by John Light
April 9, 2013
Lately, I’ve been receiving phone calls, text messages, and emails from friends and family who have been watching the price of the peer-to-peer currency Bitcoin skyrocket over the past few weeks. They’re asking if they should buy-in, and whether or not I think the “bubble” will burst soon. While I have no crystal ball which can predict the future actions of the billions of people on this planet, I do have reason to believe that we are not experiencing a bubble at all, but rather a quite sustainable boom.
To explain how I distinguish between a “bubble” and a “boom,” let me first define how I am using these terms:
Bubble: a period of unsustainable growth which will inevitably cause prices to “pop” and come crashing down to a more “natural” or “sustainable” level i.e. prices that market fundamentals can support long-term.
Boom: a period of rapid growth associated with a bull (buying) market, which can either level off to become the “new normal” or take on the characteristics of a bubble if the market fundamentals cannot support the higher prices.
In the Bitcoin market, the fundamentals are as follows:
Changes in either of these fundamentals will cause the price to go up and down.
1. The number of bitcoins available is *kind of* predictable. We know that the number of bitcoins that will ever be released by the software is hard-coded at 21 million (making it a scarce good that takes work to create, like gold), that around 11,008,375 are in circulation at the time this is being written, and that 25 coins are released every ten minutes as a reward for securing the network via a process called “mining.” This reward number halves every four years, and the last bitcoin is predicted to be mined around 2140. However, as solid as these numbers sound, they do not actually tell us how many bitcoins are being made available in the marketplace. Miners could keep the coins they have earned, and there is nothing forcing people who already have bitcoins to sell them. So in times like this, when the price is going up and up with no end in sight, many are holding on to their coins for dear life, in hopes that they will be worth more in the future. This could put a pinch in the market called a “liquidity shortage,” or more sensationally, a “liquidity crisis,” that must be resolved by an upward price correction.
2. The number of people in the bitcoin market is probably the most elastic of the fundamental factors, because people may enter and exit the Bitcoin market at any time and for any reason. The market size has gone from a small group of several hundred or thousand people when the software was first released to potentially millions of people now. Since every Bitcoin user can own multiple addresses and wallets, it’s impossible to be certain the exact number. However, we can use trade volume as a guide to show that, indeed, the market is growing and trade has been increasing greatly in tandem with the price.
3. The Bitcoin network itself is accepted by virtually all cryptography experts to be very secure, and unlikely to be broken any time soon. Even if methods for cracking the encryption that secures the Bitcoin network are discovered, developers could modify the Open Source software and push an update which fixes the problem. So consider the security of Bitcoin the “foundational fundamental” which ensures that bitcoins will always be worth something in the future, since a breach of the security will cause bitcoins to no longer be a scarce good and, correspondingly, worthless.
4. The market’s understanding of the above fundamental factors is the hardest to measure, but perhaps the most important factor when determining the price since the price is simply an expression of the market’s desire (demand) for a scarce good (supply). If the market does not understand why a product is valuable, then it is quite easy to convince some market actors that it is indeed not valuable. ”Because the price is going up” is not a valid reason for why something is valuable, since the price could just as easily go down. A sell-off by one uncertain party may cause a panic as others begin to ask “why is this person selling for below market price? What do they know that I do not?”
What do these fundamentals reveal about the current rise in price for bitcoins, and do they answer the question of whether or not we are experiencing a bubble?
June 2011 saw a rise in the price of bitcoins from under $10 to over $30 in a matter of days, partially (if not entirely) fueld by a Gawker story entitled “The Underground Website Where You Can Buy Any Drug Imaginable.” Despite the focus of the article being the Silk Road website, the real star of the show was the means to purchase items from this mysterious market: a little-known cryptocurrency called Bitcoin. Fear soon set in as the market became uncertain about the sustainability of this rise, and prices fell within minutes to around $15, where they hovered for about a week. Then, major Bitcoin exchange Mt. Gox announced that they had been hacked, which caused a huge selloff, pushing the price down to near-$0.
What happened in June 2011 was a shaking of the 2nd and 4th fundamental. People who did not understand why Bitcoin was valuable panicked when the unexpected happened (a dramatic rise in price, followed by a large exchange being hacked), causing a sell-off which pushed the price down. These people were originally speculators who were intrigued by all of the press surrounding Bitcoin at the time, hoping they could cash in on the buying frenzy. They almost certainly did not understand the fundamentals that make up the price of Bitcoin, or they wouldn’t have been so quick to sell.
People who do understand Bitcoin’s fundamentals are therefore fundamentally different: they understand that Bitcoin as a payment protocol is extremely secure, which ensures that bitcoins will remain a scarce, valuable good. Even if the State cracks down on regulated merchants and exchanges, as long as people can buy illegal products, gamble, and trade stocks (but I repeat myself) with relative anonymity using bitcoins, they will still have value. Add to this utility the fact that bitcoins remain a decentralized, peer-to-peer currency which is very difficult to steal or counterfeit when proper security protocols are followed, and you have the makings of a robust global payment system that is here to stay.
After laying out the fundamentals and examining the causes of the previous Bitcoin bubble, we can now make an educated guess as to whether the current market is a “boom” or a “bubble.”
I believe that the fundamentals are much stronger this time around. The huge amount of news stories about Bitcoin, including the hit pieces, are more accurately describing how Bitcoin works and what makes bitcoins valuable. This is leading to an increased understanding of the fundamentals that make-up the price of bitcoins, which leads to people being more likely to hang on to their coins.
But wait – if people are hanging on to their coins as the price keeps going up, how will more people enter the market when no one is selling?
These questions lead to the point I made earlier about an “upward price correction.” Everyone has a selling price. Everyone. And if the Bitcoin market reaches deadlock, that price will be found. Because bitcoins are currently divisible to 8 digits past the decimal point i.e. to .0000001BTC (and this is an easy change in the source code of the Bitcoin software if need be), there are plenty of “satoshis” to go around for everyone. Even if the price of one bitcoin goes up to $1,000,000, commerce will continue, except we’ll be paying with micromillibitcents, or some other creative denomination, rather than whole bitcoins. The growing Bitcoin market will lead to less price volatility, as market movements will be less able to move the price very drastically. Instead of fluctuating several dollars per day, the price will eventually only fluctuate by fractions of a penny per day unless an early adopter with a massive store of coins performs a huge below-market sell-off. Even this would only cause a temporary fall in price, and the market would soon stabilize as people trade on the newly available store of coins.
In conclusion, as long as the “foundational fundamental” of Bitcoin – the security of the network – remains the same, the number of bitcoins in circulation continues to drop as more people buy and save, and the number of people entering the Bitcoin market continues to grow with the increasingly viral interest being generated by the aforementioned “huge amount of news stories,” I can say for absolute certain that the price of bitcoins will continue to go up.
Welcome to the 2013 Bitcoin Boom!
**Erik Vorhees, head of marketing and communication for BitInstant, published a similar post on Reddit this morning entitled “An insider’s opinion on the crazy Bitcoin market” which prompted me to finally put my responses to my family and friends in a format more appropriate for this blog. Thanks for the push, Erik!
John Light is an eager participant of the Peer-to-Peer economy. Specializing in Bitcoin, personal cryptography tools, and social media marketing. Interested in using technology to help solve the world’s most urgent problems. Catch him on the bleeding edge.
Tuesday, April 09, 2013
by Mike Adams, the Health Ranger
(NaturalNews) John, Mary and Kate are three “investors” who are buying bitcoins. Each time one of them buys a bitcoin, the value of bitcoins rises due to increased demand.
John got in early and bought 10 bitcoins for $1 each. So John’s investment is a total of $10.
Mary got in a month ago and bought 10 bitcoins for $20 each. So Mary’s total investment is $200.
Kate just bought her bitcoins, purchasing 10 of them for $200 each. So Mary’s total investment is $2,000.
The total amount of their combined purchases as $10 + $200 + $2000, or a grand total of $2210.
But the three of them, in total, THINK they have a grand total of $6,000 worth of bitcoins because ALL the bitcoins they purchased are now “valued” at the most recent purchase price of $200.
In other words:
John currently owns 10 bitcoins valued at $200 each, so John thinks he’s got “$2,000 worth of bitcoins” in his account.
Mary’s 10 bitcoins are also valued at $200 each, so Mary thinks she’s got “$2,000 worth of bitcoins.”
Kate’s bitcoins are also worth $200 each, so Kate has $2,000 worth of bitcoins.
In total, these three people believe they have $6,000 worth of bitcoins.
Yet, they only “invested” $2210.
Somehow, $3,790 in “value” was created out of nothing.
Where did this extra $3,790 come from?
Answer: It doesn’t exist. It is an illusion.
Joe Weisenthal | Apr. 9, 2013, 1:43 PM
Earlier today we marveled at Bitcoin blowing past $200.
The news surrounding Bitcoin is now coming in so hard and fast it is virtually (pun intended) impossible to keep track of it all. It was just this past weekend that I highlighted a website that shows some of the various retail locations around the world where you can spend your BTC. Just today, I discovered that New York property management company, Alvic Property Management, is accepting Bitcoin for rent and maintenance payments at all of its properties. From PRWeb:
Alvic Property Management, a property management company specializing in the management of condominiums, cooperatives and multifamily rentals in the New York metro area, has become the first property management company to accept rent and maintenance payments in Bitcoin. Properties on the Alvic Property Management platform are now be able to accept payments with the speed and ease of credit card or eCheck payments without the risk of chargebacks or bounced eChecks.
All properties managed by Alvic Property Management are currently accepting bitcoins. Residents initially need to reach out to their property manager to have their account enabled to accept bitcoin, they will then be able to then make payments to a Bitcoin address exclusive to their account. All bitcoin payments will post to the property bank account in US dollars at the quoted bid price on the Mt.Gox Bitcoin exchange at the time of receipt.
“It has become clear to us that Bitcoin has traction in New York City and the requests to pay by Bitcoin has been increasing. When landlords provide more options, they open themselves up to larger pools of potential tenants, which ultimately increases property values.” said Michael Lacsa, head of client relations for Alvic Property Management. “We are always looking for ways to increase income while cutting expenses for our properties and accepting Bitcoin provides this opportunity.”
Guess someone forgot to tell them it’s a bubble…
Full article here.
(THE FIREWALL) Reuters is credited with breaking this story: EXCLUSIVE – U.S. to let spy agencies scour Americans’ finances
The FBI has quietly been given access to the Treasury’s Financial Crimes Enforcement Network (FinCEN).
(Reuters) – The Obama administration is drawing up plans to give all U.S. spy agencies full access to a massive database that contains financial data on American citizens and others who bank in the country, according to a Treasury Department document seen by Reuters.
The new rule was designed to be technology neutral and is meant to be adaptable to a range of products, such as a plastic card, an internet system, or a mobile phone network.
[Criteria that determines if a product is subject to the new rules include] whether the product is re-loadable, can be transferred to other consumers, and, […] can be used to transfer funds outside the United States.
We will be publishing [a] proposal for public comment very soon [on the requirement that tangible prepaid access is declared] when it is transported across a border, similar to the existing declaration required for international transport of cash and monetary instruments.
An entity that engages in money transmission in any amount is subject to the BSA rules.
The term ‘currency dealer or exchanger’ [has been replaced] with the new term ‘dealer in foreign exchange,’ a term used to include the exchange of instruments other than currency as a category of MSB.
It is recognized that AML/CFT regulations need to be applied not just to banks, but rather to a range of financial and other types of commercial institutions. Why? The reason is that any way that you can move money—any way that value can be intermediated—can be abused by criminals”.
Violations by much smaller entities might also merit monetary penalties.
Over the past year FinCEN has been engaged in an initiative to identify unregistered money services businesses, primarily independent money transmitters.
Now that FinCEN has established a solid regulatory framework for prepaid access in the United States, we must continue to promote analogous steps in foreign jurisdictions.
Cue imperial march as the American Empire refuses to allow a currency outside its control and influence to flourish. And yes, of course, the government that just let HSBC walk with meager fines is going to invoke money laundering in its clumsy thuggish attempt to shutdown yet another avenue of freedom.
The US Department of State has released its annual International Narcotics Control Strategy Report (INCSR), a key component of which is a report on money laundering activities in various countries. The list of countries/jurisdictions “of primary concern” contains a whopping 65 names, which is only half the world, but hey, no one ever accused the US of slacking off when it came to projecting its values abroad. Among the nations allegedly slacking off on their oversight of money movement are notorious rogue states like Canada, the UK and Japan, popularly known as the Axis of Mundanity.
Published time: April 05, 2013 15:33
The soaring virtual currency Bitcoin suffered a cyber-blow after its leading exchange, Tokyo–based Mt.Gox, was hit with a DDoS attack. The government-free tender also faced a hacker attack on its Instawallet database, forcing the site to be shut down.
“Mt.Gox has been suffering from its worst trading lag ever, 502 errors, and at one point some users were not able to log in their account. The culprit is a major DDoS [distributed denial-of-service attack] against Mt.Gox,” the firm declared in a statement released Thursday.
The Mt.Gox Bitcoin exchange, which claims it is responsible for “more than 80 per cent of all USD trades and more than 70 per cent of all currencies,” says the culprit may never be caught.
Apart from being an easy target due to its size, profit is most likely the primary motive for the attack, the company added.
“Attackers wait until the price of Bitcoins reaches a certain value, sell, destabilize the exchange, wait for everybody to panic-sell their Bitcoins, wait for the price to drop to a certain amount, then stop the attack and start buying as much as they can. Repeat this two or three times like we saw over the past few days and they profit.”
In a separate attack on Wednesday, Instawallet, a website which enables Bitcoin traders to store and spend their currency, was also forced to shut down after hackers gained access to its database.
“The Instawallet service is suspended indefinitely until we are able to develop an alternative architecture,” announced the company.
Their statement continued that “it is impossible to reopen the service as-is.”
Despite its widespread popularity, Instawallet was notoriously insecure, as it used a “URL as password” mechanism for protection.
The two-pronged cyber-attack failed to make a major dent in gains the four-year-old virtual currency garnered over the last month, having shot up from US$30 last month to a staggering $147 record set on Wednesday.
Following the attacks, the exchange rate for Bitcoin was $134.
The currency, which was heavily bolstered by the financial crisis in Cyprus, allows users to transfer money anonymously and free of charge.
As a completely decentralized, digital-only currency, Bitcoins are generated by a computer algorithm and can be exchanged with anyone in the world.
Once a user sets up an account, Bitcoins are credited to an electronic, encrypted wallet.
Via Bitcoin exchanges like Mt.Gox, it is both possible to buy Bitcoins from other users or convert Bitcons into hard currencies.
Critics have argued that the lack of central issuers and anonymity of Bitcoins makes them the ideal tool for illicit purchases and money laundering.
While the increased popularity of crypto currencies like Bitcoins – whose total value stands at some $1.4 billion – last month the US Treasury announced that firms which issue or exchange virtual money would be regulated like traditional money-order providers.
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