Bitcoin layperson here.
What's the deal with the volatility?
What's the deal with the volatility?
So simply put when there are less people that want to sell than people that want to buy [3], the prices rises.
Also, as other person here suggested, Bitcoin mining difficulty has risen dramatically in past few months [2] thanks to new specialized hardware (ASICs) finally arriving to its buyers. This, while does not affect the price directly, shows that there is much faith put in the system by miners, which in turn encourages people to buy even more.
It's also worth noting that the $400 price is only on MtGox, which is not considered as market leader anymore. What's more, the withdrawals from MtGox are counted in weeks or even months , so it's not a viable trading platform. If you want a reliable Bitcoin price, head over to BitcoinAverage [1] which does what the name implies - averages (and takes volume into consideration) the price over all major exchanges. They even have a button to exclude MtGox price from the calculations, as MtGox is always 10-20% higher than the rest.
As of writing this post, the average price including MtGox is $380.
[1] https://bitcoinaverage.com/
[2] http://bitcoin.sipa.be/speed-lin.png (network hashrate now approaching 5 Terahash per second)
[3] http://blockchained.com/depth_mtgox_15d.png (on bottom chart: orange line is sum of all offers from people wanting to sell, green one is for people wanting to buy)
But you can break bitcoins down into smaller increments than just 1. That must be significant in some way.
1 BTC = 100,000,000 Satoshis 1 BTC = 1000 mBTC (millibitcoin) 1 mBTC = 100,000 Satoshis 1 μBTC (microbitcoin) = 100 Satoshis
So if you think of it like this, it can be divided far more than 21million times.
http://martinfowler.com/eaaCatalog/money.html
Besides, what's your point? If you break down any amount of money in two, each part is worth half what the whole thing was worth. Many people get confused by this, and I honestly don't know why.
Private parties can certainly agree to prices that are a fraction of a penny (but they instead tend to deal in lots at those price points).
Being infinitely divisible is significant in that it renders subdivisions like cents etc meaningless and makes deflation acceptable without causing problems with transactions, but I can't see any significance for the price.
All Bitcoins are worth in the region of $4.5bn: http://blockchain.info/charts/market-cap
Twitter is currently worth in the region of $23bn: http://uk.finance.yahoo.com/q?s=TWTR
(As a side point, this either makes Twitter look ridiculously over priced or Bitcoin ridiculously under priced...)
Smaller valued assets are generally more sensitive to exterior influences.
Bitcoin really is venturing into the unknown as well which means the news around Bitcoin can in itself be more volatile (you can have some very bullish news followed by some very bearish news on the same day).
A lot of speculators in Bitcoin are amateurs as well (me included!). This lends itself to higher volatility as well as the owners of Bitcoin are more susceptible to act emotionally and induce a panic sell or greed driven buying frenzies.
It's a nervous market that isn't worth a huge amount yet. Once more is known about it and once it reaches higher valuations it will bring more stability.
Furthermore, bitcoin holds the prospect of being deflationary - and this leads to a deflationary spiral right now.
This is a revolution. This is total free market. The rules are new and might not be near similar to any other trading.
They go up and then no one wants to sell. If you check out certain areas on localbitcoins you'll find the sellers have disappeared. It's not good for liquidity.
Imagine if it was doing a spike down and there were no buyers? Markets are two way streets.
As a store of value, gaining value exponentially is a sign of danger, because it is clearly unsustainable, even in the short term. While it gains though it seems a one way bet and lots of people will take it, as they did during the south sea bubble, the railway bubble, the dotcom bubble, housing bubbles, tulips etc. Each time it was different, and we'd achieved a new paradigm where old rules no longer applied (and in some sense in each case this was true, but people got carried away).
As a currency, volatility over hours, days and months is deadly - who wants to transact in a currency when you can't tell what the value of what you hold will be tomorrow or later today?
As a currency, gaining value rapidly all the time is also difficult - who wants to transact in such a currency instead of just holding on to it and spending other currencies or bartering? It becomes more an investment than a currency (see gold when paper money is available).
Still it's an interesting currency and I certainly wouldn't discount it (though it has not taken over the world just yet!) - just wary of irrational explanations for its huge rise in value over the last few months.
> As a currency, gaining value rapidly all the time is also difficult - who wants to transact in such a currency instead of just holding on to it and spending other currencies or bartering?
That's another argument that keeps popping up and doesn't make sense, it's basically a myth. Economists and opinionologists dread this imaginary situation where people will starve before spending their deflationary coins. Hint: The world did just fine for thousands of years using gold. And no one starved to death with Bitcoin either yet.
If you have other currencies to spend or stuff to sell, you could have used them to buy more Bitcoin, and use Bitcoin to buy whatever you need at whatever price it is at the moment, so not spending Bitcoin and spending other things instead doesn't make any sense either.