[dclusin]

Probably. To understand price changes it's important to consider how they change.

Price movements occur as a result of a buyer or seller aggressing into a market and submitting an order such that the parameters of the aggressor's order match the opposite sides unfilled orders. This process is typically referred to as order matching. If a buyer aggresses into the market and matches against unfilled sell orders the price increases because they have removed the lowest prices from the order book. If a seller does something similar the price will drop because the highest prices have been removed.

Another reason price movements occur is because people are also reacting to the market and trying to predict where the market is going. As a consequence they will either enter the market at an off market price attempting to predict it, or cancel their outstanding orders and re-price them. But this is another topic entirely and I will leave it out as it's pretty complex and my understanding of that topic is newb level at best.

The second thing to consider is the why. Why do price movements occur? Mainly because people are consuming information and trying to predict where the market is going. For other assets such as FX & commodities there are non-speculative market participants who buy and sell based on their business need. An example from Foreign Exchange is a company such as Google having a stockpile of dollars and needing to pay employees in euros. The end result of these non-speculative market participants is greater price stability because they are always buying or always selling, not because they want to, but because they have to. But since bitcoin is largely a speculative currency (the majority of bitcoin trading volume is the result of speculation, not legitimate commerce) the news has a disproportionate effect on it's prices.

My 2 cents say that this will temporarily depress prices but they will quickly recover because someone such as myself recognizes that those bitcoins haven't entered the market, so nothing has really changed.

[minimax]

You seem like someone who knows something about markets and you accept that there are very few, if any, natural buyers of bitcoins, and that the price of bitcoin is largely driven by speculators. I'm just trying to understand how you think this thing doesn't end up at $0 some day in the not too distant future.

[dclusin]

The only three events that could send bitcoin to $0 are, in my opinion, if people stop using it and decide that it's worthless, the encryption scheme or peer to peer network are some how compromised, or all nations simultaneously outlaw it. However the last one would only serve to send it near zero.

Consider if all governments outlaw it simultaneously. The market participants currently consist of free market type enthusiasts & hobbyists, rich celebrity speculators, drug dealers and cyber criminals. I think it is a fair assumption that most of the active traders are currently from the hobbyist & enthusiast category. Additionally when you consider that places like Silicon Valley and other hubs around the world have a large proportion tech savvy workers who make a lot more than subsistence wages, it's not too hard to see how some sort of speculative market could continue to lumber along without much reason for existence. Look at sports betting and horse racing.

If the government were to come out and drop the hammer, however, I think most of these people (myself included) would vanish. The volume would dry up and the only people left in the market would be criminals and people with a hard requirement for virtually untraceable digital currency, prison be damned. My opinion is that these people would continue to remain using it as a means of commerce and store of value provided that the underlying cryptography & p2p network remain sound and un-compromised. There are currently millions of bitcoin in existence so a price of near zero would probably satisfy the black market. How does $3 sound as a reasonable number that readers can use against me in the probable event that I turn out to be wrong 5 years from now?

Of course this all relies on the underlying cryptography and associated peer to peer network remaining sound and trustworthy. If a party is able to compromise the underlying encryption or execute a double spend by attacking the network then trust in bitcoin as a finite commodity would be irrevocably destroyed. No one would ever use it, thus a $0 price.

The utility of bitcoin is just too hard to ignore from a commerce perspective. It's taking away authority and power from banks to act as gate keepers to their countries finical & economic system and putting it in the hands of the people who engage in commerce themselves. I don't believe banks will cease to exist as some of bitcoin's most ardent supports hope it will, but the transaction costs for international business could drop substantially. Barring bad news on the legislative or technology front the only thing stopping bitcoin from gaining greater adoption is that too many people are psychologically fixated on an individual bitcoin. Bitcoin is sub divisible up to 8 decimal places, the vast majority of people who have heard about bitcoin that I have talked to do not realize this. Since the total number of bitcoins is fixed at 21 million this yields a total number of theoretical units of currency of 210 trillion. That's a pretty formidable island on which to create a base of trade on.

[dclusin]

My math is wrong for total number of units of currency. It should be 2.1 * 10^15, which is 2.1 quadrillion. At the height of the financial crisis the notional value of all Credit Default Swaps was ~640 trillion.