Yeah but its not all that good. People can use bitcoins for more than speculation.
They go up and then no one wants to sell. If you check out certain areas on localbitcoins you'll find the sellers have disappeared. It's not good for liquidity.
Imagine if it was doing a spike down and there were no buyers? Markets are two way streets.
I don't know why people keep asking this question, other than to try to sound smart or experienced without much effort. Yes, it's pretty damn different this time. Else tell me: when was the last time you saw a decentralized distributed crypto-currency be born and take over the world?
Markets, particularly unregulated or opaque ones, are often subject to volatility, exponential network effects, irrational exuberance, etc, and the most common excuse for that is 'this time it's different', which is your argument and that of the OP. Often, the explanation is just that crowds follow each other and/or those with a stake attempt manipulation.
As a store of value, gaining value exponentially is a sign of danger, because it is clearly unsustainable, even in the short term. While it gains though it seems a one way bet and lots of people will take it, as they did during the south sea bubble, the railway bubble, the dotcom bubble, housing bubbles, tulips etc. Each time it was different, and we'd achieved a new paradigm where old rules no longer applied (and in some sense in each case this was true, but people got carried away).
As a currency, volatility over hours, days and months is deadly - who wants to transact in a currency when you can't tell what the value of what you hold will be tomorrow or later today?
As a currency, gaining value rapidly all the time is also difficult - who wants to transact in such a currency instead of just holding on to it and spending other currencies or bartering? It becomes more an investment than a currency (see gold when paper money is available).
Still it's an interesting currency and I certainly wouldn't discount it (though it has not taken over the world just yet!) - just wary of irrational explanations for its huge rise in value over the last few months.
It's not a sign of danger in this case though, it's a sign of exponential adoption, which is exactly what's happening and is perfectly understandable for such a technological feat like Bitcoin. The same happened with many startups like Facebook: A lot of volatility in the beginning, exponential growth, IPO, stabilization.
> As a currency, gaining value rapidly all the time is also difficult - who wants to transact in such a currency instead of just holding on to it and spending other currencies or bartering?
That's another argument that keeps popping up and doesn't make sense, it's basically a myth. Economists and opinionologists dread this imaginary situation where people will starve before spending their deflationary coins. Hint: The world did just fine for thousands of years using gold. And no one starved to death with Bitcoin either yet.
If you have other currencies to spend or stuff to sell, you could have used them to buy more Bitcoin, and use Bitcoin to buy whatever you need at whatever price it is at the moment, so not spending Bitcoin and spending other things instead doesn't make any sense either.
It's just law of the market. Bitcoin has limited supply (only 21M will ever be "mined" and even less in circulation due to lost wallets) and ever growing demand. Most recently Chinese got interested in Bitcoin, so the demand grew even more, while the supply stayed the same.
So simply put when there are less people that want to sell than people that want to buy [3], the prices rises.
Also, as other person here suggested, Bitcoin mining difficulty has risen dramatically in past few months [2] thanks to new specialized hardware (ASICs) finally arriving to its buyers. This, while does not affect the price directly, shows that there is much faith put in the system by miners, which in turn encourages people to buy even more.
It's also worth noting that the $400 price is only on MtGox, which is not considered as market leader anymore. What's more, the withdrawals from MtGox are counted in weeks or even months , so it's not a viable trading platform. If you want a reliable Bitcoin price, head over to BitcoinAverage [1] which does what the name implies - averages (and takes volume into consideration) the price over all major exchanges. They even have a button to exclude MtGox price from the calculations, as MtGox is always 10-20% higher than the rest.
As of writing this post, the average price including MtGox is $380.
Besides, what's your point? If you break down any amount of money in two, each part is worth half what the whole thing was worth. Many people get confused by this, and I honestly don't know why.
But you can break bitcoins down into smaller increments than just 1. That must be significant in some way.
Being infinitely divisible is significant in that it renders subdivisions like cents etc meaningless and makes deflation acceptable without causing problems with transactions, but I can't see any significance for the price.
(As a side point, this either makes Twitter look ridiculously over priced or Bitcoin ridiculously under priced...)
Smaller valued assets are generally more sensitive to exterior influences.
Bitcoin really is venturing into the unknown as well which means the news around Bitcoin can in itself be more volatile (you can have some very bullish news followed by some very bearish news on the same day).
A lot of speculators in Bitcoin are amateurs as well (me included!). This lends itself to higher volatility as well as the owners of Bitcoin are more susceptible to act emotionally and induce a panic sell or greed driven buying frenzies.
It's a nervous market that isn't worth a huge amount yet. Once more is known about it and once it reaches higher valuations it will bring more stability.
The bitcoin mining difficulty has ~doubled since October, when the price was ~$200. The price is currently pegged to the minimum profitable price for mining.
Governments can print money whenever they want. It's harder to saturate Bitcoins. Demand is rising more than the amount that it can be mined at. Pretty simple.
That's not completely correct. Governments don't print money, central banks do. Governments still have have to sell bonds to actually have money to spend. The amount of money in circulation affects the interest on these bonds, but it's not as simple as saying governments can just print money without consequences (maybe it should be, but that's a different discussion).
No, credit is created by private banks, but the money supply is controlled by central banks, for example like the FED does right now by scooping up assets (quantitative easing, ie: increasing the money supply). This is popularly called 'printing money' but obviously that just an allegory: nothing is actually 'printed', and the amount of currency (notes and coins) in circulation is completely unrelated to the money supply.
Yes, if anything I'd imagine the Bitcoin price influences the mining difficulty. If a Bitcoin is worth more, miners can invest more in mining hardware, thereby increasing the difficulty.
While bitcoin is many things to many people (a currency, an investment vehicle), it is also a commodity, produced by miners who need to make back the money spent mining. When their costs go up, they will raise their prices to match, just like farmers, coal miners, or RAM manufacturers. If the market is supply-constrained, the price increase will be accepted.
You have it backwards. If I spend $1M doing some awesome product and will ask for it $1.1M to cover my costs and make some profit, then it says nothing about how many people would actually pay that price.
Miners invest in mining in expectation of price rise. They could equally go to exchange and buy bitcoins in expectation of higher price in the future. Whether they are correct or not will be decided not by them, but by all other people who demand bitcoins and bid up the prices.
If there is no new demand for bitcoins, price will not grow because there won't be competition for buying them.
Bitcoin is a little bit weird because it is a currency which (essentially) nothing is priced in.
So actual users of bitcoin-the-currency don't really care what the price of a bitcoin is, as long as it is stable enough for them to complete a transaction. They don't need to buy 1 or 0.1 or 10 bitcoins, they need to buy exactly $100 or $10 or $1000 of bitcoins to complete their transaction, and the actual price per bitcoin doesn't matter.
You are right that exact price of Bitcoin is irrelevant when you need to convert 8 hours of your day job into an iPhone. But for anything to be a medium of exchange it must have value. And the value is derived solely from the desire to hold Bitcoins vs. holding dollars, euros, oil, gold, consumption goods etc. The more people on the market want to hold Bitcoins, the more liquid it is (regardless of the price). But since the amount of Bitcoins is fixed, increasing liquidity would always have to come with a growing price. Simply because for every new person to come in and buy a Bitcoin, he need to outbid all other people like him, and also outbid time preference of the existing holders.
In other words, growing price of a good in a fixed supply sends a signal of its bigger liquidity. Meaning it's even better medium of exchange for you to accept (even if you don't invest in it yourself).
Things don't need to be priced in Bitcoin for it to have value and to be used in exchange with this value. Things will be priced in the most stable, most liquid commodity and today it is fiat currency. Bitcoin needs to be spread to many more hands than it is today. This is what happens today and we are still at less than 0.1% of global population that is even aware that this technology exists.
I will say that BTC has risen another ~10% since the discussion started, in the lead up to what had been predicted as a 11% difficulty increase (now predicted at 15%), which looks bad for my hypothesis.
The price of bitcoin affects bitcoin miners. People will turn off / sell miners when the price plummets, or go out and buy a miner/hardware when the price is on the rise.
Bitcoin miners affect the difficulty level directly, by mining or not.
Furthermore, there are a finite number of bitcoins to be mined. The higher the difficulty, the faster they are being mined. Therefore, the scarcity of each individual coin is going UP as they are mined. Let me say that another way: before a coin is mined, it is still available for anyone to get by mining. After it is mined, it is in a private wallet number, worth whatever the market says the owner should reasonably receive for it. As coins are mined, the supply of total available coins goes DOWN. As long as demand continues, price will go UP. BTC become more scarce with each coin mined, because there is one fewer to mine in the future, and every one to be mined after it will need to be done so at the new (assumedly higher) mining cost.
The difficulty level might be thought of as a direct index of the COST of mining a new coin. As that cost increases, supply for coins goes DOWN. Ceterus paribus, supply DECREASES, price INCREASES.
> The higher the difficulty, the faster they are being mined. Therefore, the scarcity of each individual coin is going UP as they are mined.
You are wrong. Coins are mined at a mostly fixed rate regardless of difficulty.
> BTC become more scarce with each coin mined
They are actually becoming less scarce since the total amount of coins in circulation increases every ~10 minutes (until there are ~21M coins in circulation). Believe it or not, supply is increasing but demand is increasing at a much faster rate, hence the price going up.
Mining difficulty on the other hand has pretty much no influence on price (although price does have an effect on mining difficulty).
I concede to your point, that makes sense. The rise in difficulty is to regulate that fixed rate of producing new coins, I'm certainly wrong there.
Scarcity of coins to the market goes down w/ each new coin mined, you're right. BUT, because we know exactly how many coins there are available to mine, doesn't this make the total number of coins available to you via mining go DOWN? If all the world's gold was in a single, perfectly measurable and publically accessible vein, would someone moving it from that publically minable place to a private reserve make its scarcity go UP or DOWN? There is the risk of the blockchain failing drastically, but past that it can be assumed that you have THAT MANY FEWER COINS available to mine, in total, right?
I may be thinking about this in the wrong way entirely, appreciate the comment.
You've got it backwards. It's the difficulty which is pegged to the price. If the price went back to $5 now, miners would turn off their equipment and the difficulty would plummet.
On the other hand, if difficulty would shoot 10 times now, it wouldn't affect the price much, because most of the cost of mining would already be sunk in. Miners would sell their bitcoins even with a loss.
If anything, it seems that difficulty follows the price (Dec 2010, Feb-March 2011) on the above chart.
And here:
http://bitcoin.sipa.be/
You'll see that difficulty was raising constantly during the past year, while the price stood still for quite a long time, and fluctuated wildly at other times.
First, to narrow my claims: I am not claiming that BTC has always been supply-constrained on miners. I think this is a recent phenomenon, tied to the rise of ASIC miners. Nor am I claiming that miners will always be able to demand any price from the market (nor do I know the point at which the market will reject the higher prices).
The question you raise about the direction for the arrow of causation in the correlation between price and mining difficulty is interesting. While it seems intuitively obvious to me that difficulty is leading price, "intuitively obvious" is not evidence.
One test might be the upcoming increase in mining difficulty, which is currently only projected to be +11% (compared to the previous difficulty increases of 30-50%): http://bitcoindifficulty.com/ . I would predict that the price of BTC should increase ~11% after that increase (the price following the difficulty).
I've read a handful of reports here in the past week about several site that got hacked and millions of dollars in bitcoins stolen. For the life of me I can't understand why someone would pay so much for something that can be taken away from him/her. Perhaps someone here can explain and enlighten me. Please.
Those reports that you've read are basically the same as you would read that some small, obscure bank with anonymous owners was robbed and people lost their money. That doesn't tell you anything about the currency that was stored in this bank, but it tells you something about people that decided to put currency into it.
Bitcoin as a protocol and technology proved itself to be rock-solid. People are already using it all around the worlds for many different purposes, from storing their wealth to buying subs in Subway. On the other hand, there are some Bitcoin services that are can be used to store your Bitcoin that are not exactly very secure or trustworthy. Most people advise against storing your Bitcoins in such services, as it has risks of either service operator or hackers to take your coins from their servers. Still, some people decide against these advices and still use these online wallets. You can't blame Bitcoin itself for that.
There are more secure ways to store your Bitcoins, from printing your private keys on as a paper wallet and store it in a safe place where no one can reach it, to storing it on your computer, protected with a long, unique pass phase, to storing it in a web wallet like blockchain.info which doesn't store your coins directly, but encrypts the private key with your password before storing it on their servers.
> Those reports that you've read are basically the same as you would read that some small, obscure bank with anonymous owners was robbed and people lost their money.
Except there's no such thing, so there are no such reports.
Bitcoins itself are not unsafe. It's just a keypair (public/private key). You can create a so called paper wallet on your machine and use the public key to transfer money to that address. Nobody can steal it from you in that case.
The problem is: In order to for transactions to work fine you'd need to run the bitcoind client on your machine. So you have to secure your machine and need to run the client.
This is quite difficult for some people so a lot of web services offer you an online wallet. There the private and public key is on their server. These services get hacked quite often. You basically trusting a stranger with all your money.
The exchanges also provide you with a wallet. A lot of people are lazy and keep their Bitcoins and their money in the exchange. But some exchanges store the money they don't actively use in so called "cold storage" i.e. on a computer that is not connected to the network and webserver of the exchange. In that case you can hope that your money get's refunded.
If you store your Bitcoins in an offline wallet and only use exchanges for buying or selling the Bitcoins and withdraw your coins or money after the transaction you can minimize the risk.
About a million dollars were stolen from a tiny Australian bank run by some teenager, and 4 million from a small Chinese exchange. There are much safer places to store your coins. Meanwhile, individuals have taken profits upwards of those figures. Maybe that explains why those incidents had absolutely no effect on the market.
Those stolen bitcoins were not holded by their owners with care, but by shady third parties.
If you take the proper measures bitcoins are very hard to steal. You can create wallets and transactions even from an offline computer and never expose your savings to the internet. You can even print to a paper your wallet info and never again use it within a computer. You just need to trust the wallet generator enviroment.
Still, keeping BTC safe for the average user is really hard, even tech savy people made costly mistakes. Hardware solutions will be needed to solve this problem, but the tech is in itself safe(tm).
Bitcoins can be stored offline, making them as safe as any other possession. How many millions in cash have been stolen in the last week? Jewel theft totals $100 million each year[1]. That doesn't stop people from using cash or buying jewels.
A better question would by why would anyone store anything of value with a website they do not trust?
Someone stole my car a few months back. I still bought a new one. People who park their cars in high crime areas are inviting trouble. Likewise people who deposit their coins with random Internet sites are asking for them to be taken. If you store your coins properly the chances of them being stolen are very very small.
The first mention of bitcoin on HN was 4 and a half years ago. You could have bought them at about $0.05 back then. I wish I'd been paying more attention.
Hindsight is a wonderful thing :) It's worth reminding yourself why you ignored it then, and (perhaps like some), continue ignoring it today..
I may be a reluctant Bitcoin user sometime in the future, but attempting to profit from its price movements is an inherently risky business, especially given the legal and tax grey area it entails in many parts of the world.
If I'd held on to the BTC I bought in 2011 it'd be worth £20k right now, but I'm still glad I didn't, for all these reasons
Not exactly :) If we suppose that entire economy (which is nearly 70,000,000$M) is expressed in bitcoins (there will be 20M of it), then each bitcoin would cost 3.5$M. Started from order of 4e-2, it is now traded around 4e2, so it have done half-way (in logarithmic scale) to 4e6 -- its potential limit value.
Everyone that says this doesn't know how hard it was to get back then. I started looking for a way to buy it when it was at a buck fifty, and it took me until it was at four dollars before I finally was able to do the transaction (in cash in person at a cafe in Toronto with a off-grid cryptoanarchist).
The easiest way back then was to try to figure out how to install the GPU miner and then just hope that the block difficulty did spike because everyone else was doing the same thing. When I wen't back to start selling bitcoins when it started going north of 50 bucks a coin, it was too easy, Mtgox did a direct wire to my bank account and I was limited to a certain amount per day or month (can't remember).
As for buying it now: Right now the bet is whether or not you think that bitcoin will survive governments worldwide trying to clamp down on it and whether or not you think it will scale to billions of transactions a day. I put the first one on about 10% chance of happening and the second one on about 30% chance of happening, so about 3% chance total. If it hits that 3% the maximum I think bitcoin could be worth is about ten million dollars a coin ($10k average purchasing power for a couple billion people). So I made my profit already (on my original bet that it would gain momentum, which it has) and now I'm riding a decently likely (given the payout) lottery ticket.
Oh, it seems like I made a grave error doing my mental math... I don't see how I got it so wrong, but I guess I'm not used to dividing millions and trillions together. I meant to say about $1 million dollars per coin. With the updated numbers, it would be $21 trillion worth of purchasing power, which is a quarter of todays Gross World Product (the economic activity of the world for one year). So yes, it does seem that the world has that kind of wealth.
Ease of purchase was definitely an issue. When it was $1/coin there was a guy selling them through PayPal, maximum order size of 20 bitcoins. So I bought 20 because it was easy and it reminded me of some cool Neal Stephenson stories. Shortly after, PayPal shut him down and I didn't immediately see any other easy way to buy more, so I didn't buy more. It's hard to be pissed off about turning $20 into $8k, but fuck me.
Or even better, we stop quoting the MtGox price since it is artificially inflated due to delays with cash withdrawals. This is the graph I personally use: http://bitcoinwisdom.com/markets/bitstamp/btcusd
As someone not invested in Bitcoin I'm just curiously waiting for the day when someone discovers a serious cryptographical weakness which makes all Bitcoins suddenly worthless. Has there been any advance in finding flaws in Bitcoin already?
Nice one, as someone who almost invested 2k of his savings when it went from $2 to $20, I'm also very interested in a projected failure of the entire system. No envy in play here at all.
/edit
Hint: You could always start accepting bitcoin payments. the long term trend seems to be up. There is still money to be made from speculating on this without selling your house for BTC.
> As someone not invested in Bitcoin I'm just curiously waiting for the day when someone discovers a serious cryptographical weakness which makes all Bitcoins suddenly worthless.
Typical hater...
> Has there been any advance in finding flaws in Bitcoin already?
No. So far we just have people who only understand Cryptography, or only understand Game Theory, or only understand Economics, or even none of those, creating inflammatory blog posts on why Bitcoin is doomed and should die any minute. But the reality is... Bitcoin users not affected!
Anyone have recommendations for books about financial bubbles?
I have a few bitcoin and I believe it is a legitimate currency, but I'm feeling uneasy with the 'this time it's different' reasoning which is supposed to justify its current runup.
Thanks. I didn't watch the video yet, but I've read the article before. What I'm wondering is whether the bubble is stable, or inflating above the eventual equilibrium (and more importantly, deflating by the time I want to convert to another currency). I have a feeling the current lawlessness has a lot to do with the value attached to bitcoin, and that probably won't last.
It's not really a bubble (other than in the sense given to it in the article) and it's definitely not above the eventual equilibrium. The video explains it very well.
Good chapters on tulip mania, the original South Sea bubble, Mississippi company, the introduction of paper money and hyperinflation in the French ancien regime.
Bonus fun on "Influence of Politics and Religion on the Hair and Beard", duelling, and "Popular Follies of Great Cities" (which were basically memes long before the internet).
All the Devils are here is interesting on the US housing crisis which sparked the last bust.
Fiat Money Inflation in France is an interesting short outline of a currency which goes horribly wrong due to being debased (opposite problem to bitcoin):
White describes a disillusioned public who, under the influence of increasingly self-serving public officials and orators, accepted more and more assignat printings even though the perils of such printings had been documented throughout history...
Bitcoin is interesting because it has this hard limit, which means in theory it will reach a point where no more currency is made, and thus it is relatively stable in value. Until them though the value of it will ramp up in relation to real goods and other currencies (deflation). It's a really interesting experiment, though it does heavily reward the initial investors and skews it towards being an investment (and a bubbly one at that) rather than a currency, at least till the hard limit is reached.
I do find the question of whether the public could be persuaded to just up the limit and print more bitcoin interesting - I suspect if we had bitcoin as a world or national currency, just like assignats or other currencies, people could be persuaded to print more or otherwise bend the rules for the good of the nation/world/economy.
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[ 2.9 ms ] story [ 163 ms ] threadWhat's the deal with the volatility?
This is a revolution. This is total free market. The rules are new and might not be near similar to any other trading.
They go up and then no one wants to sell. If you check out certain areas on localbitcoins you'll find the sellers have disappeared. It's not good for liquidity.
Imagine if it was doing a spike down and there were no buyers? Markets are two way streets.
As a store of value, gaining value exponentially is a sign of danger, because it is clearly unsustainable, even in the short term. While it gains though it seems a one way bet and lots of people will take it, as they did during the south sea bubble, the railway bubble, the dotcom bubble, housing bubbles, tulips etc. Each time it was different, and we'd achieved a new paradigm where old rules no longer applied (and in some sense in each case this was true, but people got carried away).
As a currency, volatility over hours, days and months is deadly - who wants to transact in a currency when you can't tell what the value of what you hold will be tomorrow or later today?
As a currency, gaining value rapidly all the time is also difficult - who wants to transact in such a currency instead of just holding on to it and spending other currencies or bartering? It becomes more an investment than a currency (see gold when paper money is available).
Still it's an interesting currency and I certainly wouldn't discount it (though it has not taken over the world just yet!) - just wary of irrational explanations for its huge rise in value over the last few months.
> As a currency, gaining value rapidly all the time is also difficult - who wants to transact in such a currency instead of just holding on to it and spending other currencies or bartering?
That's another argument that keeps popping up and doesn't make sense, it's basically a myth. Economists and opinionologists dread this imaginary situation where people will starve before spending their deflationary coins. Hint: The world did just fine for thousands of years using gold. And no one starved to death with Bitcoin either yet.
If you have other currencies to spend or stuff to sell, you could have used them to buy more Bitcoin, and use Bitcoin to buy whatever you need at whatever price it is at the moment, so not spending Bitcoin and spending other things instead doesn't make any sense either.
So simply put when there are less people that want to sell than people that want to buy [3], the prices rises.
Also, as other person here suggested, Bitcoin mining difficulty has risen dramatically in past few months [2] thanks to new specialized hardware (ASICs) finally arriving to its buyers. This, while does not affect the price directly, shows that there is much faith put in the system by miners, which in turn encourages people to buy even more.
It's also worth noting that the $400 price is only on MtGox, which is not considered as market leader anymore. What's more, the withdrawals from MtGox are counted in weeks or even months , so it's not a viable trading platform. If you want a reliable Bitcoin price, head over to BitcoinAverage [1] which does what the name implies - averages (and takes volume into consideration) the price over all major exchanges. They even have a button to exclude MtGox price from the calculations, as MtGox is always 10-20% higher than the rest.
As of writing this post, the average price including MtGox is $380.
[1] https://bitcoinaverage.com/
[2] http://bitcoin.sipa.be/speed-lin.png (network hashrate now approaching 5 Terahash per second)
[3] http://blockchained.com/depth_mtgox_15d.png (on bottom chart: orange line is sum of all offers from people wanting to sell, green one is for people wanting to buy)
But you can break bitcoins down into smaller increments than just 1. That must be significant in some way.
1 BTC = 100,000,000 Satoshis 1 BTC = 1000 mBTC (millibitcoin) 1 mBTC = 100,000 Satoshis 1 μBTC (microbitcoin) = 100 Satoshis
So if you think of it like this, it can be divided far more than 21million times.
http://martinfowler.com/eaaCatalog/money.html
Besides, what's your point? If you break down any amount of money in two, each part is worth half what the whole thing was worth. Many people get confused by this, and I honestly don't know why.
Private parties can certainly agree to prices that are a fraction of a penny (but they instead tend to deal in lots at those price points).
Being infinitely divisible is significant in that it renders subdivisions like cents etc meaningless and makes deflation acceptable without causing problems with transactions, but I can't see any significance for the price.
Furthermore, bitcoin holds the prospect of being deflationary - and this leads to a deflationary spiral right now.
All Bitcoins are worth in the region of $4.5bn: http://blockchain.info/charts/market-cap
Twitter is currently worth in the region of $23bn: http://uk.finance.yahoo.com/q?s=TWTR
(As a side point, this either makes Twitter look ridiculously over priced or Bitcoin ridiculously under priced...)
Smaller valued assets are generally more sensitive to exterior influences.
Bitcoin really is venturing into the unknown as well which means the news around Bitcoin can in itself be more volatile (you can have some very bullish news followed by some very bearish news on the same day).
A lot of speculators in Bitcoin are amateurs as well (me included!). This lends itself to higher volatility as well as the owners of Bitcoin are more susceptible to act emotionally and induce a panic sell or greed driven buying frenzies.
It's a nervous market that isn't worth a huge amount yet. Once more is known about it and once it reaches higher valuations it will bring more stability.
The bitcoin mining difficulty has ~doubled since October, when the price was ~$200. The price is currently pegged to the minimum profitable price for mining.
I think most money is created by private banks, not central banks.
Miners invest in mining in expectation of price rise. They could equally go to exchange and buy bitcoins in expectation of higher price in the future. Whether they are correct or not will be decided not by them, but by all other people who demand bitcoins and bid up the prices.
If there is no new demand for bitcoins, price will not grow because there won't be competition for buying them.
So actual users of bitcoin-the-currency don't really care what the price of a bitcoin is, as long as it is stable enough for them to complete a transaction. They don't need to buy 1 or 0.1 or 10 bitcoins, they need to buy exactly $100 or $10 or $1000 of bitcoins to complete their transaction, and the actual price per bitcoin doesn't matter.
In other words, growing price of a good in a fixed supply sends a signal of its bigger liquidity. Meaning it's even better medium of exchange for you to accept (even if you don't invest in it yourself).
Things don't need to be priced in Bitcoin for it to have value and to be used in exchange with this value. Things will be priced in the most stable, most liquid commodity and today it is fiat currency. Bitcoin needs to be spread to many more hands than it is today. This is what happens today and we are still at less than 0.1% of global population that is even aware that this technology exists.
Bitcoin miners affect the difficulty level directly, by mining or not.
Furthermore, there are a finite number of bitcoins to be mined. The higher the difficulty, the faster they are being mined. Therefore, the scarcity of each individual coin is going UP as they are mined. Let me say that another way: before a coin is mined, it is still available for anyone to get by mining. After it is mined, it is in a private wallet number, worth whatever the market says the owner should reasonably receive for it. As coins are mined, the supply of total available coins goes DOWN. As long as demand continues, price will go UP. BTC become more scarce with each coin mined, because there is one fewer to mine in the future, and every one to be mined after it will need to be done so at the new (assumedly higher) mining cost.
The difficulty level might be thought of as a direct index of the COST of mining a new coin. As that cost increases, supply for coins goes DOWN. Ceterus paribus, supply DECREASES, price INCREASES.
You are wrong. Coins are mined at a mostly fixed rate regardless of difficulty.
> BTC become more scarce with each coin mined
They are actually becoming less scarce since the total amount of coins in circulation increases every ~10 minutes (until there are ~21M coins in circulation). Believe it or not, supply is increasing but demand is increasing at a much faster rate, hence the price going up.
Mining difficulty on the other hand has pretty much no influence on price (although price does have an effect on mining difficulty).
Scarcity of coins to the market goes down w/ each new coin mined, you're right. BUT, because we know exactly how many coins there are available to mine, doesn't this make the total number of coins available to you via mining go DOWN? If all the world's gold was in a single, perfectly measurable and publically accessible vein, would someone moving it from that publically minable place to a private reserve make its scarcity go UP or DOWN? There is the risk of the blockchain failing drastically, but past that it can be assumed that you have THAT MANY FEWER COINS available to mine, in total, right?
I may be thinking about this in the wrong way entirely, appreciate the comment.
On the other hand, if difficulty would shoot 10 times now, it wouldn't affect the price much, because most of the cost of mining would already be sunk in. Miners would sell their bitcoins even with a loss.
Besides that, look at the chart: https://bitcointalk.org/index.php?topic=7427.0
If anything, it seems that difficulty follows the price (Dec 2010, Feb-March 2011) on the above chart.
And here: http://bitcoin.sipa.be/ You'll see that difficulty was raising constantly during the past year, while the price stood still for quite a long time, and fluctuated wildly at other times.
Especially this graph: http://bitcoin.sipa.be/speed.png Can you show me, from this graph alone, when price increases were due?
The question you raise about the direction for the arrow of causation in the correlation between price and mining difficulty is interesting. While it seems intuitively obvious to me that difficulty is leading price, "intuitively obvious" is not evidence.
One test might be the upcoming increase in mining difficulty, which is currently only projected to be +11% (compared to the previous difficulty increases of 30-50%): http://bitcoindifficulty.com/ . I would predict that the price of BTC should increase ~11% after that increase (the price following the difficulty).
Bitcoin as a protocol and technology proved itself to be rock-solid. People are already using it all around the worlds for many different purposes, from storing their wealth to buying subs in Subway. On the other hand, there are some Bitcoin services that are can be used to store your Bitcoin that are not exactly very secure or trustworthy. Most people advise against storing your Bitcoins in such services, as it has risks of either service operator or hackers to take your coins from their servers. Still, some people decide against these advices and still use these online wallets. You can't blame Bitcoin itself for that.
There are more secure ways to store your Bitcoins, from printing your private keys on as a paper wallet and store it in a safe place where no one can reach it, to storing it on your computer, protected with a long, unique pass phase, to storing it in a web wallet like blockchain.info which doesn't store your coins directly, but encrypts the private key with your password before storing it on their servers.
Except there's no such thing, so there are no such reports.
You can store BTC on your own computer, or even offline on a sheet of paper.
The problem is: In order to for transactions to work fine you'd need to run the bitcoind client on your machine. So you have to secure your machine and need to run the client.
This is quite difficult for some people so a lot of web services offer you an online wallet. There the private and public key is on their server. These services get hacked quite often. You basically trusting a stranger with all your money.
The exchanges also provide you with a wallet. A lot of people are lazy and keep their Bitcoins and their money in the exchange. But some exchanges store the money they don't actively use in so called "cold storage" i.e. on a computer that is not connected to the network and webserver of the exchange. In that case you can hope that your money get's refunded.
If you store your Bitcoins in an offline wallet and only use exchanges for buying or selling the Bitcoins and withdraw your coins or money after the transaction you can minimize the risk.
If you take the proper measures bitcoins are very hard to steal. You can create wallets and transactions even from an offline computer and never expose your savings to the internet. You can even print to a paper your wallet info and never again use it within a computer. You just need to trust the wallet generator enviroment.
Still, keeping BTC safe for the average user is really hard, even tech savy people made costly mistakes. Hardware solutions will be needed to solve this problem, but the tech is in itself safe(tm).
A better question would by why would anyone store anything of value with a website they do not trust?
[1]:http://www.npr.org/blogs/parallels/2013/10/28/234587002/for-...
I may be a reluctant Bitcoin user sometime in the future, but attempting to profit from its price movements is an inherently risky business, especially given the legal and tax grey area it entails in many parts of the world.
If I'd held on to the BTC I bought in 2011 it'd be worth £20k right now, but I'm still glad I didn't, for all these reasons
Edit:
The easiest way back then was to try to figure out how to install the GPU miner and then just hope that the block difficulty did spike because everyone else was doing the same thing. When I wen't back to start selling bitcoins when it started going north of 50 bucks a coin, it was too easy, Mtgox did a direct wire to my bank account and I was limited to a certain amount per day or month (can't remember).
As for buying it now: Right now the bet is whether or not you think that bitcoin will survive governments worldwide trying to clamp down on it and whether or not you think it will scale to billions of transactions a day. I put the first one on about 10% chance of happening and the second one on about 30% chance of happening, so about 3% chance total. If it hits that 3% the maximum I think bitcoin could be worth is about ten million dollars a coin ($10k average purchasing power for a couple billion people). So I made my profit already (on my original bet that it would gain momentum, which it has) and now I'm riding a decently likely (given the payout) lottery ticket.
$10,000,000 x 21,000,000 = $210,000,000,000,000
Does the world even have that kind of wealth?
Or even better http://bitcoincharts.com/charts/mtgoxUSD#rg2zig15-minztgOzm1...
In any case, why not quote the highest volume exchange, BTCChina? It's usually Gox price or slightly higher.
/edit Hint: You could always start accepting bitcoin payments. the long term trend seems to be up. There is still money to be made from speculating on this without selling your house for BTC.
Typical hater...
> Has there been any advance in finding flaws in Bitcoin already?
No. So far we just have people who only understand Cryptography, or only understand Game Theory, or only understand Economics, or even none of those, creating inflammatory blog posts on why Bitcoin is doomed and should die any minute. But the reality is... Bitcoin users not affected!
I have a few bitcoin and I believe it is a legitimate currency, but I'm feeling uneasy with the 'this time it's different' reasoning which is supposed to justify its current runup.
Amazon reviews aren't being particularly helpful; there isn't a book that stands out in my searches so far. I'll probably order 'Manias, Panics and Crashes' by Kindleberger & Aliber ( http://www.amazon.com/Manias-Panics-Crashes-History-Financia... )
EDIT: Thank you all for your excellent suggestions!
https://www.youtube.com/watch?v=qHUPPYzzZrI
http://www.amazon.com/Devil-Take-Hindmost-Financial-Speculat...
http://www.gutenberg.org/browse/authors/m#a516
Good chapters on tulip mania, the original South Sea bubble, Mississippi company, the introduction of paper money and hyperinflation in the French ancien regime.
Bonus fun on "Influence of Politics and Religion on the Hair and Beard", duelling, and "Popular Follies of Great Cities" (which were basically memes long before the internet).
http://www.econ.yale.edu/~shiller/books.htm
Fiat Money Inflation in France is an interesting short outline of a currency which goes horribly wrong due to being debased (opposite problem to bitcoin):
White describes a disillusioned public who, under the influence of increasingly self-serving public officials and orators, accepted more and more assignat printings even though the perils of such printings had been documented throughout history...
Bitcoin is interesting because it has this hard limit, which means in theory it will reach a point where no more currency is made, and thus it is relatively stable in value. Until them though the value of it will ramp up in relation to real goods and other currencies (deflation). It's a really interesting experiment, though it does heavily reward the initial investors and skews it towards being an investment (and a bubbly one at that) rather than a currency, at least till the hard limit is reached.
I do find the question of whether the public could be persuaded to just up the limit and print more bitcoin interesting - I suspect if we had bitcoin as a world or national currency, just like assignats or other currencies, people could be persuaded to print more or otherwise bend the rules for the good of the nation/world/economy.