

Bitcoin Surges Past $5 Mark - pemulis
https://mtgox.com/trade/history

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pemulis
Just to provide a point of reference, one Bitcoin was worth less than $4 only
twelve hours ago. Although this is great for everyone who owns Bitcoins
(disclaimer: self included), you have to wonder how damaging this sort of
sudden deflation is to the overall ecosystem. Any merchants currently
accepting Bitcoins might have to post prices in terms the relative value of
Bitcoins in USD (or whatever other currency), based on minute-by-minute
changes in the exchange. Which, obviously, is a huge pain point, and might
cause them to rethink using Bitcoins at all.

~~~
esrauch
Since the bitcoin prices are going up when compared to USD if the owners
simply set the USD price and calculated the bitcoin price, that isn't too much
of an issue for them. It would be a lot worse if the price had plummeted the
same amount rather than rose.

20% higher prices in an alternate currency isn't exactly going to change much,
many major websites that list prices in multiple currencies end up having that
much gap anyway.

~~~
pemulis
Bitcoin prices have a tendency to plummet, too. After they passed the $4 mark
for the first time, the price dropped precipitously, as people began to worry
about a bubble. I expect the same thing to happen now that the price has
passed the $5 mark. (In fact, as of this writing, the price has already
dropped from a high of $5.2 down to $4.95.) There are a lot of weird
psychological factors at play here. Another issue is that the trading volume
is far to small to see anything like a "real" price. There only seem to be a
few thousand people buying and selling Bitcoins right now, and the majority of
those Bitcoins are held by an even smaller group. Until millions of people
start using Bitcoins, the exchange rates are based on the psychology of a
tiny, tiny mob. This results in totally insane spreads like today, with $3.8
at the low end and $5.2 at the high end.

But here's the Catch-22: As more people start using Bitcoins, they become
inherently more valuable. This causes the price to increase, bringing
enormous, sudden profits to people trading on the Mt. Gox exchange. The new
Bitcoin owners see this happen, and naturally get in the trading game
themselves, since it looks like a great way to get rich quick. This drives the
price even higher, bringing more attention to Bitcoin, bringing in more users,
&c., &c. And so Bitcoins wind up being used for speculation more than as a
medium of exchange.

The only way I could see this cycle breaking is if some merchant emerges that
provides an attractive reason to spend Bitcoins on a large scale, instead of
just trading them back and forth. The obvious use case (to me) is online
gambling: An online casino or poker room that started accepting Bitcoins could
then bring in U.S. players without risking prosecution for money laundering,
since there is no bank intermediary they have to work with, and no way for
them to know which customers are from the U.S. and which are from countries
where online gaming is perfectly legal. Until a big institutional merchant
gets in the game, Bitcoins are just going to be like baseball cards or Beanie
Babies or tulips circa 1636.

~~~
lyspooner
As more people start using bitcoins (specifically by mining them), by nature
of the design of the network, bitcoins become more secure. When this happens,
the currency becomes perceivably more stable for the future, which should
raise the price of each unit of currency. it's not a speculative bubble in
this regard. it's more of a reinforcing trend. I won't disagree that bitcoins
are highly speculative at the moment-- but it is just important to note that
along with speculation comes increased security.

~~~
pemulis
I don't think that that extra security is what we're seeing priced in the
exchange, though. The traditional causes of volatility in commodities like
gold and silver are increases in supply (new mines being discovered, new
techniques developed, etc.) and people hedging en masse as they lose faith in
the value of fiat currencies. (There are also speculative bubbles on occasion,
as with anything else.)

With bitcoins, we know where the supply will peak (21 million bitcoins) and
the rate the supply will grow. Since the supply is predictable, it shouldn't
lead to the volatility we can see in the market. The other cause for rapid
deflation in commodities - people hedging because of a weak dollar (or
whatever currency) - doesn't seem to be in play right now, either.

The increase in security might account for an increase in value, but not 50%+
in one day. That sort of rapid deflation tells you that this is a bubble. We
don't know what the stable value of a bitcoin is right now. It may be $100, it
may be $1. But since nearly everyone using bitcoins right now are using them
as investment instruments, we aren't seeing anything like a real price.
Merchant and consumer adoption don't matter right now. All that matters is the
market of other speculators. Watching the way the price shot up and down and
up and down over the past 24 hours makes me think that a few people are
manipulating the market and making a killing, and a lot of other people are
getting scammed.

------
vannevar
The ratio of Bitcoin speculation to trade is very high; it's less a currency
than a peer-to-peer gambling system, the economic equivalent of a penny stock
that is being repeatedly pumped and dumped. If you're a merchant, you
certainly don't want to be holding Bitcoins. Leave them to the gamblers.

