Comment by SolarNet | Hacker News Reader

Comment by SolarNet | Hacker News Reader

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That's an interesting understanding of how currency works. There is no currency connected to bitcoin. There is an exchange rate. Someone out there willing to give you X dollars for Y bitcoins. (Consider the concept of X dollars for Y barrels of gas, or Z oz of gold).

Money is used multiple times. The dollar you spend at the store is then split up and spent again, and again, and again. So the value of the whole currency is what is important, how much buying power the currency you have is based on how many dollars there are, what they can be spent for, how often they are spent, etc. By offering X dollars for Y bitcoins, what people really mean is: offering x% of all the dollars for y% of all the bitcoins.

This sale adds more bitcoins (because portions of the markets believed them unrecoverable, and they haven't been in circulation for a while), so Y bitcoins is now a smaller percentage of the whole buying power available for bitcoins, which means they are also worth less dollars. Similar effects are seen in fiat currency (like dollars) when more money is printed, it affects the money supply, and allows the government a modicum of control on inflation (when used correctly) but also can let the government to let inflation get out of control (re: most cases of Hyperinflation[1]).

The simpler explanation is simply: Because the supply of bitcoins went up, with a constant demand of bitcoins, the value goes down because more people are trying to sell them, and the price goes down due to competition etc (e.g. basic supply and demand).

[1] http://en.wikipedia.org/wiki/Hyperinflation

The increased [bit-]money supply doesn't explain the observed price drop - it would explain a price drop, but much, much smaller than this one; those 30k bitcoins is a rather tiny part of the whole bitcoins in circulation; so obviously some other reasons dominate this particular price change.

If US treasury prints a billion dollars, then that doesn't trigger a 10% drop in value of a US dollar - it's a comparably tiny change with a tiny effect; similarly an extra 30k BTC is not by itself a reason for large fluctuation if the market is functioning properly.

Yes, but market fluctuations always shoot above and below 'rationalizable valuations'.

A few reasons why your analogy is flawed. First, M0 (which is one of the more conservative definition of money, is about 4 trillion, so the value loss from a billion dollars is not going to be anywhere near 10% to start off with). Secondly, by printing money you're again only affecting M0, but there are a lot of debt-based instruments that are probably better characterizations of "total money", but since they are debt-based it creates some level of 'springiness' to the total money supply.

Finally, it's not clear to me what you mean by 'functioning properly'. Even if a small change triggers a bigger effect (it will, these things are categorized by cascading effects) - Is the market coordinating individual values with prices? Probably, it is: it's just that the individuals' value systems have gone a bit out of whack in a spate of mania. But who are we to judge if people get a little silly from time to time?

My analogy doesn't seem flawed to me- that's exactly what I meant:

1. printing a billion dollars should be approximately just as [in]significant to USD supply as the 30k BTC to the BTC supply in circulation; that's why I said a billion, but not a million or a trillion;

2. market fluctions over/undershooting any corrections is reasonable, but not exaggerating them by multiple orders of magnitude - it may react to a 0.1% change as a 0.2% change, but not as 10% change;

3. a market that's "functioning properly" would be expected to correct for so huge overexaggerations - if some people get a little silly from time to time, then the market should (and would) take their money from them; but if most of the people get very silly frequently, then that's not a properly functioning market.

Well, the sort of obvious explanation is that amount of BTC in active circulation is much smaller than bitcoin proponents claim.

Well, that's market information sort of thing. Note that there are many more bitcoins in federal custody. And that the prospect of large amounts of bitcoins re-entering the market will cause some investors to dump their bitcoins.

To add onto your analogy, if they government did print billions more than normal, then investors would project that behavior out, try to figure out what was wrong, and exasperate the effects.

If USA government starts printing extra tens of billions every single day, then investors project that out and that has a significant effect; it was called quantitative easing.

Similarly, if USA government had now started to do sales like this (and larger) every other day, then it would be grounds for some major effects - but they are not; the government does not have many more bitcoins in custody, they have a few limited amounts like this one of less than $20m. Why should such a comparably small sale cause any market disruption? If some $20m re-entering the market does that, then that's a sign of a very, very small and illiquid market.

If any real scale business would start using BTC, gets a few thousand BTC in sales, and wants to swap them to another currency - do they have to think of themselves as 'market influncer' that should be careful on how to sell them so as not to rock the boat; instead of simply immediately getting the current exchange rate for that?

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