[graeham]

Does anyone have a link or justification in anyway for the rise in the conversion rate? I like the idea of an independent (non-government), secure currency - but I can't see this as anything other than a speculation driven investment vehicle. Seems like tulip mania to me [1].

Also, is there any management of Bitcoin to prevent excessive currency fluctuations? Not having this would seem to be a flaw to me - you can't have an exchange-based economic system without some expected stability in the value of the exchange.

[1] - http://en.wikipedia.org/wiki/Tulip_mania

[aneth4]

It's hard to say. There are many who justify prices far higher based on future adoption. Adoption is picking up at a remarkable rate.

The USD money supply is around $3T or $10T, depending on whether you are counting money multiplied by leverage. The US GDP is $15T. If we presume that a currency then should be on the same order of magnitude of money supply as the GDP or transaction volume, it's not hard to project a $100B+ supply of bitcoin. With the supply currently at $2B, there is a lot of room to grow. I have no idea if this analysis is reasonable, but I suspect it is close to the "story" behind the bubble.

Of course all of this presumes that bitcoin will prevail as the leading crypto-currency, regulatory hurdles will be surmounted, and the currency remains secure. Those are not implausible ifs. In fact, I'm a big believer in the future of bitcoin, even if it is getting a little ahead of itself.

I anticipate a significant collapse at some point, regardless of the success of bitcoin. That crash may very well be from $1000 to $200 though.

[dragontamer]

http://blockchain.info/charts/n-transactions

The number of bitcoin transactions per day has remained roughly constant since February. The price of Bitcoins however, has risen by 1000%.

Do you have any evidence to suggest that people are actually using Bitcoins? Because the hard evidence I've got seems makes it seem like Bitcoins are getting traded like crazy, but not necessarily used.

[aneth4]

For one example, BitPay is doing quite well:

http://www.dailydot.com/news/bitcoin-legal-sales-higher-ille...

[dragontamer]

And my statistics include all of BitPay's transactions, since every bitcoin transaction has already been included in my graph.

Bitpay may be growing, but Bitcoins in general are not.

[Diederich]

I've been asking my friends what they would consider the threshold for BTC to be considered a 'serious' global currency. We agreed that if it had $1T USD equivalent value, it will have arrived.

So, 22M BTC valued at $1T USD comes to $45K USD/BTC.

I have invested less than two thousand dollars into BTC. I consider it an epic gamble, but honestly, not an enormous one.

On the other hand, if BTC does 'go long', I could very well be in 'good shape'.

Here's the other consideration: the more unstable other currencies are, the less people all over the world trust their central governments with their currencies, the more likely people will move their money to a currency with no central control at all.

BTC is indeed turning into the place you put your money when things are scary. And there's a lot of scared people right now. Whether that anxiety is well considered is a separate question, and one that hardly matters.

[dragontamer]

At what point would an airplane be considered "heavy" enough to fly? Some people agree that when its about as heavy as other planes. </sarcasm>

Asking the wrong questions is silly. When bitcoins are used, that is when they'll be a serious currency. A bitcoin enthusiast should be looking at the number of bitcoin transactions and hoping it rises.

The price of bitcoin is irrelevant to its value to consumers. On the contrary, the more stable the price, the better.

[aneth4]

The price is relevant to merchants though. It's much more appetizing looking at $2B in bitcoins than $200M. Price increases drive adoption, which drives it's value, which drives price increases. That's what we are seeing now, though not in rational proportions. Price stability is likely to affect consumer behavior, though unclear how much.

[dragontamer]

No. Speculators like looking at that value.

Merchants want the opposite. Merchants right now are pissed off because they just finished setting their prices at 1BTC per widget four months ago, but today they're only getting 0.1BTC per transaction.

Merchants are receiving less and less bitcoins everytime the price goes up. Merchants want BTC to go down, so that they can sell the same stock for more BTC.

Its like the whole thing that happened to the Japanese Yen between 2008 and today. As the Yen strengthened, Nintendo lost money. Even though the Wii was selling in record numbers, Nintendo lost revenue as the Yen grew stronger.

Similarly, a Merchant based on BTC today is making 10x less bitcoins per transaction. That is BAD for business. Furthermore, merchants are now forced to consider the highly fluctuating exchange rate as part of their business.

[aneth4]

That depends on how the transactions are structured. Most merchants new to bitcoin will not hold on to bitcoin, and only use it as a transaction currency.

I can certainly tell you from a business perspective, $2B of money supply is A LOT more attractive than $200M.

[cs702]

Does anyone have a link or justification in any way for the rise in the conversion rate?

Yes. Nearly two years ago I wrote an essay with my thoughts on Bitcoin's potential for long-term appreciation at http://cs702.wordpress.com/2011/05/29/on-the-potential-adopt... and the essay is holding up pretty well so far, particularly given the recent reported spike in adoption by people in Spain[1] and Cyprus[2].

The TL;DR summary of my argument: the more people who adopt Bitcoin as a store of value or medium of exchange of last resort, the more demand there will be for it around the world. Supply being fixed, this growing demand will be reflected in a rising price. Should Bitcoin continue to work as intended, in the long run nothing prevents it from eventually gaining as much credibility as, say, gold.

--

[1] http://www.wired.co.uk/news/archive/2013-03/20/bitcoin-spain...

[2] http://news.cnet.com/8301-1023_3-57576928-93/bitcoin-hits-re...

[dicletian]

Thanks -- this is one of the best essays on Bitcoin I've read.

[vader1]

Most Bitcoin supporters agree that there are only two possibilities in the long run: either a fundamental flaw in the Bitcoin code or economics is discovered and the value drops down all the way to zero; or Bitcoin reaches a point of global acceptation causing the value to reach way, way above 200$.

For someone who leans towards the second outcome, they see the recent rise as a 'correction towards the true value' rather than a bubble.

[rms]

If it's not a bubble, it's the first hyper-monetization. http://konradsgraf.com/blog1/2013/4/6/hyper-monetization-que...

[oleganza]

If everyone's intention is just to buy low and sell high, then it's a tulip mania. But if there are people who would be satisfied with a stable price, or price above their investment amount, or ability to buy stuff for it, then it is not just a tulip mania.

Bitcoin price was pretty stable during 2012. Some people used it as a "store of wealth". Now, you still can use it for the same purpose, but you have to bid up the price a little to take a piece of it.

[smackfu]

It's simply more buyers than sellers. And there are more buyers because Bitcoin is getting more publicity.

[gerhardi]

I'm along your lines. If I happened to have a stash of bitcoins in my pocket, I'd be very careful about actually buying anything with them today, as the next week they would be more and more valuable. So I think the deflation is the main reason why I don't feel comfortable with idea of using bitcoins as a currency for buying anything - selling might be a different story.

edit: How large volumes of selling bitcoins for USD/EUR/etc. is enough to have significant effect on the value of bitcoin? For example if I had VERY URGENT need to sell 100 000 bitcoins by tomorrow in exchange for USD.

[midnightsine]

Cashing out 100 000 BTC would crash the market down to 0 - right now the MtGox has exactly 105 708 BTC in the order book.

Cashing out 100 000 USD however is a different story. It actually happened a few hours ago, you can see the impact for yourself[1].

[1] http://i.imgur.com/cjI9ZaT.png

[aneth4]

> Cashing out 100 000 BTC would crash the market down to 0 - right now the MtGox has exactly 105 708 BTC in the order book.

All demand is not reflected in the order book. In fact, most demand is not. The more sophisticated a trader is, the more likely he is to use limit orders to manipulate the market instead of the rather stupid move of telegraphing demand.

If the market went down 10%, a flood of buy orders is not unlikely to appear.

[dragontamer]

If the market went down by 50% however, and then stayed low for an extended period (maybe two days), then a flood of sell orders will definitely appear.

It works in both directions, people who are speculating on Bitcoin will be easily spooked by a medium-term crash.

[aneth4]

Of course. Not my point though.

midnightsine is pulling his numbers from limit orders posted on MTGox. I'm saying that's not an accurate measure of what it would take to send Bitcoin to 0.

[GaryRowe]

A more sensible approach would be to take advantage of TradeHill's "dark pools" which enable very large BTC transactions to take place outside of the public order book.

[nunb]

the real test of a bubble is to see if people are buying to hold or merely flip. their time horizon is also an important consideration.

if they're buying to flip with a short horizon, it's a bubble. the first buyer to feel they might be the greatest fool walks away, and the bubble pops.

> speculation driven

speculation is a normal economic mechanism. taking risk in expectation of reward.

> you can't have an exchange-based economic system without some expected stability in the value of the exchange

yes you can. especially if the value of the currency is only going up. probably not if it's going down.

currently the ratio of stock to flow is rather high. since there is less flow available, and lots of fiat chasing it, the price rises. since the value of the currency rises, people who sell in that currency benefit (especially if they keep the difference in bitcoin).

money is a shared societal delusion. it's a giffen good, where rising price acts as a signal that more should be owned. misesian/mengerian theory requires only an initial direct barter exchange, the rest of it is bootstrapped by historical events (given certain basic properties, which bitcoin has in abundance[2]).

we are living those historical events today, thanks to the ECB & Cyprus.

at the moment bitcoin is a transient medium of exchange (usd->btc->silkroad) on both sides and a few risk-takers are betting on it holding value, where few is relative to world population. most merchants (at least thru bitpay etc) don't hold it either.

for the price to drop consistently, bitcoin-busters would have to take a large position, driving up the price, and then consistently sell enough to trigger other people's latent limit-sell orders. the problem is that naked shorting is not possible, so on the way to building large positions, they will send out the rising-price signal, which will make downward price-pressure quite hard later (aka high prices will be sticky since people's expectations have been reset). [1]

when the price gets high enough, the realization will sink in that the only way to accumulate bitcoin is to participate in the economy with one's labor (ie, sell things for bitcoin).

that's the ultimate win for bitcoin.

[1] oddly, one of the criticisms of btc, namely that Satoshi holds a significant amount, will provide downward stickiness as long as that large cache isn't sold. [2] bitcoin has a lot more properties than most other monies, principally anonymity & distance-agnosticism, and also invisibility via the use of darknets/tor

[Hermel]

A better comparison than tulips would be silver. Tulips are a bad store of wealth (they rot, anyone can grow them, are not divisible, etc), whereas Bitcoin and silver can be stored and easily divided into smaller units. It still could be in a bubble, like silver was around 1980.

http://silverprice.org/charts/history/silver_all_data_o_usd....

[jbester]

Not sure I buy either of the metaphors. Silver has industrial, scientific, and commercial (i.e., jewelry) applications that create demand and use the commodity. Bitcoin, on the other hand, does not. It's just used as a transitional currency.

[rikf]

It does have certain mathematical properties that make it rare. or at least harder and harder to produce as times goes on that leads to scarcity. And as we all know price = demand / supply

[impostervt]

More and more sites are accepting bitcoins, making it more useful as an actual currency. I detail some of the sites in a book I wrote for Bitcoin Beginners.

http://www.bitcoinbeginner.com

If you (or anyone else) would like a free copy, just email me: [e-mail]