Bitcoin

[eläin]

@EL I am not sure I understand your question. Isn't it very fundamental that when you cut production of something the price goes up?



@IG my theory is that these "unusually" large spikes up/down in price are mainly due to leverage. In a time of low volatility people increase their leveraged positions (both directions). Bitmex has up to 100x leveraged futures. With enough side way price action, these leveraged positions become much larger than there is liquidity on any exchange. It is like a spring, being put under more and more pressure. At some point, because of a large order or pure randomness, these positions start to unwind and only stop after "all" of them are liquidated.

[Its Grisha]

@elain, this theory makes sense thanks, not sure why I didn't think of it. Probably because in traditional assets, deleveraging events usually happen on some sort of publicized and tangible bad news.

[EspressoLover]

Thanks, Elain. That makes a lot of sense.



But some back-of-the-envelope math makes it seem like it wouldn't have any serious impact. (And please correct any misunderstandings I make in the following.) There's 18 million BTC in the current supply. The halving reduced the seignorage rate from 1800 BTC/day to 900 BTC/day. At monetarist equilibrium, that implies the annual inflation rate fell from 0.1% to 0.05% a year.



A 5 basis point reduction in inflation would not seem to meaningfully change the market value of BTC as a store of value. Annualized volatility on BTC/USD is on the order of 50% or more. As an investment vehicle, halving increases the long-run expected Sharpe ratio by less than 0.001.



As an analogy, it'd be like Vanguard lowered the fees on its index fund from 0.05% to 0.04% and for some reason people were expecting that to double the value of the S&P 500. Am I missing something here?

[svisstack]

I think this picture here is too simplified. Miner's incentives were affected, inflation also depends on the cost of maintaining the network, and these things + energy prices are related.

[nikol]

@elain



when you cut production of something the price goes up



Yes, if demand stays same at least. But it does not. Or at least, why it should? On the eve of economical decline?



About miners:



I see no reason why miners should disappear. Major factor (ok, one of) is price of miners. If design & production cost of fresh miner like S19 is about 200 usd while it is sold for 3000 usd, then I see still lo-o-o-ong way for price adjustment.

[eläin]

Sorry EspressoLover this got a bit long, but here is how I see/think of it:



Initially Bitcoin was only needed for drugs on the interwebz. When trying to understand how the supply and demand dynamics of Bitcoin, effect Bitcoin’s price, it is very important to empathise the word need. Here – need – is defined as something the person does not want to do (use Bitcoin), but will do, because it is so beneficial to him. Why would have anyone used Bitcoin to buy drugs if it was as safe to buy them with a credit card?



In the early days of Bitcoin, this usage for drugs was the only real demand there was. Here – real – is defined as the part of total demand for Bitcoins that consist of use cases where the user NEEDS to use Bitcoins. Rest of the demand is speculation. Real demand (drugs) + speculator demand (people buying because they believe the price will go up for what ever reason) = total demand. With time, other types of real demand showed up. But to keep things simple lets only focus on drugs, and keep other needs and speculators out of the picture.



Lets imagine the most simple world. There is only 1 Bitcoin in existence, it has a price of 10$ and there is only 1 drug dealer and one drug user called X. X buys 1 Bitcoin and pays 10$ for it. X uses the one Bitcoin to buy 10$ worth of drugs from the drug dealer. X buys drugs once a week, and thus needs to buy 1 Bitcoin every week. In this example he buys it from his drug dealer, because the drug dealer is the only person with Bitcoins. So the drug dealer sells X first the Bitcoin and then X uses that Bitcoin to buy drugs from him. The price of Bitcoin does not move in this setup.



First scenario: imagine X stops using drugs and thus stops buying Bitcoins from his drug dealer. The dealer is left with the 1 Bitcoin but because no one is buying it, the Bitcoin is now worthless.



Second scenario: a new drug user, T, enters the scene. Now both X and T want 10$ worth of Bitcoins at the same time. Only option for the drug dealer to give both customers Bitcoins is to split his 1 Bitcoin into half. Now X and T both get 0.5btc and they pay 10$ each, total of 1 Bitcoin for 20$. In this scenario the price of Bitcoin doubled! For the drug users it does not matter how many Bitcoins there are, 1 or 21million, or if the price of 1 Bitcoin is 1$ or 1million. Only thing that matters is that they get 10$ worth of these “units of account” (Bitcoin) to use in their questionable activities.



I would call this new 20$ price of Bitcoin, Bitcoins real price without speculators. Real price varies depending how many people are entering the space to buy drugs. If more people enter than the new coins mined a day, the real price has to rice.



Also important to note is that, even if each drug user holds their Bitcoins for just a few days, with enough users it has the same affect on price as a totally “lost” Bitcoin, i.e. the Bitcoin is “removed” from the supply. Roughly speaking: 365 people holding a Bitcoin for a day, has the same affect on price as 1 person holding it for a year. You could maybe think of it like oil in a car’s engine. Yes, it still exists, but you would not consider it being a part of the supply of oil (unless oil’s price goes astronomically high).



What I think I am trying to say is that there is only a surprising small amount of coins that are used to actually price all Bitcoins. And if the need for Bitcoins continue to rise (“eating” the supply), which seems to have happened ever since Bitcoins inception, and the amount of new coins created is cut, there is really only one way for the price to go (up). You could imagine a puppy that wants food (drug users want Bitcoins). With time as the dog grows, the dog wants more food (darknet grows, they want more Bitcoins). But you don’t give the dog more food, you actually give it less (Bitcoin halvening). The disparency between demand and “supply” becomes huge very quickly. Now add speculators that amplify the moves in both directions. Boom.



I believe these post halvening bubbles continue to happen as long as the need for Bitcoins continues to rise even a little. These real use cases give it price support after the crash and give speculators hope of a new bubble.



There are also interesting dynamics in the supply side due to price fluctuations and the halvening. But this is getting way too long already now so maybe leave that for another time.

[eläin]

Nikol: did not Paul Tudor just say he bought Bitcoins because of the economic decline -> endless printing -> inflation hedge..



I also think not many people who get value from using Bitcoins for something care that much what the economy overall does.

[nikol]

Paul Tudor is buying? Oh, yes, that should FOMO the market.

[svisstack]

@nikol: the price of the miner could not carry any informational value here, as an asset owner (someone how has the miner), you can sell it or generate value using this miner under certain assumed conditions, then you basically not sell it for the cost of producing, but for the value related to your loss of not mining under this assumptions, but I think this description is most likely showing an only retail side of things. Real players here can probably build it and also be ahead of the curve, so they not paying the premium, at least it could be priced in the parts itself - but there is higher liquidity here.

[nikol]

@svisstack

Interesting idea. Retail price of miner have to go in line with that of futures curve then.

where to get history of prices of miners, futures i have.