Fraggle: Not so fast, I'm talking about economic fundamentals here.
A response to this is a good way to transition into my explanation of bitcoin's fundamentals as a currency.
As I said in a previous Bitcoin thread - it's a bubble. You'd be better off putting your money into tulip bulbs, when the dust settles you will at least have something pretty flowering in the garden.
Bitcoin prices have been in decline since China's central bank banned financial institutions from trading in that virtual currency, it's apparently a popular means of smuggling money out of the country.
You're right about it being a bubble. A bubble by trading definition is a fast valuation of a commodity fueled by speculation, and often leads to correction. Most users of bitcoin at this stage are speculators like me. In order to have real value (beyond a speculative stock/commodity), bitcoin must have the widespread ability to be traded for usable goods, right? And it does, at an increasingly exponential pace.
What determines it's value? Math. Metacafe's law. In practice, BTC's value has almost perfect correlation with the square-root rate of transactions per time period:
The numbers suggests that bitcoin's value increases in accordance to the rate of transactions, like any currency. Bitcoin's transactions gives it money velocity, which in turn determines its speculative value.
As the market capitalization rises, it becomes visible to businesses which then in turn accepts bitcoins. This is where the bitcoin transaction stops being a speculative bubble, and becomes a currency of tradable value.
Why would any business choose bitcoins over dollars, or any fiat for that matter? No fear of chargeback, counterfeit, getting physically robbed, credit card fees / overhead, and ultimately, because of increasing BTC customer demand.
This is pretty straightforward, if not for BTC's legendary volatility, the public's distrust of things they don't understand, and flat out government bans (China).
In spite of uncertainty, not everyone is deterred from adopting bitcoins. Libertarians looking for a way to decouple their money from the gov, venture capitalists, tech geeks like myself, and a few other groups braves the darkness and decides to give it a go! Here are some of the more recent adoption news:
- Overstock accepts bitcoins
- Square marketplace accepts bitcoins
- Chicago Sun Times accepts BTC
- BTC now on Bloomberg
- Winklevoss twins to list BTC on NASDAQ
In the face of all these groundbreaking news, the public is still skeptical, and for good reasons.
There exists extreme information asymmetry between bitcoin owners and non-owners. Proportional to the population, very few people know about bitcoin, and even fewer about its properties as a payment system.
In the beginning, during the first boom of 2011, the number of people who heard about bitcoin including myself was in the millions. The witnesses during the 2011 events propelled the boom in 2013 because their average decision making time takes several years. In 2013, hundreds of millions of people heard about Bitcoin when its valuation past $1000.
On average, a small percentage of these people takes several years to enter, but there are so many of them! There are literally millions of people out there who will eventually adopt BTC, and by doing so, their action increases the price again in the subsequent years, letting the rest of the planet hear about it and putting hundreds of millions of people in the pipeline.
The bust-and-boom cycle of bitcoin follows this logic precisely, the numbers of adopters comes in waves. There will be technical as well as regulatory hurdles in the future, but if the fundamentals are as I observe, we are witnessing the formation of a new monetary system that will change the world.
If it is just a speculative bubble, it's final value will approach zero. If it has value in trading for goods, then it's market price will rise in reflection to its utility. That is my take on the fundamental of bitcoin economics.
Like Graf Zahl stated, it is a gamble at this point. Only history can verify if my investment decision is sound or not.
Last edited by Doom Marine on 05-09-14 at 08:41