Bitcoin’s Rise: What If It Is Not A Bubble? | Hacker News Reader

Bitcoin’s Rise: What If It Is Not A Bubble?

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38 pointsnpguy59 comments

> We are convinced that nobody is buying Bitcoins right now to sell it for a profit before the music stops (in which case it would be a bubble).

I'm not sure where they got this impression. I've been buying BTC explicitly for this purpose for a bit now; just disappointed that I didn't buy more, given the insane increases I've seen. I know dozens of people buying BTC just to make money from it before the next crash/dip, and that cycle will continue for a while yet.

That statement was based on the common sentiment that 'let me keep out of this stuff it might crash anytime', particularly since everyone has seen Bitcoin crash before.

Your data point proves that this assumption could be wrong. And there is no way we can find out if you are in the majority or not.

That sentiment may be common, but it's by no means universal. Even if I suspected a crash were coming (which I do -- end of this month or early next month, after it hits $200-225), that wouldn't affect the fact that I'm buying, simply the price I'd be willing to buy at. It's all just a matter of risk vs reward.

Why do you think $200-$225 is the number it will hit? Why do you think end of this month or next month? Why not this week or 1 year from now?

The time estimation is based on the number -- just based on the rate of increase, I'm probably not far off. The number, though, is complete guesswork, purely based on discussions I've had with people about BTC's current rise; no evidence in the least. I have little enough to lose here that I'm willing to go by my gut on it; if it turns out I'm wrong, I won't be losing any sleep, which is always nice.

Its also a self fulfilling prophecy. When everyone colludes to start selling at the $200 mark, it will certainly burst.

That's a large part of why I'm thinking it'll happen. There's something "different" about $200 when people talk about the rise of Bitcoin; that number just makes people uncomfortable. I don't think it'll rise much beyond that, this time around. (Though I do think that the eventual value of BTC will be much, much, much higher, years down the road.)

Why do you think $200-$225 is the number

Indeed:

I'm Raising My Bitcoin Price Target To $400

http://www.businessinsider.com/im-raising-my-bitcoin-price-t...

Just some advice - if you think the market will top out at $200, take your profits at 20-25% less gain than your maximum. You are highly unlikely to predict the exact peek, and highly likely to overestimate it. Greed and delusion are powerful forces.

I'd be selling now, and have sold 75% of my holdings.

I might be a buyer again at $20.

Unless the post was edited, the quote is:

> It is possible that most folks are not buying Bitcoins right now to sell it for a profit before the music stops (in which case it would be a bubble).

Certainly many are, if not most. Otherwise, why are they buying bitcoin? To store value? To buy drugs and passports? Not, I suspect, to buy electronics, for which fiat currency does just fine.

Also, look at the order volume. People are buying $10k chunks of bitcoin. If they are not buying for speculation, what value are they receiving?

The post was indeed edited; the original quote is in my parent comment.

> Certainly many are, if not most. Otherwise, why are they buying bitcoin? To store value? To buy drugs and passports? Not, I suspect, to buy electronics, for which fiat currency does just fine.

I know many people buying BTC based on a belief that they will be dramatically more valuable in the future, if BTC takes off in a serious way. Not too many uses for it outside of that and short-term speculation, though, right now.

> a belief that they will be dramatically more valuable in the future

And the definition of speculation: "engagement in business transactions involving considerable risk but offering the chance of large gains, especially trading in commodities, stocks, etc., in the hope of profit from changes in the market price"

It's not necessarily a bad move to speculate on BTC. But it is certainly not based on any current fundamentals. Speculative bubbles ALWAYS crash, though some rise far above the value they crashed from after a long period of stabilization and development of fundamentals.

While I believe it is a bubble, I have very little evidence that it is and I fully recognize that it may not be.

As an outside observer, I'm comfortable not profiting from it, and I'm even more comfortable not taking a loss on it. That being said, proclaiming bubbles is the newest trend ever since the housing bubble. It is the easy place to argue on the side of emotion.

I remember 6 months ago there being a VC bubble and an engineering bubble, neither of which have materialized. If you have to wait 5 more years for them to materialize, you were wrong for too long.

You can have a bubble without it bursting right away. You just can't confirm that it is a bubble until that happens. So long as when the bubble does burst, prices drop well below the point at which you were calling a bubble, you would be proven right in the end. A bubble does not have to be at the very peak in order to be a bubble.

By your logic you can call every asset price a bubble.

"The stock market is currently a bubble!" If it takes 10 years for it to fall 30% in one month, you are right it is a bubble, just really, really early. If it falls next week you are right.

In either case, you calling it a bubble added no value.

If you are going to say we are in a bubble, then there must actually be a real bubble at the time, not at some future hypothetical time.

If it took 10 years for it to fall 30% in one month, it would depend on all the activity in between, and where the value ended up relative to the original point at which a bubble was called, in real (inflation adjusted, not nominal) dollars. If there was a complete economic cycle or two during that time, then the original call for a bubble would have been mistaken. However, if it were still the same economic cycle, then that bubble would have been called correctly, regardless if it was 5 years, 10 years, or any length of time. And I was not defining a bubble, I was simply noting that a bubble and a market top are not the same thing.

At any point where prices trend significantly upward, beyond historical cyclical patterns, there is a potential for a bubble. Whether that trend is indicative of a permanent market shift or whether it is a temporary phenomena where prices will revert to the mean afterwards is what decides whether or not there was a bubble. Whether you are at the start of a bubble or near the end of a bubble doesn't change whether or not it's a bubble.

Yeah, I like how you described it. We definitely agree.

I'm amazed at that a lot of the discussion around Bitcoin ignores one crucial fact - you can (relatively) safely buy illegal drugs with them. This makes it attractive to a lot of people who would like to buy drugs but don't know how to get them, or are scared of being personally involved with dealers and possibly gangs, and of going to jail.

I have never done this (nor even owned Bitcoins) but for the people I know who're talking about Bitcoins this is the main motivation for having them. Indeed, to many of them Bitcoin = Silk Road.

To counter your anecdotal evidence with my own, I know a fair few people who have bitcoins and not one of them has any interest in the fact they can be used to buy drugs.

Of the people I know It's roughly an equal split between speculation on its value and longer term interest in its potential as a low friction, decentralised currency.

Not to say it's not some peoples motivation but I think that they're probably in the minority. There was a piece which was on the front page of HN a while back (can't find the link right now) which estimated the total revenue going through silk road and it was a fairly small fraction of the total bitcoin transaction volume if I remember rightly.

BitPay Processes $5 Million in March, Eclipses Silk Road http://bitcoinmagazine.com/bitpay-processes-5-million-in-mar...

FTA: "From a public relations standpoint, this is a positive sign for Bitcoin: the legal Bitcoin economy is now almost certainly larger than the illegal one, especially when one takes other merchant services like WalletBit/BIPS and Coinbase into consideration, and is growing at a much faster rate."

There is an interesting quote that goes something like this:

"when your hairdresser starts talking about the market, it is time to get out of the market".

Now I doubt your hairdress will be talking about bitcoins any time soon, they are too technical for the average non-tech person (but if he does, sell out and run for the hills, stat), but the lesson is, once a market becomes common knowledge, it is time to get out of that market.

Unless you can think of strong, fundamental reasons why bitcoins should be at the levels they are (and no, the bigger fool theory is not a strong, fundamental reason), then I would consider getting out at these levels.

It may be true for any speculation-only asset like AAPL shares or some Ponzi thing, but in case of Bitcoin, it's a good thing when hairdressers know about it. Because the whole point is to accept them as a payment and pay your bills.

It's true, the price is rising now, so people are mostly holding and not paying, but when the demand will be close to saturation, price will grow much slower and people will use BTC to pay for anything, not only USD. That's the crucial difference with the stock market. This will give Bitcoin value outside of speculation on USD price. AAPL is not really valuable if it does not grow (and dividends are almost zero), but non-growing BTC is super-useful to pay anyone around the world with no questions asked.

Why can't you short bitcoins?

From what I understand shorting is just borrowing some bitcoins from someone, selling them now, buying them back and giving them back at the date agreed when borrowing them. If bitcoins are cheaper at that date you earned a profit. If they are more expensive you suffer a loss.

The only problem I see is that I wouldn't trust my bitcoins to anyone. But if I had some sort of insurance that I'll get my bitcoins back (also the fee) then I'd gladly borrow them to someone since I don't like the risk of selling them myself because I'm afraid they might never get cheaper and I won't be able to buy them back.

Why can't you short bitcoins?

Part of me suspects it's because a lot of people intend to sell their bitcoins as soon as the market shows a significant downturn, and so they don't want to lend their bitcoins in the first place.

Although given how large the percentage swings are right now, I have no idea what such a "significant downturn" would have to look like.

> But if I had some sort of insurance that I'll get my bitcoins back

That's the problem. That insurance is not possible within Bitcoin. In equities markets, shorting is possible because the broker can force the borrower to cover and return the borrowed security. The broker can in turn resort to another layer of force in legal recourse if the borrower doesn't have sufficient cash deposited with the broker.

In Bitcoin, no entity can ever compel another to spend bitcoins (to the protocol, anything like asset seizure or any other method of surrendering a bitcoin is spending.) So the short-seller can walk away and never cover a short position that went badly, and the lender never receives back his bitcoins. For Bitcoin shorting to exist requires a broker with some way of enforcing non-Bitcoin power over the short-seller, perhaps a deposit in a fiat currency or some other kind of collateral. It is possible for this to exist but not at all simple.

  > That's the problem. That insurance is not possible within Bitcoin.

Sure it is. Berkshire Hathaway and others insure satellite launches. If the launch vehicle explodes on takeoff there is zero recourse because, much like a Bitcoin trade gone bad, everything is lost and the insurance payout covers a rebuild plus an entirely new launch.

The solution involves the insurance companies understanding the risks involved, forcing Bitcoin companies to implement specific security measures designed to mitigate risk, and accepting the fact that they will have to pay out a certain percentage of trades. The premium charged for the insurance plus the deductible cost to make a claim reflects the risk of fraud + expected profit. This is a solved problem in the insurance industry already.

The only remaining question is which insurance company will put sufficient effort into understanding the risks so that they can issue a product to meet whatever market demand exists?

It's not possible within Bitcoin. An insurer as you describe is certainly possible -- but relies on a level of trust or force outside the Bitcoin protocol. A Bitcoin insurer can never be compelled to pay out its promise. Insurance in fiat currency works because there is a level of legal recourse that can apply force if necessary: you sue the insurer and the court seizes funds from their bank account. Insurance in Bitcoin alone can't work because the insurer's promise can't be enforced. A bitcoin cannot be seized except by gaining control of its wallet.

Hypothetically, the legal system could enforce Bitcoin contracts in this way, with legislation that a Bitcoin wallet can be seized under the threat of other penalties such as imprisonment. But until that happens, Bitcoin insurance and shorting can only exist as far as you trust the insurer or the lender trusts the shorter, because there is no ultimate avenue of forcible recourse.

Its sure sounds like a bubble. What drives demand for BTC? The ability to transact anonymously? What drives the value of the USD? The US government imposes a tax liability which is only payable in USD. Not gold, silver, euro's, or BTC's.

If it's not a bubble?

Well then by all means everyone pile in now and let's make it one!

... exactly.

There are 9000 people waiting in line to be qualified to trade at mtgox. When they're let in--if they're even let in before the crash--they'll truly make the growth untenable.

What I haven't seen anyone say these past two months of growth is that the value of Bitcoins must necessarily increase before it becomes a real currency. In order for people to use and exchange Bitcoins, they must buy them. This will increase the value. If, at some point, Bitcoin becomes a mainstream currency, this kind of extreme growth must happen. In fact, we should expect that Bitcoins will be worth orders of magnitude more than they are now if they come to represent any significant fraction of the world economy. Today, Bitcoins are only worth about $1.3 billion, which is tiny. This particular price hike might be a bubble, but it could also be the start of a real Bitcoin economy.

Currencies (at least useful ones) are stable. Bitcoin will never be stable, therefore never a currency: merely a speculative commodity.

Bitcoin could be stable. I think it will have a hard time being stable because of the deflationary pressures, but it could theoretically be a stable currency someday when there's a significant economy of people using Bitcoins.

> Historically, the ability to short-sell a commodity has never been a requirement for efficient price discovery

Can someone clarify or refute this?

Banning short selling removes the profit motive from price discovery. So maybe the price will eventually reach the equilibrium point, but it would be much slower.

Bitcoin's utility as a proxy-USD will remain as long as a USD / BTC exchange exists. Whether it is or isn't a buble doesn't really matter if you're only using it as a proxy. If it isn't a bubble, then hoarders will profit strongly from BTC. If it is a bubble, then hoarders will be punished.

If you don't want to take that risk, just exchange the BTC into USD at the end of every day through MT. Gox.

Forex trading is common to every currency. How else are you supposed to get the currency? If I go to Japan, I can't spend my USD in every shop, I have to find a USD/Yen exchange. That doesn't mean USD is a proxy for Yen.

> You cannot short Bitcoins...

Surely it's possible to short any instrument? Just derive me some futures.

http://www.businessinsider.com/how-to-short-bitcoins-if-you-...

Yeah I really didn't understand this part. Pretty sure you can short them, just borrow some coins, sell them, and then buy them back... that's shorting.

The hard part with bitcoin is borrowing in a way that gives a guarantee to the opposing party.

This Time Is Different: Eight Centuries of Financial Folly

"Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters."

http://www.amazon.com/This-Time-Different-Centuries-Financia...

In paperback, get yours today.

http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions... is still a horrifyingly accurate portrayal of human behavior.

Or the original academic paper, for free [1]. Anything else Rogoff and Rheinhart have collaborated on [2] is related and interesting too.

[1]: http://scholar.harvard.edu/files/rogoff/files/this_time_is_d...

[2]: http://scholar.harvard.edu/rogoff/publications

Isn't that what people say about the US dollar when you mention the long history of collapsed fiat currencies?

The key is the word that traditionally comes before bubble, speculative. When price action is more or less entirely driven by speculative forces as soon as you get a shock everyone runs for the exits.

Either it is a bubble or will become one. The only thing to argue about is what the peak and reset price will be.

What is the opposite of FUD?

Everything surrounding bitcoin screams pump and dump. Exponential growth curve. Seeding and pumping of bitcoin stories and comments...

Cash your paper wins now folks. That's the fat lady singing the coda. It'll be August before they play this song again.

Am I correct in assuming that the introduction of ASIC systems will cause a drop in bitcoin price (at least temporarily) due to a sudden surge in mining ability and thus a surge in bitcoins introduced to the market?

If so, would this trigger a crash?

Every couple weeks the mining difficulty adjusts to keep the rate of bitcoin generation relatively constant.

I think people new to Bitcoin could be confused by this. Mining difficulty is not "adjusted" by anyone. Only 21 million Bitcoins can ever be found. It's like hunting for Easter eggs. The last egg is hardest to find.

Lots of math but looks like you can calculate the difficulty yourself with an algorithm here:

https://en.bitcoin.it/wiki/Difficulty

It is adjusted, but by an algorithm shared among all clients, rather then arbitrarily by a person. Every miner and relay client calculates the difficulty themselves, and refuses to accept any block that was not solved with the correct difficulty. The difficulty changes after a fixed number of blocks rather than a fixed amount of time.

A sudden influx of ASIC miners, carefully timed, could disrupt things a bit for a short time, but it isn't very practical, and I don't think it would disrupt the overall market much. If they successfully sped up the overall block rate, they'd just make the difficulty adjustment happen even sooner.

The only case that might be a potential concern is if >90% of the miners all shut down at once. Then, it could take quite a while to solve enough blocks to get to the next difficulty adjustment. I can't forsee a situation that would cause that many miners to all shut down within a few days of each other, though.

OK thanks for explaining it better. My initial impression was that everyone was just brute-force attacking the same mathematical problem and there was only 21 million solutions. Apparently it's way more complicated than that.

ASIC miners won't make it out into the world fast enough to drop the average time between blocks dramatically. At least, it seems very unlikely to me; the difficulty will just slowly go up to go along with the new mining power. (For those who don't know, there's a difficulty value across the network that keeps the average mining time between blocks (currently 25BTC, or $3325 at time of writing) at an average of 10 minutes, to ensure a continuous release of bitcoins.)

Mining difficulty is adjusted by the network to keep things nice and smooth. If the ASICs all came online at once and managed to really, massively increase the hashing ability for a while then it might do something. But most likely whoever holds the ASICs wants to avoid this situation, and ramp up in such a way that nothing is disrupted. That way they can quietly corner a good percentage of the mining without screwing the price.

The thing about bitcoin is that I feel it is fairly vulnerable to legislative intervention if/when it becomes extremely popular, or attracts too much attention for being the defacto currency for illegal items.

Who cares? What's interesting about Bitcoin is not that it can be used as yet another currency, but that it can be used as a distributed replacement for Paypal.

If you thought Bitcoins price would be higher tomorrow, why would you ever spend them? For this reason, it's a speculative instrument.

If it is not a bubble, then you just got left behind!

This sounds like MLM spiel.

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