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Comment by john_moscow | Hacker News Reader

I'd say there's a simpler explanation. Bitcoin has a limited predictable supply, so its price is mostly a function of the demand. And demand correlates with expectations, that typically follow the hype cycle [0]. I'm not sure how much someone managed to single-handedly manipulate the price, but the plain old human psychology, FOMO and the positive feedback loop for media writing about bitcoin demand definitely played their role. All by the book really.

[0] https://en.wikipedia.org/wiki/Hype_cycle

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Whenever some kind of good has a truly limited supply, that can fuel the most massive of bubbles by making the “bubble” look rational at first. The bubble hides itself under the guise of being about “supply and demand”.

The one thing that leaps to mind is the Japanese real estate speculation in the 1980’s. Everyone claimed, very logically, that Japan is a mountainous island with very limited space, so real estate would be almost sure to go up in value. Ultimately, the market crashed, and hasn’t recovered even 25 years later.

Curiously, at the height of the housing crisis homes were about 5.5 times the median national income. In San Francisco right now (another place where supply looks limited by the water) homes there are 17.2 times the median national income.

> Curiously, at the height of the housing crisis homes were about 5.5 times the median national income. In San Francisco right now (another place where supply looks limited by the water) homes there are 17.2 times the median national income.

You're comparing national home prices in Japan vs national income in Japan. Then you're comparing local prices in SF to national income in the USA. You're then comparing these comparisons to show SF is super inflated.

This makes no sense.

In 2016, it seems SF median household income was $96,677 [1] and that the median house price was $1.31 million [2]. Couldn't find more recent number for income.

That a 13.6 median price to income ratio. 2018 median house price is $1.61 million, so for wages to keep up the 2018 median income would need to be $118,382 to maintain the 13.6 ratio.

Edit: I agree with parent it probably still doesn't make sense to compare cities with nations. These numbers are just for your entertainment. I think median price-to-income ratio for Tokyo now is now about 4. I am sure in the bubble it was much higher. Though again apples to oranges, it seems that the peak bubble average price to average income ratio for Tokyo was 18 [3].

1. https://www.deptofnumbers.com/income/california/san-francisc...

2. https://sf.curbed.com/2018/4/5/17201888/san-francisco-median...

3. http://japanpropertycentral.com/2014/08/apartment-price-to-i...

You also have to account the rise in population, which translates to higher demand. Not sure Japan had similar Demand/Supply to SF before bust.

The average annual gain in SF since 2010 came to 11,173 persons, and the median is 10,824. The overall population increase of 78,593 amounts to an estimated spike of more than 9.75 percent. For comparison, that’s a higher year-over-year increase than seven of the ten most populous counties in the country, including number-one ranked Los Angeles County (up 0.1 percent since 2016), Orange County (0.4 percent), and San Diego County (0.6 percent).

Breakdown of how the city has grown since the last full census in 2010, with SF’s official population of 805,770 at the time:

2011: +10,524 (816,294) 2012: +14,112 (830,406) 2013: +10,486 (841,270) 2014: +11,988 (853,258) 2015: +13,062 (866,320) 2016: +9,783 (876,103) 2017: +8,260 (884,363)

1. https://sf.curbed.com/2018/3/26/17165370/san-francisco-popul...

SF median household income is vastly distorted by rent control and prop 13, which allow very many people to live there who otherwise would not be able to afford to live there. Therefore the above measure is not an apples-to-oranges comparison to the Japan data.

It was said at the time that the Imperial Palace was worth more than all the real estate in California.

https://amaral.northwestern.edu/blog/how-much-was-japanese-i...

They should have sold the Imperial Palace and bought California

It was probably impossible to find a buyer.

As I understand it, for a variety of reasons, the value of a home tends to fall much more rapidly over time in Japan compared to the US. This probably means that if you're going to get a loan to buy a house in Japan, it's probably going to be for a lot less (relatively) and/or for a shorter period of time than you could generally get in the US, which will put significant downward pressure on home prices (again, as compared to the US).

Put another way, the more people are spending razing and rebuilding on a given supply of land, the less they'll be able to spend on the land itself.

Why are you comparing regional prices to national income?

I'm an economics noob, but is `comparing regional prices to national income` in some way technically wrong or misleading in some way?

Is the supply really "limited"? Sure, there's finite number of "coins" that can be generated. But unlike physical objects, there's not really any special property of that unit. Also, you can just generate a new currency of more units and similar utility (as has happened many times recently.)

Objects in the real world have utility that's directly linked to their unit value. That's not necessarily true for Bitcoin... if it goes up 10X, I can just use 1/10 as much and get the same exact transaction result. So why is it "limited" from a supply/demand perspective?

while the supply of digital coins is infinite (you could fork btc, or any other chain, or create different coins that could then be forked) the supply of Bitcoins is finite & knowable. this is a component of the argument by "maximalists" who suggest that alternate coins/tokens are bullshit by design, and anybody who thinks they aren't is necessarily in favor of inflationary money.

> Objects in the real world have utility that's directly linked to their unit value.

Could you explain what this means to you? I don't understand what you're saying

Bigger diamonds are more desirable than larger diamonds, not because of the price, but because they look better and are sparklier and harder to lose and all sorts of other real-world metrics.

If I want $1000 of bitcoin, I don't care whether that value is in 1 BTC, 100BTC, or 0.0001BTC. They are otherwise identical to me.

Therefore, the fact that the total of all bitcoins in circulation can't exceed 23 million is irrelevant unless you care about the value of 1 BTC, which is only the case if you are trying to sell them for more than you paid.

What he said above: unless you have a long or short position, you don't care whether you get a full unit or some fraction thereof.

There are some elements of behavior economics that counter this - people like to buy lower-priced coins and stocks because they get "more" of them, from a unit perspective. But rationally, there's no reason to consider 1 BTC @ $10 any different from 0.1 BTC @ $100, hence the number of "units" seems potentially irrelevant.

but is the same not true of trading USD for EUR? If I want $1000 of EUR, I don't care whether that is 1 EUR, 100, or .01. The value is in the ecosystem.

Bitcoin is still at the beginning of the beginning of any sort of ecosystem. Everyone expects way more from it than is possible. It is/will deliver on the things it is designed to.

You're correct that I don't care about the value of 1 BTC (or 1 EUR) unless I can sell it, but you imply only selling it for USD again. When it is widespread enough to be a currency, you can 'sell' it for goods and services.

Yes, but people argue that the finite supply of Bitcoin is a fundamental advantage vs. currencies. The supply of a currency isn't really infinite, but it's quite flexible when you consider that giving credit effectively "creates" more currency and expands the monetary supply. (I'm not clear why BTC won't eventually have this issue as well if folks start lending / borrowing it.) All the BTC really avoid is increases in the monetary supply via the printing of additional currency, which is arguably a feature of traditional money, in that the central government can intentionally tighten or ease the monetary supply to help manage economic volatility.

while the supply of digital coins is infinite (you could fork btc, or any other chain, or create different coins that could then be forked)

This is bull. It's not zero cost to fork a cryptocurrency. It's not zero cost to mine. The supply of a digital good might well be very large. However, it will most certainly be finite.

You could fork the cryptocurrency and let miners decide their reward.

Then you're limited to "What's the biggest number that a miner can name in the finite amount of memory available?", which has the ultimate limit of a Busy Beaver function.

BB(n) for n > 1500 behaves like an infinity in many important ways.

Then you're limited to "What's the biggest number that a miner can name in the finite amount of memory available?"

Then just apply my original argument. It's not zero cost to mine. It's not zero cost to fork. The supply of cryptocurrency will be very large, but it will be so many x orders of magnitude smaller than BB(kerjillion), that x itself might be larger than the number of every cryptocoin ever made and every cryptocoin that ever will be made.

The useful thinking is about the computational limits of our current civilization, not infinities or redonkulous numbers.

You don't need to fork it, or mine it. You just use a smaller amount.

My point was that other traditional "store of values" have inherent value based on their utility per amount, which means that the finite supply has implications for people who want to use it. Bitcoin doesn't have that - it's purely useful in terms of what you can trade it for (much like a dollar.) Hence the fact that there's only so many "units" is kind of uninteresting, because a fractional unit is no less useful.

I'd say that an analogy with diamonds works: There is an infinite supply of lab-made-diamonds, however they are not fungible with real diamonds. Them being substitute goods, lab-made-diamonds may have negatively impacted the price, but real diamonds are still considered scarce.

This analogy isnt complete though because it doesnt take into account network health. Its easy to make a cryptocurrency, but hard to build a network large enough to defend against various attacks. There are many, man coins out there suseptible to double spending - bitcoin is the most secure, and this security adds some value in itself.

Maybe you're jumping to the conclusion too fast. Most coins don't have publicly declared vulnerabilities (ie there might be many 0days). But it might be untrue that bitcoin price is not being manipulated (an attack itself on the network) based on multiple articles on HN alone.

So bitcoin might not be too unique or valuable.

There is nearly an infinite supply [for all practical purposes] of mined diamonds, for that matter. And lab-made diamonds are real, and aside from the early versions being a little too perfect they are indistinguishable from mined diamonds.

> There is an infinite supply of lab-made-diamonds, however they are not fungible with real diamonds.

Ada Diamonds sells lab-grown diamonds and jewelers can't tell https://news.ycombinator.com/item?id=17228369

De Beers admits defeat over man-made diamonds https://news.ycombinator.com/item?id=17183603

There's an infinite supply, but there's non-zero cost associated with accessing incremental units in that supply. (And some would say diamonds are an artificially constrained market anyway.) With crypto, there's arguably an unlimited supply at zero cost.

> With crypto, there's arguably an unlimited supply at zero cost.

I like that one. Makes it seem like its a perpetual motion machine and we all know how that ends.

The mining cost is actually quite high for bitcoin, there's a friction involved that's being overcome.

They pretty much are fungible with natural diamonds. High quality synthetics can't be told by eye from equivalent quality naturals.

If they're < 1ct., it doesn't pay to have them analyzed.

"Real" diamonds have always been considered scarce, but only because of marketing. De Beers, AlRosa, etc. have very large reserves of natural diamonds. Over time, they will become genuinely scarce, as the industry agrees that economically recoverable deposits of natural gems will decline after about 2020.

Diamonds aren’t scarce. They are just unevenly distributed, and a few cartels own the means of production. The resale market for all but the most valuable diamonds is complete crap, because deBeers keeps bringing enough new diamonds to market every year to meet demand.

> Objects in the real world have utility that's directly linked to their unit value.

But that's not true of money...whether it's official fiat money, many local currencies, or even gold, which has some utility but not near enough to support its total value.

Why can't it be both? (Hype cycle and manipulation).

Indeed, any theory of manipulation has to involve a managed hype cycle.

If a small number of people and organizations controlled both bitcoin supply and bitcoin trading and had the ability generate tether, they could "prime the pump" of the hype cycle to get attention and a rise in price. They'd then cash out money from the folks who put dollars into bitcoin. But once the hype cycle turned, they could slow down trading in bitcoin, slow down the cashing-out of tether, and print new tether so that a bust wouldn't be evident in the price, and so that an actual mass exodus from bitcoin into real dollars wouldn't be possible.

Thus bitcoin prices could be sustained at an apparently high level, with even a few upward bumps, for a while.

> Bitcoin has a limited predictable supply

Lots of things have predictably limited supplies. Most of them don't go through a hype cycle.

Agreed. I heard millennials (mainly) looking at the desolate financial future that awaits them and deciding to roll the dice and throw what little cash they had into Bitcoin.

Sad on many levels.

i just want to tip my hat to such a succinct, and in my view accurate summary.

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