
Bitcoin’s Rise: What If It Is Not A Bubble? - npguy
http://statspotting.com/bitcoins-rise-what-if-it-is-not-a-bubble/
======
daeken
> 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.

~~~
aneth4
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?

~~~
daeken
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.

~~~
aneth4
> 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.

------
wtvanhest
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.

~~~
hhw
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.

~~~
wtvanhest
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.

~~~
hhw
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.

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

------
vosper
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.

~~~
talkingquickly
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.

------
SeanDav
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.

~~~
oleganza
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.

------
scotty79
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.

~~~
T-hawk
> _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.

~~~
biot

      > 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?

~~~
T-hawk
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.

------
bubbleRefuge
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.

------
Nursie
If it's not a bubble?

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

~~~
Helianthus
... _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.

------
teebs
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.

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

~~~
teebs
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.

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

Can someone clarify or refute this?

~~~
rrrrtttt
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.

------
dragontamer
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.

~~~
freehunter
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.

------
wodow
> 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-...](http://www.businessinsider.com/how-to-short-bitcoins-if-you-really-
must-2013-4)

~~~
itistoday2
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.

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

------
jellicle
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...](http://www.amazon.com/This-Time-Different-Centuries-
Financial/dp/0691152640)

In paperback, get yours today.

~~~
SkyMarshal
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...](http://scholar.harvard.edu/files/rogoff/files/this_time_is_different.pdf)

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

------
trotsky
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.

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

------
jack_trades
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.

------
george88b
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?

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

~~~
pjbrunet
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>

~~~
ufmace
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.

~~~
pjbrunet
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.

------
TrevorJ
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.

------
marssaxman
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.

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

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

~~~
illuminate
This sounds like MLM spiel.

