As we cross the $100 bitcoin threshold we examine the growing Bitcoin bubble that’s guaranteed to pop.
For those that don’t know, there was some news a while back where the Bitcoin enthusiasts were excited about having an electronics store that specialized in bitcoins, which “proved” that bitcoins were slowly becoming a legitimate currency for legitimate transactions. But has anyone actually checked out the site?
Normally, transparency is very difficult in the bitcoin world. But bitcoinstore is a special case, because they need to hit a certain dollar amount with their supplier in order to maintain the best possible discounts. Since they are nowhere close to reaching their goal, they put up a live chart on their website to show viewers how far they need to go. At the current market rate of $77, bitcoinstore has raised about $363,000. They need to hit $850,000 by March 31st, three days from now. This implies that they currently have around 4700 bitcoins in their wallet, or about 0.04% of all bitcoins in existence (1 in every 2,500).
From February to March, bitcoins essentially went from a low of $20 to a high of $95. That means that they essentially created $800 million in market value from thin air. For every dollar spent at the bitcoinstore, the market value of bitcoins has increased by $2000. This completely destroys the argument that the price of bitcoins are going up for any reason other than speculation. People are speculating on the idea that bitcoins are a useful currency, but the simple fact of the matter is, no one seems to be using them for anything other than silk road.
1 year price history of BTC
Here’s another bit that’s interesting:
http://www.businessinsider.
Notice how even as the price is going up, the number of actual transactions has gone down? This pretty much destroys the idea that bitcoins have gone up due to heightened interest. Instead, it implies one or both of the following:
1) The lack of transactions is causing the price to go up. Speculators hoard their bitcoins in the hopes of future gains, which creates artificial scarcity and a self-fulfilling prophecy.
2) The price going up is causing a lack of scarcity. This would imply that the price is going up due to manipulation, rather than actual interest. As the price goes up, hoarders are less likely to sell (due to greed), and buyers are less likely to buy (because it’s too expensive).
Since bitcoins generally have no accountability, such manipulation would be impossible to investigate.
We should also note that the $800 million increase in market value is purely speculation. In other words, just because you have 11 million bitcoins each valued at $95, that doesn’t mean that you will actually be able to sell them at that price. Which is precisely what happened here.
One of the major problems with the bitcoin economy is that the current market price is based on the current trading price, and trade volume is easy to inflate. You simply pass some money back and forth between different wallets, so that the market looks more active than it really is.
Imagine if an author wanted to get on the bestsellers list, so he sets up two separate book stores. Bookstore A purchases 100 copies from Bookstore B, and then Bookstore B purchases those books back from Bookstore A. As long as there’s no sales tax, this can go back and forth indefinitely to make it look like millions of copies were sold, even though you only had 100 copies to start with. Bitcoins are never actually consumed. They’re not a good or a commodity on their own. Instead, they can only pass from one hand to the next, and we have no way of knowing if these transactions are legitimate.
This brings up another point: If Bitcoins can be re-used an infinite number of times, then you can’t really attribute the skyrocketing price to supply and demand, because the supply is essentially infinite. There is absolutely no reason for the price to go up so dramatically, other than greed and speculation.
In other words, the economy of Bitcoin is not growing in any meaningful way, and it will stay that way in a deflationary economy. Why spend Bitcoins when holding them will produce grater rewards? Any growth in the economy is due to the simple movement of coins back and forth, not due any type of exchange between Bitcoins for goods and services.
The fact is this bubble is undeniable and with no real growth to be seen the instability will increase until everything collapses again.
April 1, 2013 @ 2:56 pm
Thanks for taking the time to write this, though I’m still not convinced that buttcoins is a bad idea.
April 3, 2013 @ 10:21 pm
Might I recommend, http://buttcoin.org/why-should-i-invest-in-bitcoins
April 1, 2013 @ 6:23 pm
Speaking of wild speculation, I see a lot of that in this article. There might be a case to make that this is a bubble, but this isn’t it. Furthermore, there is a difference between a bubble and something being momentarily overpriced, if indeed Bitcoin is currently overpriced. I’m not so sure it is.
If you’re looking for manipulation, the blockchain is publicly visible. If someone was just shifting coins back and forth between addresses, or just selling Bitcoins to themselves over and over, a clever analyst would be able to detect it, but it would take a little more work than a cursory glance at Mt. Gox.
“Hoarding” as you so ineloquently put it, happens to be one of the legitimate uses of currency. If people are buying them due to fears of confiscatory banks or governments, is it any wonder they aren’t spending them again immediately?
If the price of a Bitcoin is too high, then the price will come down. No market goes straight up forever. When people proclaim “Bitcoin bubble!” It just tells me they don’t know what a bubble actually is.
April 2, 2013 @ 9:40 am
look at this guy here who didn’t read a damn thing
April 2, 2013 @ 9:42 am
So what’s the difference between a bubble and bitcoins “being momentarily overpriced”.
What’s the price bitcoins should be at? Why do you think a deflationary spiral won’t prevent the economy from growing.
April 13, 2013 @ 2:16 pm
There’s a very good book here on the nature and history of speculative bubbles: https://mises.org/books/bubbles.pdf
Bubbles occur when a rise in the money supply, combined with speculative enthusiasm, ends up bidding the price well above what the price would otherwise be. During the past 3 months a great deal of money has flooded into Bitcoin in reaction to some positive press and what appears to be a nod from FinCEN. This past week had plenty of exuberant buying, so by that definition of a bubble, the past two weeks in Bitcoin have been a bubble.
But two weeks ago, BTC had just crossed the $100 mark for the first time. A dizzying height for anyone who has been watching bitcoin for more than a few months. I said that at that price I wasn’t sure it was overpriced yet. After the precipitous rise and “crash,” here we are back at $100 again. Maybe the price will go lower. Who can say? But if you were predicting Bitcoin returning to near zero in price, you are so far completely wrong.
I have no idea what the price “should” be but I can tell you I have never paid more than $100 for one.
A “deflationary spiral” just doesn’t happen. In an environment of falling prices, not everyone decides to hide every cent under the mattress forever. Your currency might be appreciating but you still want things. You can observe this in consumer electronics. I know tablets will be better and cheaper next year, but I want a Nexus 10 *now*. So I buy one. Has the deflationary tablet market caused an implosion that halts all tablet production? No. Instead productivity is sky-high and rising. In fact, a deflationary money creates an incentive to only buy things that will last, or things that represent a better return than holding the money. In other words, the market would reward quality, affordability, and long-term value, instead of what we have now where everything is cheaply made and short-lived and purchased on credit.
April 2, 2013 @ 5:39 pm
Needs more butts
http://i.imgur.com/bVaJKAi.jpg
April 3, 2013 @ 10:20 pm
Dat ass.
April 3, 2013 @ 1:09 am
“If Bitcoins can be re-used an infinite number of times, then you can
April 3, 2013 @ 9:20 pm
The trading value of Bitcoin has quadrupled over the last month. At
those growth rates, a single bitcoin will be worth over $9 million at
the end of the year!
April 3, 2013 @ 9:58 pm
And you still won’t be able to use them.
-alternate reply-
This would imply you could sell a bitcoin and get 9 million dollars for it EVER. It also implies that someone with 1,000 bitcoins could sell them off at the end of this year for 9 billion dollars. If you had even the smallest iota of business sense (or common, for that matter), you’d know that such growth rate is unsustainable and unrealistic. If bitcoin were to reach even 1 million dollars by the end of this year, either something has gone horribly wrong or something is
about to go horribly wrong. There *will* be a crash, and it *will* be nasty. Sure, a handful of people are going to get rich, but unless you have the ticker projected onto your retinas in realtime, it probably won’t be you.
April 4, 2013 @ 4:03 pm
It seems the sarcasm was lost.
April 4, 2013 @ 4:22 pm
With the majority of responders to this article being butt-defenders, can’t safely assume sarcasm here =V