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Comment by panarky | Hacker News Reader

The efficient markets hypothesis has a hard time explaining behavior in real markets.

In theory, traders search for asset prices that are higher or lower than fair value and profit by arbitraging back to fair value.

But in real markets, rising prices encourage more buying, which drives prices even further from fair value. Falling prices encourage more selling, pushing prices lower still.

Markets don't price to what traders think is fair value. They price to what traders think other traders will think the price will be.[1]

  We have reached the third degree where we devote our intelligences to
  anticipating what average opinion expects the average opinion to be.

The very existence of persistent booms and busts debunks much of efficient markets theory, and consequently the illusion that free markets can regulate themselves.

[1] http://en.wikipedia.org/wiki/Keynesian_beauty_contest

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Yes. In the short term markets are a voting machine. In the long term it's a weighing machine. That's to your point about arbitraging back to fair value.

How hard is it to short Bitcoin? That will determine the susceptibility to manias and panics.

The very existence of Bitcoin debunks much of efficient markets theory, at least when markets are thin and difficult to safely short.

> markets are thin and difficult to safely short

I would be happy to lend you Bitcoin you can sell short (if you post sufficient collateral, of course).

How much do you want?

How many do you have? What is "sufficient" collateral?

If someone has the cash, is able to withstand volatility, and the rates are low enough this trade is a no-brainer. BTCs have no intrinsic value and are propped up by speculators. Aside from speculative interest, they only have value in so much as they can be exchanged uniquely online, but they are just as useful for doing that at $0.0001/BTC as they are at $1000/BTC. Long-term I would not be surprised to see them go to 0 or some nominal amount.

ETA: Odds are nobody will loan you enough at a low enough rate to make this trade worth putting on. It's like how you can short leveraged long and short ETFs and make money due to volatility decay, but nobody will lend them cheap enough for it to be worthwhile.

People said shorting Bitcoin was a no-brainer when the exchange rate was $2. When the exchange rate rocketed to $10, many serious, smart people just knew it was a speculative bubble.

Rinse and repeat for each leg up ... $32, $90, $240, $1100. Same arguments every time.

Given historical volatility, I'd say fair collateral for a short sale would be 300% of the current exchange rate in USD, EUR, CHF or gold, with a margin interest rate of 6% per month.

The same argument held on Amazon, as the shorts got crushed on it's rise. :-)

In order to exchange them someone needs to buy them first. So, depending on how much they are used for trade, the amount held transitively for this purpose will vary.

Since there is a fixed number, the more popular they become as a trading platform, the higher the price will go, since if many people, P, need to trade at the same time, and they need an average of $X worth at any given time, and there are B bitcoins available, then $X * P / B is the minimum price a bitcoin can be.

So, if the amount used for trade becomes somewhat stable and/or continues to grow, it means there is some real base dollar value for a bitcoin in order to support this. Given this base value, along with its other features of easily being kept safe and transferred across national borders, it then makes them attractive to store wealth, which increases the value much more. And then, given the group of people willing to store wealth in bitcoin, it makes people even more confident in it as a store of wealth. And so on and so on...

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