Could someone explain the logic behind the price drop? Is that related to the fact that those 30k will be sold below the standard price? For some reason it seems counter-intuitive for me, since the money connected to those coins have been already paid once (whether for mining them or via exchange). So in practice it's more like they've been actually paid for ~twice now, so the effect "should" be opposite.
There is no logic. Searching for logic behind bitcoin's price is a fool's errand. You'll trick yourself into believing things that aren't true, because the price of bitcoin is determined by a small number of large players. Those large players enter or exit the market for any reason they feel like. It's gambling, plain and simple. News announcements serve as a trigger for the gamblers to initiate gambles (exit/enter the market).
Until bitcoin achieves a critical mass among both consumers and merchants, searching for reasons for a price drop or jump may as well be numerology.
The trouble with opinions about the price of bitcoin is that they're very hard to disprove, because no one is privy to the information that's causing the price fluctuations except the people causing the price fluctuations. But remember, that's my point: you won't ever know why the price rises or falls. It's beyond your knowledge, unless your friends include those who are actually moving the price.
Until the price of bitcoin is determined by more than a couple hundred people, you simply cannot reason about its price in any meaningful way. Even talking about "downward price pressure due to mining costs" is mistaken at this point. The price of bitcoin is a function of the whims of those couple hundred people.
There is logic. All speculative trading is driven by two motivations, fear and greed. The balance of these two decides the price.
Before this announcement the balance was about $650. It means that greedy people think it will go higher than $650, and fearful people think it would go lower.
Now comes this announcement. About 30.000 bitcoins wil sometime in July come into the hands of someone who will have paid significantly below market rate for them.
Is this good news or bad news for the market? It's bad of course. In the most optimum case, the buyer will keep the bitcoin, and the market won't move at all. In the worst case, the buyer will sell all the bitcoin the second he receives the bitcoin.
Between these two extremes there is a range of possibilities, but you can see that the range is from 0 to negative something, so overall we predict a negative outcome for the market.
So, the fearful people will become a little stronger, and the balance will drop accordingly.
Is this good news or bad news for the market? It's bad of course.
This is exactly what I meant by "you'll fool yourself into believing things that aren't true." You cannot reason about the price of bitcoin in terms of fundamentals. Not right now; not when the price is a function of a few hundred people (some of whom are maliciously manipulating the market).
I've been closely watching how the price of bitcoin reacts to announcements since mid last year. The price goes up? People come up with a reason that makes sense. The price goes down? People come up with a reason. The price has gone down; you've come up with a reason, and lo, it seems to make sense. Except none of these reasonings make any sense whatsoever because the market isn't logical. It doesn't pay any attention to your theories, or mine, or anyone else's. The price inexorably follows from the actions of fewer than a couple hundred people, almost all of whom are trying to prey off each other. That's the game. Buy to raise the price; sell after others follow your lead.
You can craft a theory that makes sense for any possible upswing or downswing. But what fools we were to think our theories mattered back in November, when the price was almost entirely due to Mt. Gox's market manipulation!
My opinion in this matter has been forged by the heavy hammer of experience. Don't make my mistake; don't delude yourself by having the hubris to think you alone can reason your way around an irrational gambler's market. Here's how it will go. You'll make some money, and you'll feel smart and elated. Then you'll risk a little bit too much on your "insight" and watch as it crumbles beneath your feet and you lose some money. But not too much; you're smart, after all. But then you'll hear stories of others who have fared Bette than you, and you'll start to get a bit jealous. It's just a matter of experience, you'll tell yourself. I'll do better now that I know not to do that again. So you'll try a new, more insightful theory. A theory based on sound fundamentals. And then you'll make a bunch of money, and you'll think you've got it all figured out. So you'll wager even more on your theory (which, somehow, everyone else has seemingly overlooked, but Nevermind that, our theory is based on logic so it must be correct!) and then when the market's irrationality catches up to your reality, you'll lose big.
Greed does indeed drive the market. And greed doesn't play by fair or logical rules.
This is exactly what I meant by "you'll fool yourself into believing things that aren't true." You cannot reason about the price of bitcoin in terms of fundamentals.
Wherever there is perceived value, you can reason about fundamentals, it is just how the world works.
But what fools we were to think our theories mattered back in November, when the price was almost entirely due to Mt. Gox's market manipulation!
You invested in a time of great volatility, and got hurt. That doesn't mean the game is broken. That MtGox manipulated the market is irrelevant. If something appreciates 10x in 3 months, that's volatile and it's your fault for investing when you did not know the full reason behind that volatility.
I don't say "It's bad of course" as some sort of guess, it's pure logical reasoning. I am not saying it is necessary that the balance goes down. Combine the information of the logical effect of this event with the actual effect that lies in the past and you can say that there was a likely relation.
I think you're mistaken about what a "fundamental" is. Bitcoin is speculation. It's also the kind of speculation where you'll never be able to logically deduce the expected outcome, because you'll never have the proper information to make correct decisions (unless you're friends with someone like Karpeles).
Here's an example of a fundamental:
By looking at the economics of a business, the balance sheet, the income statement, management and cash flow, investors are looking at a company's fundamentals, which help determine a company's health as well as its growth prospects. A company with little debt and a lot of cash is considered to have strong fundamentals.
There are more kinds of fundamentals, of course. But all of them have a common theme: publicly available information, or logical reasoning (which depends on having publicly available information).
Bitcoin's market value is determined by insiders who hide all information from you. Therefore, there are no fundamentals right now. Not until the price is determined by something other than people like Karpeles.
You invested in a time of great volatility, and got hurt. That doesn't mean the game is broken. That MtGox manipulated the market is irrelevant.
I doubt most investors would agree. Gamblers, perhaps, since at that point "the game" is literally gambling, not investing.
Your scenarios smells wrong to me. Why would anyone pay USD for these seized BTC, then turn around immediately and sell them for USD again? The government is the party dumping BTC on the market. The buyer presumably intends to profit. They would profit by holding until the price goes up, and selling into the market at rates that don't dominate the marketplace.
> There is no logic. Searching for logic behind bitcoin's price is a fool's errand.
The logic is that people (or algorithms that people put in control of their bitcoins) offered to sell bitcoins at a certain price, and other people (or algorithms) decided to accept that offer. One side decided that they prefer x USD to y bitcoins, and the other side decided that they prefer y bitcoins to x USD. So they agreed to swap. That is precisely the same logic that goes into literally every commercial transaction.
To look for some concise one-sentence explanation for the aggregate preferences of a bunch of people, however, is a fool's errand. And that doesn't change when "more than a couple hundred people" are trading.
people offered to sell bitcoins at a certain price, and other people decided to accept that offer. One side decided that they prefer x USD to y bitcoins, and the other side decided that they prefer y bitcoins to x USD. So they agreed to swap.
This is tautology, though. It's just the definition of a market.
The couple hundred I refer to are those who (a) have thousands of bitcoins, and (b) enter and exit the market with some frequency. Those are the people who determine the current price of bitcoin. I say there are only a few hundred of them because bitcoins have been distributed according to a power curve (as is all wealth), and those few hundred are the ones who have the temperament to wager large sums of money on a monthly, weekly, or daily basis.
When one of them decides to exit the market, the price drops noticeably. When one of them decides to jump back in, the price jumps noticeably, causing others to follow their lead and buy in, which drives up the price even more.
If you have currency equivalent to thousands of bitcoins, you can place a large buy order, which triggers a price spike, which causes some upwards "momentum" because a bunch of other people will feel pressured to enter the market due to your large buy order, which of course makes the price rise even more; hence, momentum. Gamblers with thousands of bitcoins can take advantage of this phenomenon to grow their holdings: place a large buy order, wait for others to follow your lead, then sell. It's obviously not guaranteed to work, but nonetheless that seems to be what these gamblers are doing.
Announcements serve to trigger a bunch of these "gambler whales" into action all at once, so you get large fluctuations in price. But there isn't a fundamental reason for this price drop beyond the game theory presented above. The claim that the price movement is based on underlying fundamentals or logic simply doesn't match the available evidence. Evidence thus far indicates that the price fluctuation is due to a combination of market manipulation and gamblers with thousands of bitcoins actively trying to hoodwink their fellow gamblers.
Of course it's the definition of a market. Why is that a problem? Nothing in your comment contradicts what I said, although I don't agree with everyone you said.
That's an interesting understanding of how currency works. There is no currency connected to bitcoin. There is an exchange rate. Someone out there willing to give you X dollars for Y bitcoins. (Consider the concept of X dollars for Y barrels of gas, or Z oz of gold).
Money is used multiple times. The dollar you spend at the store is then split up and spent again, and again, and again. So the value of the whole currency is what is important, how much buying power the currency you have is based on how many dollars there are, what they can be spent for, how often they are spent, etc. By offering X dollars for Y bitcoins, what people really mean is: offering x% of all the dollars for y% of all the bitcoins.
This sale adds more bitcoins (because portions of the markets believed them unrecoverable, and they haven't been in circulation for a while), so Y bitcoins is now a smaller percentage of the whole buying power available for bitcoins, which means they are also worth less dollars. Similar effects are seen in fiat currency (like dollars) when more money is printed, it affects the money supply, and allows the government a modicum of control on inflation (when used correctly) but also can let the government to let inflation get out of control (re: most cases of Hyperinflation[1]).
The simpler explanation is simply: Because the supply of bitcoins went up, with a constant demand of bitcoins, the value goes down because more people are trying to sell them, and the price goes down due to competition etc (e.g. basic supply and demand).
The increased [bit-]money supply doesn't explain the observed price drop - it would explain a price drop, but much, much smaller than this one; those 30k bitcoins is a rather tiny part of the whole bitcoins in circulation; so obviously some other reasons dominate this particular price change.
If US treasury prints a billion dollars, then that doesn't trigger a 10% drop in value of a US dollar - it's a comparably tiny change with a tiny effect; similarly an extra 30k BTC is not by itself a reason for large fluctuation if the market is functioning properly.
Yes, but market fluctuations always shoot above and below 'rationalizable valuations'.
A few reasons why your analogy is flawed. First, M0 (which is one of the more conservative definition of money, is about 4 trillion, so the value loss from a billion dollars is not going to be anywhere near 10% to start off with). Secondly, by printing money you're again only affecting M0, but there are a lot of debt-based instruments that are probably better characterizations of "total money", but since they are debt-based it creates some level of 'springiness' to the total money supply.
Finally, it's not clear to me what you mean by 'functioning properly'. Even if a small change triggers a bigger effect (it will, these things are categorized by cascading effects) - Is the market coordinating individual values with prices? Probably, it is: it's just that the individuals' value systems have gone a bit out of whack in a spate of mania. But who are we to judge if people get a little silly from time to time?
My analogy doesn't seem flawed to me- that's exactly what I meant:
1. printing a billion dollars should be approximately just as [in]significant to USD supply as the 30k BTC to the BTC supply in circulation; that's why I said a billion, but not a million or a trillion;
2. market fluctions over/undershooting any corrections is reasonable, but not exaggerating them by multiple orders of magnitude - it may react to a 0.1% change as a 0.2% change, but not as 10% change;
3. a market that's "functioning properly" would be expected to correct for so huge overexaggerations - if some people get a little silly from time to time, then the market should (and would) take their money from them; but if most of the people get very silly frequently, then that's not a properly functioning market.
Well, that's market information sort of thing. Note that there are many more bitcoins in federal custody. And that the prospect of large amounts of bitcoins re-entering the market will cause some investors to dump their bitcoins.
To add onto your analogy, if they government did print billions more than normal, then investors would project that behavior out, try to figure out what was wrong, and exasperate the effects.
If USA government starts printing extra tens of billions every single day, then investors project that out and that has a significant effect; it was called quantitative easing.
Similarly, if USA government had now started to do sales like this (and larger) every other day, then it would be grounds for some major effects - but they are not; the government does not have many more bitcoins in custody, they have a few limited amounts like this one of less than $20m. Why should such a comparably small sale cause any market disruption? If some $20m re-entering the market does that, then that's a sign of a very, very small and illiquid market.
If any real scale business would start using BTC, gets a few thousand BTC in sales, and wants to swap them to another currency - do they have to think of themselves as 'market influncer' that should be careful on how to sell them so as not to rock the boat; instead of simply immediately getting the current exchange rate for that?
Only when increased supply doesn't cause an even higher increase in demand. There are some examples of this in history, although they are few and far between.
By this logic, withdrawing money from the ATM increases money supply... Also, the expected amount of silver in the ground is factored into the current price of silver. It's really only when new deposits are discovered that there is an impact to the price. Actually pulling known silver deposits out of the ground has a negligible effect on the price.
If a bunch of people in a city decided to withdraw cash from all the ATMs one day, so that the amount of cash in ATMs got very low, don't you think the banks could increase the ATM fee and discover that people would be willing to pay the higher price? That example fits the logic perfectly.
This is completely false. If what you were saying were true, the price of oil would not change when the stability of the middle east was under question. Supply is the amount on the market, not the amount locked up somewhere that can't be brought to market immediately.
Except fiat economics are a bit more complicated than that. Everyone getting a 100% wage raise would increase money supply (and by extension massive inflation).
The publicly available portion of something is the supply of a good.
That would be like saying the supply of uranium in the universe hasn't increased, the only thing that increased was the free float of uranium (say due to new mining technologies, or the sale of previously restricted stocks).
Supply is not a number, it's a function relating the price someone bids, to the quantity the bidder could buy at that price.
For example, if 100 bitcoins that were previously unavailable at any price, become available for $600, then supply at $600 (and above) increases by 100. The supply curve shifts to the right.
It is fairly common to use the phrase "the supply increased" to mean "the supply curve shifted to the right." It's an abuse of terminology in my opinion, but it's already extremely widespread.
It's plausible that folks who are interested and able to buy these coins have a position in BTC. They may be selling BTC in order to have the cash to purchase the Silk Road blocks. This has the duel effect of driving the price down, which makes the "list" price (i.e. the exchange rate) of the SR blocks lower which, in turn, may make the competing bids lower.
People had priced in the freeze on these coins, which might have continued indefinitely. The price drop is out of proportion ot the actual (re)inflationary effect of these bitcoins, but people are irrational.
If there was logic, it would be repeatable, and all those providing advice on said logic would be millionaires therefore doing something other than answering this very question.
Same goes for capital markets which is why only brokers and Warren Buffett "make money".
Maybe some of the people who are looking to bid on these bitcoins are driving the price down, so that they won't have to bid as much to win them. Then when they price recovers they can start selling them off slowly at a profit.
