, the crash has come.

Until the day comes that you can ACTUALLY spend your BTC (I know there are places you can, but in all reality it's still very much a novelty currency today) and prices stop fluctuating wildly from month to month I am staying away from the entire Bitcoin craze.

This is kind of like saying you won't invest in Facebook or Google or Apple until their price stabilizes. Either it's worth it to you or it's not. Stability is overrated in a world where pricing updates can be automated. If you're concerned about exchange rate risk, what you do is keep your funds in a more stable asset (like USD) but ready to be converted. Put a small amount of USD in an exchange and you'll be able to buy when you want to without this exchange rate risk.

At least facebook and google and apple have liquidity. All bitcoin has in that regard is a bot on mtgox that makes large fake bids and then moves them 50 cents cheaper if the market actually reaches that price.

There is one merchant that I know of that is offering thousands of electronic products at amazon cheaper prices.

Also, this is a chicken and egg problem. Merchant won't accept bitcoin because consumers don't use it, but consumers won't demand bitcoin because merchants aren't accepting it. Obviously something have to happens to break the mold. If you want to make a "novelty" currency useful, you have to start using it, but no "novelty" currency is guaranteeing to succeed. However, with bitcoin, the situation is changing. More merchants are accepting bitcoin everyday.

One drop-shipper of questionable reliability does not an economy make.

it's run by roger ver:

http://www.justice.gov/criminal/cybercrime/press-releases/20...

http://www.reddit.com/r/Bitcoin/comments/15alra/roger_ver_of...

The monthly price fluctuations aren't necessarily a problem, if you're just using Bitcoin as a mechanism to transfer money.

I imagine most businesses would exchange as soon as feasible.

I'm wondering if it's just a delayed result from Halving Day, in which case it should stabilize around $20 or so. But who knows.

One would expect that supply and demand would not increase together for any significant period of time.

Why? It happens like that for lots of things. Furthermore, keep in mind that growth in the supply of Bitcoins is somewhat artificially capped.

Is this an aberration or is Bitcoin going to stay at these pricing levels?

Any answer to this question is a guess. You can make plausible guesses either way, but if anyone knew for sure, they'd invest appropriately, keep quiet, and become rich.

I too have tried to understand Bitcoin. Perhaps I just don't understand the basic economic principles that are important for Bitcoins. Perhaps I'm just not trusting of it or that the money I put into the system would not just disappear - but if they want mass adoption then people certainly need to be better educated regarding it all.

> what is causing the value of each coin to increase? One would expect that supply and demand would not increase together for any significant period of time.

Yes, but a lot of economics is psychological. http://www.npr.org/templates/transcript/transcript.php?story...

Summary: A currency works because enough people think it has value. Psychological sleight of hand is how Brazil beat 80% hyperinflation two decades ago.

I'm not sure why you wouldn't expect supply and demand to increase together. It's been happening for things like tablets and smartphones for years now. In the case of bitcoin, supply obviously increases due to mining, and demand increases probably for several reasons (it's getting easier to use and accepted at more places, more people are finding out about it, etc.).

>Wasn't there a big Bitcoin heist last month due to the Rails vulnerability?

Just curious, but why is there a widespread belief that security incidents that have nothing to do with the bitcoin protocol will lead to the value to implode? Seriously, maybe I don't understand something here.... does this happen to the dollar when US banks are robbed?

If it was a really big heist, you do kind of expect the value to drop, and we have seen that happen especially with that big heist that brought down the value when it had reached as high as $30, less than a year ago.

The robber makes plays to dump his illegally acquired currency on the market and launder it into clean money, and while dumping he accepts prices that the original owner(s) would never have considered, simply because he's seeking to convert it into something untraceable before he can be apprehended.

I am kind of thinking that some day in the next couple of years, we are going to see a large bitcoin bust, and we'll get to make up our mind in the media whether the perp was the legitimate owner and is persecuted, or if he's a thief and should go to jail.

I don't think they will ever get Pirateat40 for his First Pirate Savings and Trust scandal. I'm not even sure that there's any law enforcement who is out there looking.

I just found this. https://bitcointalk.org/index.php?action=printpage;topic=837...

It's a dated thread, but the research looks in-depth. The rails vulnerability was after this, I did not really hear who actually got robbed in Bitcoin land because of that.

Banks have insurance, but you can't buy Bitcoin insurance. Some people see Bitcoin as uninsurable due to the fact that transactions are irreversible and each wallet is controlled by a single private key. It's a very brittle system; if you make a single mistake your money is gone forever. This may eventually be fixed with HSMs and multiple signatures.

one of the individuals who was preselling asic's has to refund allegedly $200k in preorders and is planning on doing so via bitcoins. speculation is rife he was behind a large buy a few days ago but he is still well short of enough bitcoins to repay everyone. speculators are likely driving up the price in anticipation of the increased demand he will bring. there's not a lot of real market depth, so a $200k buy is signigicant

To look at it the other way, the value of the bitcoin has not changed. Its price increase in dollar is just a reflection of the inflationary nature of the dollar.

But that's obviously not true. The value of bitcoins has changed wildly, independent of inflation in the dollar.

For instance, the dollar hasn't lost half it's value over the past year. Your rent hasn't doubled. Your grocery bill hasn't doubled. Your salary hasn't doubled. But the value of a bitcoin has: http://bitcoincharts.com/charts/mtgoxUSD#rg360ztgSzm1g10zm2g...

at this early stage in the bitcoin game, the price is much more affected by supply-demand of the currency than inflation of the USD.

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