Bitcoin prices, Bitcoin inflexibility

Tuesday, 12 February, Year 5 d.Tr. | Author: Mircea Popescu

knotwork Seems likely at $32 people will worry that higher might be "just a bubble", and of course some folk will be already thinking it *is* a bubble, so likely should slow the climb around there.
ThickerThanThiev Just the fact that we're noting $32 means it's obv people will get skittish at that point.
Bugpowder Nah. This move will violently reverse at some point. Retrace 25-50%, bounce, resettle... who knows how high.

The guy's pretty clever and he has a point : if you mentally model what would happen when infinitely elastic ball X hits infinitely heavy wall Y, the result would be precisely what he describes : bounce, then resettle, another bounce, sort of bouncy-track the "inherent value" with a probably harmonic series of bouncy amplitudes.

The problem is that the system described has precisely nothing to do with the practicalities of Bitcoin. Admitting to begin with that the price of anything - even Bitcoin, WoW gold, Diablo 3 gold and other game currencies - is a result of the interplay of their respective supply and demand, let's look into things.

On the dollar supply side, the basis is currently tiny. MtGox reports something to the tune of 1mn USD being brought to the market each day. If we don't bother to notice that likely a large section of that is speculative rather than bona fide USD added to the marketi and if we count MtGox at about 50% of the total exchange market (which may be overstating it but more likely is understating it) we're looking at something to the tune of half a billion dollars yearly.

During that same year gambling in the US alone will have involved something to the tune of 100 billion, or two hundred fold. The total of all McDonalds meals served in the US will have come to about 25 billion, or fifty fold. The Walt Disney Company made about 40 bn from operating its parks and theatres, so that's about 80 fold. And to top everything off, we don't even know what the notional size of the derivatives market is even, but people close to the virtuality guess it must be something over 1`000 trillion (that's two million fold).

So, leaving MPEx out of this equation entirely, if just one percent of discretionary spending is redirected from hamburgers, disneyworlds and one arm bandits to Bitcoin, that's a 3.3x increase of total supply side (330%). If this shift doesn't happen during the course of a year, but during the course of two weeks the momentary supply side spike is more like 85x (8`500%). If we count MPEx into the story we're already discussing 1000x's (ie 100`000%) even if instead of percents we're looking more at tenths and hundredths thereof.

On the Bitcoin supply side, conversely, things look quite grim. Up until recently Bitcoins were generated via mining at the rate of about three million a year. Starting with the current year mining rewards halved, which means yearly Bitcoin generation is 1.3mn tops. Out of this, a fraction between a third and a half will have to be sold to pay operational costs of the miners - so about 600`000 Bitcoins are meeting the market this year (although part of them are possibly meeting the market straight in the pockets of their owners, who bought mining gear in the first place to acquire Bitcoins, so they've paid for the rigs and electricity in fiat, are registering the tax-deductible loss thereof and keeping the Bitcoin).

Other than this ~4% of the Bitcoin monetary mass, there may be as much as maybe 10ish% that is looking for dollars for whatever reasons. Then again, that 10ish% could be as low as 1%.

Now let's remodel : what happens when a 300% increase on the supply side meets a 5% increase in the demand side ? There's pretty much literally nothing those extra dollars nobody wants can do to increase the Bitcoin supply. It's very, very inelastic, and consequently the only stability point is when equilibrium is reached. Two billion dollars divided by 600`000 Bitcoins comes to three thousand dollars and change per Bitcoin.

Will people stop throwing dollars at Bitcoin because Bitcoin prices in dollars are rising ? No, they will not. If anything the converse is more likely. Will people start throwing Bitcoin at dollars because Bitcoin prices in dollars are rising ? No, they will not. If anything, the converse is more likely.

There will certainly be psychological backlash, in the sense that consumers are trained from infancy to get what they want, and so the reaction to badmouth whatever ignores their precious will and desire is quite strong. Nevertheless, the pressure is unyielding : people holding Bitcoins have no practical incentive to get rid of them, and people trying to get rid of their increasingly worthless dollars have no recourse.

This impasse has a few possible solutions.

One of them is that consumers yield and submit, Bitcoin goes to somewhere in the thousand dollars per range and there's a rush to move society away from the dysfunctional standard. Banks start taking Bitcoin deposits, Bitcoin hedge funds pop up everywhere, the FED chairman, ECB chairman and everyone else come to Timisoara whenever they want to make a move to obtain my blessing and so forth.

Another one of them is that consumers revolt, governments intervene, we all spend the remainder of this decade fighting with each other. Bitcoin also goes to thousands of dollars per, but the energy, effort and resources which could have been expended on comfortably yielding and productively submitting are wasted in an ultimately doomed effort to play tough on a weak hand. Neutral and unengaged governments win, and as the dust settles the balance of macroeconomic power has shifted from the Western world to whatever, China, Iran, Brazil, what have you.

Yet another one of them is that consumers revolt, entrepreneurs intervene, before the end of 2015 there's about a thousand to a million different Bitcoin forks, each with its ten million-ish monetary base worth about a dollar, on global average. The size of the inter-Bitcoins market, the complexity and confusion ensuing makes pretty much everything unmanageable for the "ordinary person". Hedge funds and banks (the ones a little ahead of using Excel) that trade in this murky complexity make a killing and become the principal driver of economic growth worldwide. Not only is the consumer about as screwed as is currently the case, but to everyone's benefit he has just been clearly proven yet again that revolt = being fucked in the ass harder, longer, with a thicker implement with sharper barbs on it. Also conveniently, the thing to revolt at has become much more vague and intangible. On the balance of probabilities this would seem the most likely outcome, strictly because history unerringly flows in that direction which most cruely rapes the "average person".

Yet another one of them is that everyone goes to bed, sleeps well, wakes up and all about Bitcoins is somehow forgotten, like in a fairy tale. This would seem about as improbable a scenario as proposing that people were going to forget all about the Youkon gold rush sometime after the first newspaper reports of the 49ers' success, but nevertheless, who knows.

Go ahead, make your bets, I'm curious even.

  1. If someone buys and sells a bitcoin ten times during a day that'll look like two hundred and more dollars were added to the supply side, but it wouldn't be the case at all. []
Category: Bitcoin
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50 Responses

  1. I would note that my stated expectation is for the next few weeks of price action. Long-term, I expect it will either continue to appreciate significantly, somewhat in line with the above proposal, or blow up in a catastrophic failure.

  2. Mircea Popescu`s avatar
    Mircea Popescu 
    Tuesday, 12 February 2013

    Yeah I guess that's a big point completely glossed over. If critical encryption assumptions are proven false tomorrow it's back to the drawing board across the board.

  3. Your analysis of the supply and demand aspects are unimpeachable with respect to people who want to hold bitcoin as a store of value.

    However, a rapidly rising value should make people reluctant to use them for commerce - preferring to sensibly hold them instead and spend their devaluing fiat first. How do you think this will play out?

    Perhaps merchants will give bitcoin a discount over fiat which factors in the expected rise? Sort of the opposite of what merchants do when accepting a rapidly inflating currency.

  4. Mircea Popescu`s avatar
    Mircea Popescu 
    Wednesday, 13 February 2013

    On one hand, I don't think there's much commerce going on at all. There was that grill shop in New York a year or so ago, meanwhile it went out of business. I bought a pair of Bitcoin-themed cufflinks some months ago. You could, I guess, buy pizza through that new service recently featured by the BBC, but I don't see why you would.

    On the other hand the idea that Bitcoin is a practical or useful payment processor for small payments seems outlandish to me for reasons of business strategy, or to quote

    Honest toil not so much, but honest cunning aplenty in this fabled subsection of the population, the offensively stupid poor. The costs of the strategic mistake of dealing with them are huge.

    Up until recently it was practically impossible to become embroiled into any sort of dealing with the subgroup, their ownership being strictly assumed and their lives strictly subsumed by the corporations competent at dealing with the human cattle : fastfood providers, supermarkets, the government. Both as employers and providers these specialised bureaucracies have the necessary tools, including cattle prods (or whatever they’re called now, non-lethal something or the other) to correctly handle them. They have the chemicals, they’ve done the research, know the behavioural patterns, have the walls all built to obstruct vision, living arrangements all thought through and everything.

    Bitcoin suddenly opened the gate. It is a poisonous offering. You are grossly unequipped to interact straight with the refuse of Western society.

    I don't think it's either practical nor feasible nor even desirable to use Bitcoin in the day to day dabble of pizzas, phone credits, hairspray and sneakers. People try to, because of the misguided belief that Bitcoin value is somehow related to or deriving from its crossection in the retail market. This happens to be completely untrue : you can't buy any pizza with SDRs, and yet that doesn't somehow make SDRs worthless. The belief itself may be a case of "everything appears a nail to the man holding a hammer", in the sense that people who have never interracted with any other aspect of economy besides the supermarket counter may genuinely imagine that's what economy is. Still, that makes no difference.

    On a third hand, from a technical perspective Bitcoin is neither designed to nor capable to support retail level transactions. The credit card processors (Visa, Mastercard, AmEx etc) cleared something to the tune of one billion transactions in 2010. At an average size of a very conservative 600 bytes per transaction that would have added 600 Gb to the blockchain. At roughly 1% of that for its entire 4 year history Bitcoin is already too heavy, causing serious problems for people trying to start a new client. Moreover the year of 2010 contained about 50k blocks, which at most may carry 1 Mb each : even if each block was full Bitcoin could have at most carried 10% of that sort of volume.

    For the reasons noted and for many other reasons I am pretty much satisfied that Bitcoin is not nor will it ever be a direct means of payment for retail anything. You may end up paying for a month's worth of coffee vouchers at your favourite coffee shop via Bitcoin (so shop scrip built on top of Bitcoin), you may end up settling your accounts monthly at the restaurant in Bitcoin (so store credit built on top of Bitcoin), you will probably cash into whatever local currency from Bitcoin (be it Unified Standard Dubaloos or Universally Simplified Dosidoes or whatever else) but all that is entirely different a story.

    All this aside, Gresham's law has been known for over five centuries and it applied without exception much earlier than it was known. So yes people will gladly spend their worthless fiat and gladly hoard their valuable Bitcoin, but this is not really a point of concern. Quite the contrary, it's exactly how things should be.

    This may also be relevant : What are the Bitcoin market drivers ?

  5. Paul Troon`s avatar
    Paul Troon 
    Friday, 15 February 2013

    Gresham’s law does indeed explain it and your point about block-chain based problems is also interesting.

    Another way to look at it might be to compare the exchange of bitcoin to the exchange of physical gold in a gold based economy.

    Even if initially people handed around pieces of metal, eventually gold-backed bank script became the norm and then national script. Using gold to settle international imbalances would be like using bitcoin to cash in/out of different use-scripts.

    Your contrarian views are, as always, greatly appreciated.

  6. Mircea Popescu`s avatar
    Mircea Popescu 
    Friday, 15 February 2013

    I imagine the idea that Bitcoin will "kill" fiat is muchly an exageration. Bitcoin needs its silver to do its legwork. Getting back to the email-post office analogy, the advent of the Internet brought about the email, which "killed" the post office except not really, and then a few years later the same Internet brought around ecommerce which... doubled, tripled, reinvented the post office. Nowadays a large section of commercial distribution is handled by the post office and its competitors. This isn't something the catalog sellers of the 1970s could have ever accomplished, and for that matter no government could have *paid* anyone in 1970 to start a post office competitor, simply because there wasn't any market demand. Now there's enough market demand for dhl, fedex and usps to all do business somehow.

    Bitcoin will bring about new life for fiat, which currently has no other alternative of surviving. In the process it will quash the monopolistic government license on it, sure, but everyone will be happier for it. Including the government, probably at the top of the list. Contrary to what our conspirationist friends think, running a currency is a huge pain in the ass. The bureaucracy is stuck with it currently, but wouldn't mind being liberated in the least.

  7. angelina`s avatar
    Sunday, 31 March 2013

    The Rise Of Bitcoin What Is It And Is It Worth It? | Bitter Bananas

    Bitcoin is starting to get very popular these days, but still the majority of people know nothing about it. It is considered as one of the best investments you could have made, because of its’ massive price jump over the last year.

    So what is Bitcoin?

    This article best describes the overivew of Bitcoin, which is largest online used digital currency in online world.

  8. gheorghe`s avatar
    gheorgheinsigna de tehnologinsigna pentru 1000 de comentarii 
    Thursday, 4 April 2013

    Well, If I had bought about $1000-2000 worth of bitcoin back when they were $2-3 (and it wasn't that long ago) fosure I would have sold them when they reached $15 or something, if not sooner. If I kept them until now, I would have definitely sold them at $40. $150 is like winning a jackpot. That's buying a house with $2000, of course you're going to sell...

    The thing is, even if you don't destroy the evil fiat empire, life gets at least twice as good if you don't have to pay a mortgage or rent. And if you don't take this opportunity, what are you wanting for? To become a BSDM bitcoillionaire? :P

  9. gheorghe`s avatar
    gheorgheinsigna de tehnologinsigna pentru 1000 de comentarii 
    Thursday, 4 April 2013


  10. Mircea Popescu`s avatar
    Mircea Popescu 
    Thursday, 4 April 2013

    And yet I'm not selling. Because the sort of people who actually buy Bitcoin by the thousand back when it was 2 and 4 and 10 don't really need fiat whether Bitcoin is 100 or 100`000. The sort of people who were looking but not buying are thinking about what'd it be like, but that's not really of much practical importance.

  11. gheorghe`s avatar
    gheorgheinsigna de tehnologinsigna pentru 1000 de comentarii 
    Thursday, 4 April 2013

    So people who look for where there's money to be made don't count, but mindless fools with "bitcoin rocks" tshirts are the future? :)

  12. Mircea Popescu`s avatar
    Mircea Popescu 
    Thursday, 4 April 2013

    Your reading. It is broken.

  13. gheorghe`s avatar
    gheorgheinsigna de tehnologinsigna pentru 1000 de comentarii 
    Thursday, 4 April 2013

    Well, thanks for pointing that out. Your writing is pretty fucked up and I don't expend too much energy for things that aren't really worth it. The same with bitcoin, it's pretty hard to actually get $1000-2000 into some shitty exchange in order to buy the stuff, and by the time the money gets there they'll probably be double the price.

    I'm really looking forward for another crash, but with the stupidity floating around bitcoinland it will probably be overvalued forever.

  14. gheorghe`s avatar
    gheorgheinsigna de tehnologinsigna pentru 1000 de comentarii 
    Thursday, 4 April 2013

    Meaning that I expect a SLOW decline into irrelevance or something like that.

  15. Mircea Popescu`s avatar
    Mircea Popescu 
    Thursday, 4 April 2013

    Listen douchy, it doesn't work that way. You're still you and I'm still me, all posturing aside.

  16. gheorghe`s avatar
    gheorgheinsigna de tehnologinsigna pentru 1000 de comentarii 
    Thursday, 4 April 2013

    Good luck with that.

  17. Vexare`s avatar
    Friday, 5 April 2013

    floating around bitcoinland it will probably be overvalued forever.

    You seem to hate this now profitable ponzi for not investing earlier.

  18. Garfield`s avatar
    Friday, 5 April 2013

    Deci a) vii aici sa "discuti", desi b) nu vrei sa depui energie ca sa intelegi ce citesti, insa c) tot tu esti ala care a castigat cand ti se transmite ca n-ai inteles nimic. Brava mei, esti fix ca un tigan care-si declara valoarea lui inegalabila, desi e un coclit adunat de prin conducte.

  19. Mircea Popescu`s avatar
    Mircea Popescu 
    Friday, 5 April 2013

    Nuca nuntelegi tu. El are de fapt dreptate, cit timp sta cu puletii lui la o bere. Pai ce mai conteaza ca se pisa toata omenirea fix in sticla lor ? Prost sa fii, tovarasi sa ai, restu' ie bun cum ieste.

  20. Porodica saltareata`s avatar
    Porodica saltareata 
    Friday, 5 April 2013

    Toata lumea sa mai traga inca un loz.

  21. Mircea Popescu`s avatar
    Mircea Popescu 
    Saturday, 23 November 2013

    Re-reading this stuff nine months later... wow.

  22. Sean William`s avatar
    Sean William 
    Friday, 7 February 2014

    “It is considered as one of the best investments you could have made, because of its’ massive price jump over the last year.” - This is one of the reasons why many people are jumping into this bitcoin bandwagon. They see a positive future for it.

  23. melodee_swanton`s avatar
    Sunday, 19 April 2020

    Simply want to say your article is mindblowing. Thank you a million and please keep up the good work.

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