While I am far from a newbie to bitcoin, that digital money that has been bouncing around for a few years and which shot up in value a couple of months ago to $255 and then crashed to $50, then rebounded to about $130 and then dropped this weekend to below $100, having discovered it when the price was at $28, I recently discovered how many people have actually known about bitcoin since its price was below $10. There are some very smart young people out there who are looking to translate their bitcoin tech and bitcoin business ideas into something that will make them into the next high tech under-30 billionaire.
Bitcoin has its own threads on Reddit (but then again, everything and everyone has its own threads on Reddit), its own forum, BitCoinTalk.org, a foundation which no one except its own members respect ( bitcoinfoundation.org ) and some big money moving around.
On of the biggest subjects discussed both on the RIC bitcoin channels on freenode and on bitcointalk.org is how and why the price of bitcoin goes up, down, hold steady, is in another bubble, will never return to previous highs, will definitely get to $500 by September, November, February of next year, or will be banned by Homeland Security and be made illegal, or will be adopted by all the big banks and taken over by the evil corporate empire.
Why did the price of bitcoin fall below $100 US this weekend? I have read a variety of article by people smarter in finance, economics and computer science come up with their theories and I have come to the realization that no one really knows. The price of bitcoin is based upon supply and demand. Fiat currency, the price of corn, gold, oil are all subject the government influence and are not pure free market commodities. Maybe at some point the price of bitcoin will be made stable through goverments’ interventions, but at the moment, of all commodities on this planet, whether bonds, stocks or tangibles, the price of bitcoin is the only one whose price is determined solely through a free market based purely on supply and demand.
So, if the price of bitcoin has dropped, it means that either more bitcoin has entered the market, or that people have begun to lose faith in bitcoin and are not interested in buying anymore. The variance of bitcoin prices can be better understood by psychology than traditional economics. In fact, there is a discipline called behavioral economics, but, I have no expertise in that, so I only speculate on these issues. But, given that bitcoin is still in the wild west development stage, my theories and speculations are as good as anyone’s.
Well then, why did the price drop this weekend? Simply: Who the fuck knows? Seriously, there is no expert who really has an answer.
The really rich people in this world know all about bitcoin. If they don’t already know about it, the smart and rich but less rich managers of the money of those rich people know all about bitcoin. When I say rich, I mean those people whose great-great-great grandchildren will never have to work, because the interest on the principle of what these people get is more than what you or I earn in any ten year period. These people are well aware of how to hide their wealth, preserve their wealth and pay as little in taxes as possible. They know about bitcoin, but my not be invested in bitcoin. Remember, these people have been able to hold on to their money because they avoid silly risk. No matter what bitcoin-fanboys (myself included) think, bitcoin is still risky. It is hard to move money of any large quantity in and out of exchanges, there is very little that really can be bought with bitcoin, and most bitcoin is being held and hoarded and not used.
What is means is that bitcoin, because it is still so unregulated, is a big risk. What it means is that because bitcoin is still so unregulated, there is great opportunity for bit profits. What is means is that because bitcoin is unregulated, it is probably the only real free market in the world, other than some camel and goat market someplace in Africa which also is uninfluenced by government interference and represents a true coming together of buyers and sellers and whose price negotiations really do look like those simple supply and demand graphs from Economics 101.
The price of bitcoin dropped below $100 this weekend, and everyone in the Bitcoin-opinion-sphere offered an opinion why. Well, until we find that one handed economist, like the punch line in that famous joke, no one knows why the bitcoin price fluctuates one way or another. This is less a puzzle for pure classical economists than it is for psychologists (or rather, behavioral economists).
Despite it being touted as a decentralized currency, with a distributed control, and no single person or entity able to control it, only one exchange (a website where you can trade fiat for bitcoin) really matters in determining bitcoin price. That is MtGox.com. I love CampBX.com, but it just doesn’t have the volume that Gox has. Rumours abound of private brokers who find whales who want to make bit trades of USD for bitcoin and bitcoin for USD, and arrange private exchanges, that are off the books, and are of such large quantity that the exchanges could not really handle those trades. Most trades on MtGox are for amounts less than $1000.
What if you got into Bitcoin over a year ago, bought tens of thousands of bitcoin when the price was below $10 and you need the money to buy a Lamborghini or pay for your wedding to that French fashion model you met while on Spring Break? Well, you can just sell your long hoarded bitcoin. Since the depth of trading is so shallow on MtGox, even though it is the biggest exchange, a $10,000 or 1000 bitcoin trade could easily change the price of bitcoin a significant amount. Behavioral economics relies on the idea that aggregate behaviors of large groups of people can be studied and predicted. The problem is because bitcoin exchanges are so small, the random behavior of some financially and bitcoin endowed individual can push the price of bitcoin in one direction or another for no reason that can be understood or used to determine any trend, since it may not be due to a trend but due to the random decision of one individual.
Well, what does that mean about the recent price change below $100? It means absolutely nothing. It means you have to not look at any short term changes and decide if you believe in bitcoin in the long term. It means that human beings, even geeky nerdy brainy men (and 90% of all bitcoiners are male) are subject to enjoying and engaging in the commerce of gossip and rumors even if those rumors are about the government, the price of bitcoin and what the Winkelvoss twins are doing.
If bitcoin drops below $100, you should buy and hold. Unless of course, you don’t believe in Bitcoin, in which case, I suggest you leave bitcoin altogether and seek out the next-next-big thing, and when you find it, come back and tell me, so i can join that next adventure.