How Bitcoin Really Works

Other discussions not related to the Permanent Portfolio

Moderator: Global Moderator

User avatar
Storm
Executive Member
Executive Member
Posts: 1652
Joined: Tue Aug 24, 2010 1:04 pm

Re: How Bitcoin Really Works

Post by Storm »

Another interesting article:

http://www.entrepreneur.com/article/230346
"I came here for financial advice, but I've ended up with a bunch of shave soaps and apparently am about to start eating sardines.  Not that I'm complaining, of course." -ZedThou
Libertarian666
Executive Member
Executive Member
Posts: 5994
Joined: Wed Dec 31, 1969 6:00 pm

Re: How Bitcoin Really Works

Post by Libertarian666 »

Storm wrote: You both raise some good points.  There are many new digital currencies competing against Bitcoin.  At this time, though, it's really the ecosystem of business investment around Bitcoin that makes it the most valuable and most stable (relatively speaking, of course) compared to the others.

For example, Bitpay, a service that allows merchants to accept Bitcoin and immediately converts it into USD to eliminate the currency risk, has transacted over $100 million this year:  http://www.coindesk.com/merchants-love- ... ons-prove/

Coinbase, a Silicon Valley startup that allows consumers to buy and sell Bitcoins using their checking account (like Paypal), and merchants to accept Bitcoin, just received another round of $25 million from Andreesen Horowitz:  http://techcrunch.com/2013/12/12/coinba ... -services/

If you're familiar with startup funding, Andreesen Horowitz doesn't just invest in companies that are high risk; they usually pick winners.

BitPay also has some interesting statistics around black friday sales made using Bitcoin:

http://www.washingtonpost.com/blogs/the ... tpay-says/

They were only 6% of the total transactions on the network, indicating that much of the volume is pure Forex type activity; currency trading.  But, look at total FX volume for "legitimate" currencies: approximately $3.98 trillion USD per day in 2010, and compare that as a percentage of retail sales.

You're right, Kshartle, this is all pure speculation, and extremely high risk.  My initial investment in Bitcoin was a $729 graphics card to mine in 2011 and about $1500 in electricity.  That initial investment was roughly 0.25% of my portfolio, and an interesting hobby for someone like me that is into computers.  That initial speculation, if I wouldn't have cashed $12,000 out a while ago, would be 50% of my portfolio now, however, as is, it's still a respectable 20%.  I've taken some additional cash out to do a few repairs around the house and buy a piano for my son.

I wouldn't recommend anyone put more than 1% of their portfolio in Bitcoin, however, if I would have put just 5% I could have retired by now... That's something to think about.  But, I'm too damn conservative to do something like that.

As someone else in a different forum said "I feel more comfortable investing at $850 instead of $10 because it's less risky now."  I think there's something to be said for that.  Big money is investing into Bitcoin now.  When the merchants and general payment processors start using it, watch out.

Regarding volatility:  It's extremely volatile because the markets are not well developed and have low volume and liquidity now.  A big whale can drive the price down by putting fake sell walls up, constantly moving them lower, then scoop up cheap Bitcoins at the bottom and drive it back up with buy walls, netting a 10-20% profit from price movements a day.  When we have more efficient markets with more liquidity, this activity will be self-regulating.
That is what always happens in a bubble.
Kshartle
Executive Member
Executive Member
Posts: 3559
Joined: Thu Sep 22, 2011 4:38 pm

Re: How Bitcoin Really Works

Post by Kshartle »

Libertarian666 wrote:
Storm wrote: You both raise some good points.  There are many new digital currencies competing against Bitcoin.  At this time, though, it's really the ecosystem of business investment around Bitcoin that makes it the most valuable and most stable (relatively speaking, of course) compared to the others.

For example, Bitpay, a service that allows merchants to accept Bitcoin and immediately converts it into USD to eliminate the currency risk, has transacted over $100 million this year:  http://www.coindesk.com/merchants-love- ... ons-prove/

Coinbase, a Silicon Valley startup that allows consumers to buy and sell Bitcoins using their checking account (like Paypal), and merchants to accept Bitcoin, just received another round of $25 million from Andreesen Horowitz:  http://techcrunch.com/2013/12/12/coinba ... -services/

If you're familiar with startup funding, Andreesen Horowitz doesn't just invest in companies that are high risk; they usually pick winners.

BitPay also has some interesting statistics around black friday sales made using Bitcoin:

http://www.washingtonpost.com/blogs/the ... tpay-says/

They were only 6% of the total transactions on the network, indicating that much of the volume is pure Forex type activity; currency trading.  But, look at total FX volume for "legitimate" currencies: approximately $3.98 trillion USD per day in 2010, and compare that as a percentage of retail sales.

You're right, Kshartle, this is all pure speculation, and extremely high risk.  My initial investment in Bitcoin was a $729 graphics card to mine in 2011 and about $1500 in electricity.  That initial investment was roughly 0.25% of my portfolio, and an interesting hobby for someone like me that is into computers.  That initial speculation, if I wouldn't have cashed $12,000 out a while ago, would be 50% of my portfolio now, however, as is, it's still a respectable 20%.  I've taken some additional cash out to do a few repairs around the house and buy a piano for my son.

I wouldn't recommend anyone put more than 1% of their portfolio in Bitcoin, however, if I would have put just 5% I could have retired by now... That's something to think about.  But, I'm too damn conservative to do something like that.

As someone else in a different forum said "I feel more comfortable investing at $850 instead of $10 because it's less risky now."  I think there's something to be said for that.  Big money is investing into Bitcoin now.  When the merchants and general payment processors start using it, watch out.

Regarding volatility:  It's extremely volatile because the markets are not well developed and have low volume and liquidity now.  A big whale can drive the price down by putting fake sell walls up, constantly moving them lower, then scoop up cheap Bitcoins at the bottom and drive it back up with buy walls, netting a 10-20% profit from price movements a day.  When we have more efficient markets with more liquidity, this activity will be self-regulating.
That is what always happens in a bubble.
I didn't want to say it.

Yes, as a bubble grows it's growth is used to justify itself. It also continues to grow even as the fundamentals get obviously worse (US debt - I know many disagree). Look at the Peter Schiff was right video when he was FOX with those guys. He was explaining why housing prices couldn't be sustained and houses were now on the market for 6 months or more. They were laughing saying "so what", ""housing will go up another 10% this year because that's what it does in a normal market", or "we can't have a housing collapse because we never have before etc."

It's all self-justifying and irrational and the justifications have to get more bizzare and self-fullfilling.

This is not to say bitcoin is at the top or the bottom or close to either. I don't know. Maybe it goes to a million. It just feels to me like there won't be a lot more entrants or...."greater fools" to sell to. I wish such a great concept (the greater fool theory) had a better name. When you invoke it, it sounds like you're insulting people and I'm definately not trying to do that.
Post Reply