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[mainiac]

As for Bitcoin itself, I don't know. It could stabilize as speculators try to game other coins, or it could crash and burn as everyone keeps saying it will, or it could just keep on being its own wacky self. Its status as a mandatory entry to the other cryptocurrency markets probably ensures that it'll stay around as long as they do, unless another gets valuable enough and stable enough for long enough to get direct conversion to traditional currency.

There isn't an endless supply of bitcoin-knockoff "investors" though.  By way of comparison, if you look at gold's rise over the past eight years it's actually really, really easy to understand if you look at the size of the markets, a lot of jewelry selling in China and India and a comparatively small uptick in US demand due to hording.  Simple supply and demand explains it all rather easily, big increase in demand means that prices get bid up until markets clear.  Bitcoins should be understood the same basic way, it's supply chasing demand.  The price is going to rise until the price of a bitcoin times the quantity equals the number of investors who want in.  Rising prices aren't going to depress demand in the traditional sense.  It's not like if the price of bread doubled you'd eat less bread and eat more rice.  People aren't buying to consume or produce, they're buying to hold and conduct illegal transactions and they don't care what the price point is for that because bitcoins can be split.  The result is that in the short term we can understand the market clearing price of a bitcoin by a simple equation:

P = D/S

D is the amount of money chasing bitcoins, i.e. people's desired holdings.  S can be abstracted to fixed in the short term due to the diminishing returns of mining, there is a finite number of coins that can be mined and everyone knows it.  This is in comparison to a conventional supply and demand curve.  In that demand falls to meet price and supply rises to meet price.  Those corrections don't happen normally so we can simplify and arrive at a rough approximation that 12 million bitcoins and 800 dollars per bitcoin means that the worldwide demand for bitcoins is 9 billion dollars... and that's not going to change very much.  Bitcoins aren't going to trigger a crime wave leading to a huge increase in the desire for their transactions.  Some more "investors" will come along who want to horde but they might also try to cash out.  There is a huge, huge volume of economic research telling us that in the short term it's stupid to pretend you know if they will go up and down, we can only talk longterm (the most recent nobel prize actually was about this.)

As long as bitcoin is alone and S remains short term static, all 9 billion dollars goes into those coins.  But if knockoffs make a showing and really start to compete, it all disappears.  There is a saying going back to at least the 30s that "bad money drives out the good" meaning that cheaper currencies drive expensive ones out of markets.  If knockoffs can do what bitcoin can do, there will be a cost to holding bitcoins not knockoffs.  The knockoffs will be better for crime, authorities won't be watching them as well.  The knockoffs will be expecting to rise in value to bitcoin levels while the bitcoins will be expecting to fall.  This will become a self fulfilling prophecy...

So every time that a new currency comes along and establishes itself, S rises.  And it would be foolish for people not to try to get a slice of that action.  Start a new currency, get 1 of those 9 billion dollars to flow in and suddenly you are a millionaire.  Ironically it's a system that promotes massive inflation because if your bytecoins have 12 times the quantities of bitcoins, it increases the returns of inventing the currency even if the resulting value is lower.  Suddenly S isn't static, it's a production cost function.  D is still very inelastic but now we have a typical supply and demand curve on which an equilibrium is established and we end up at the market clearing point.

That market clearing point of course is where the cost of making a bitcoin knockoff is equal to the production costs.  And those costs are low... really really low.  And I'm not sure that bitcoins could survive a price fall like that.

Of course on the other hand... there is a surprising level of psychological attraction to bitcoins that might lead that 9 billion dollars to avoid the other currencies like the plague even if bitcoin loses value against them.  Basically the bad money drives out the good in some markets but some markets (a market here being individual libertarians currency portfolio) would be close off to all but bitcoins due to this psychological attraction.  But what happens when something offers more features then bitcoins?

[kaijyuu]

While industry interference probably can't be discounted entirely, a lot of a diamond's value comes from its status as a symbol of value.

No, it's really just industry interference. Scarcity is intrinsic to monetary value, and no scarcity will mean something's cheap no matter how high the demand is. Things keep demand due to people thinking they're valuable, but they don't keep value. That's why gold standards are dumb.

[Sheb]

What exactly is the industry interference? My understanding was that making jewelry-sized diamonds was prohibitively expensive.

[kaijyuu]

Basically all the gemstone diamond manufacturers/miners market their diamonds as valuable and expensive, and all other diamonds as "cheap" or "fake." This means they have a monopoly on "valuable" diamonds, solely by convincing consumers to only buy theirs.

It's one of the best examples of producers manipulating the market, rather than the market manipulating them.


http://en.wikipedia.org/wiki/Diamond#Industry

[Bauglir]

@mainiac

... What. I don't know what you're refuting, or if you're really refuting anything? That just read like a stream of disconnected economics claims. There's not an endless supply of any investor, and I'm not claiming there is. I'm claiming that Bitcoins have a self-perpetuating psychological attraction that may be enough to keep its value going for a few years, based on the idea that they can function as a get-rich-quick investment, which is pretty characteristic of any bubble. I don't know, however, whether the bubble will burst or not before it stabilizes into a standard fixture of the Internet for some time (see: Youtube). I thought the bubble burst with the whole China thing, but it's been recovering fairly steadily since, so I dunno. But, again, I really don't know what I'm trying to respond to, so clarification is all I can do here.

@kaijyuu

Natural diamonds, however, remain rare. My point is that when people go out to buy jewelry, they often are looking for expensive jewelry because they want to demonstrate that they have and are willing to spend the wealth for some expensive jewelry. If diamond prices fell, they'd buy something else, but because the price tag is often the point, sellers can point out the rarity of natural gemstones as a reason for keeping a high price, even though it's fairly arbitrary. So now you have to buy a natural diamond to show off your wealth or commitment or whatever, and since that's one of the major reasons people buy diamonds in the first place, it's not worth stocking the cheaper ones. Which is great for everybody except the people who just like how diamonds look or who need them for something more practical but can't afford the industrial quantities you need for lab-grown ones to be cost-effective.

You're right about the producers manipulating the market, I'm not disputing that, I'm just saying that I think there's an analogue here between the value an item gains soley from being ascribed value in both diamonds and in cryptocurrency.

[mainiac]

@mainiac

... What. I don't know what you're refuting, or if you're really refuting anything?=

Sorry, sometimes I get a little ahead of myself and rush to the end.  The point is that bitcoins and fakecoins would be chasing the same, limited supply of dollars and that supply is going to be quite inflexible.  If more bitcurrency's come along, more conventional money will not rise to the challenge because the demand doesn't have the usual balance with the price that most commodities have.  So since the demand is short run inelastic, bitcoin is very, very much at the mercy of market reaction to competitors as opposed to what you were saying of maybe bitcoin can be the most respected of the lot.  That just means that bitcoin has the farthest to fall.

[Bauglir]

That may be so, but in situations where you need to buy a product you don't particularly care about to get to the one you do, I'd expect the middle man to at least survive. I'm kind of expecting a series of competitors that get off to a running start but fail before they become stable and valuable enough for anyone to set up an exchange that doesn't use bitcoins as the medium. A lot of people who try to get in on the next big thing before becoming disillusioned when not enough people bother to get in on their particular next big thing. You'll see trickle out of the Bitcoin pool of wealth into other cryptocurrencies, and eventually back into Bitcoin, largely from people trying and failing to game the system before they cut their losses. I'm assuming, here, that they're not rational actors, notably. But I don't expect that with a great deal of certainty, which is why I covered all the bases in the initial post.

As long as bitcoin is the only cryptocurrency you can buy for dollars, it's going to be very hard to compete with it, and until it has a serious competitor, nobody's going to let you buy another cryptocurrency for dollars. Bitcoin never had that hurdle to overcome, because there never was an alternative cryptocurrency. It was dollars (or another recognized currency, or another valuable trade good or service) or nothing. On the other hand, if something does miraculously generate the momentum required to clear that hurdle it could easily split the market, especially if it develops a reputation for legitimate use (as opposed to Bitcoin's reputation for illegal transactions). And I can't really estimate very well whether not that will happen - at the beginning of this thread, I don't think anybody but the most diehard supporters thought it would ever be worth the current value, much less its peak, even as part of an elaborate scam. So I'm not gonna put too much stock in my ability to predict how things will actually go.

[mainiac]

What's preventing another crytocurrency from selling for dollars?  I can go buy WoW gold or TF2 refined metal with dollars quite easily this very moment and they're not even trying to be currencies.  That's not even getting into your more obscure currencies like runequest money.  There isn't a very high barrier for entry.

[Bauglir]

There's no exchange on which to do so, which makes it complicated to arrange a trustworthy transaction, sufficiently so to rule out all but the most determined. Bitcoin is, to my knowledge, the only cryptocurrency with an exchange rate directly to dollars - all others are exchanges to Bitcoins, from which the dollar equivalent is then derived for figuring out actual worth. I could be wrong on this point, though.

[Putnam]

Bitcoin's gone down to about 77% of the average in the past few hours. This is gonna be fun if it keeps going down.

[Bauglir]

If it falls below 50% of its starting value at the beginning of this, I may consider picking up a fraction of a coin. That's a lot of "maybe", of course.

[Putnam]

It's now hovering at 80% of original. Looks like a false alarm. Oh well.

[Reelya]

Natural diamonds, however, remain rare.

Once upon a time, but not now. Their scarcity is maintained by the mining corporations stockpiling vast amounts of the diamonds and only allowing a trickle onto the market.:

To maintain the high prices of diamonds, De Beers creates an artificial scarcity: they stockpile mined diamonds and sell them in small amounts.

De Beers at one point controlled 90% of the world diamond market. That's fallen now to about 50% due to producers from Russia, Canada and Australia distributing diamonds outside of the De Beers channel, but those other producers also want to maintain prices at the levels they were under De Beers, so they will follow roughly comparable pricing.

[alway]

First, you're looking at the wrong index; that's just the MtGox exchange, which has had all manner of problems lately. From my understanding, the exchange has always had dollar illiquidity issues, making it difficult to transfer MtGox dollars to IRL dollars. As a result, MtGox bitcoin prices have always been a good 20% or more above the external prices; people wanted more money if there was the possibility of it being harder/longer to cash out.

The cause of this drop is because of the bitcoins. MtGox keeps accounts of bitcoins, rather than doing an immediate transfer; much like a bank account. That way you could keep trading on MtGox faster than you otherwise would, and your bitcoins are theoretically safe as well; similar to how when a bank gets robbed, the money you stored there is still on their books. Barring catastrophe or a big software glitch, you should then be able to take out your bitcoins almost immediately, since the paperwork and financial regulations regarding withdrawal of money don't apply like they do when you cash out. So while cash is hard to take out, the bitcoins should almost always be extremely liquid. Then some time in the past couple weeks, MtGox has had some issues with bitcoin illiquidity. Seemingly random failures of transactions withdrawing them while the accounts show the balance as lower. Which due to the reasons just stated, is quite weird, especially since it lasted well over a week apparently. The implications of that are open to all manner of wild speculation, but needless to say, there isn't much trust in the MtGox bitcoin accounts. And so people want to cash out quick, even it it means cashing out via MtGox dollars.

Though it does appear to be triggering a slight downward drop on other exchanges, but nothing much more than the standard deviation of several percent per day (though that itself is ludicrously large).

[martinuzz]

I think they're just a hype. They will be completely devaluated after more and more countries ban them for creating a anonymous, free market platform for international crime. Any non criminal investing in them now is an idiot, and should be sued, and charged for helping accomodate international organised crime and terrorism.
Cause, for every action you take that increases the bitcoin's value, you increased the value of the criminal's assets as well.