Author Topic: Is it too late [bitcoin]?  (Read 90693 times)

brooklynguy

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Re: Is it too late [bitcoin]?
« Reply #700 on: January 13, 2018, 06:03:39 AM »
i agree with Cycling Stache.  the difference between the stock market and say the bitcoin market is just the long history of the stock market.  that's it.

So you disagree with the distinction that stocks, unlike bitcoins, have an intrinsic value apart from the price that others are willing to pay for them?  Apparently not, based on the next paragraph of your post (which seems to concede that stocks do have a fundamental value apart from their market price, but questions whether, in practice, their market price generally reflects that fundamental value):

Quote
the stock market has apparently not run out of "greater fools".  the average stock is priced 3x its book value, meaning 2/3 of the market price of your stocks is pure speculation.  you are absolutely hoping a "greater fool" comes along to buy your shares of stock/VTSAX/whatever some day.  the stock market is not converging on the book value of your stocks.

For most publicly traded companies book value is a poor yardstick for measuring fundamental value, because balance-sheet-based book value does not necessarily reflect ability to generate profits (or even the actual value that would be realized in an immediate liquidation of the company, given that asset value on the balance sheet is generally locked in at cost (as adjusted for paper depreciation and the like) without being marked-to-market to reflect real-world appreciation).

But thatís all beside the real point, which is simply that stocks do have fundamental/intrinsic value, while bitcoin does not.

maizeman

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Re: Is it too late [bitcoin]?
« Reply #701 on: January 13, 2018, 09:08:45 AM »
In the case of assets that do have intrinsic value (and that are traded in efficient markets) (like stocks), in the long-run, the market runs out of greater fools (and investors who believe in the existence of greater fools), so the "weighing machine" that is the market in the long-term corrects the overvaluation created by the "voting machine" that is the market in the short-term.  In the case of assets that do not have any intrinsic value (like bitcoins, or MMM's fingernail clippings), there is no fundamental value that the market can converge towards in the long-run, and purchasing those assets in the hope that their market value will rise in the future is not investment but speculation.

In the case of cryptocurrencies, I would argue that the value the market will converge upon for a given cryptocurrency once the speculation runs its course is likely dictated by the money supply equation M*V = T where M is the size of the money supply, V is the velocity of money and T is the number of real economic transactions conducted using the currency per unit time (using the same time units for T and V so they cancel out). 

We can expand the equation since M = (U * P) where U is the number of units of the currency, and P is the price per unit of currency and get U * P * V = T, and then solve for P: P = T/(U*V).

For most cryptocurrencies either the number of units of the currency is fixed, or the rate of growth in the number of transactions is fixed. So any guess about the long term price people will pay for a unit of some random cryptocurrency is based on their estimate of the probability distribution for both the number of transactions which will ultimately be conducted in that currency, and the velocity of money for that currency.

The problem, of course, is that different people have very different ideas about that the distribution of potential outcomes for T is, and that no one really knows what an appropriate assumption is for a cryptocurrency's velocity of money.

FWIW, the best estimates I've seen today using the variables in this equation put the price of bitcoin justified by the amount of activity conducted using the currency in the dozens to hundreds of dollars per bitcoin (and that was before transaction fees spiked and major merchants started either dropping bitcoin support or switching to other cryptocurrencies), implying the vast majority of the USD price of bitcoin at the moment is driven by either informed speculation that there is a small chance T will increase by a fair number of orders of magnitude in the future or uninformed speculation that things which have gone up in price will continue to go up in price.

phil22

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Re: Is it too late [bitcoin]?
« Reply #702 on: January 13, 2018, 11:00:02 AM »
i agree with Cycling Stache.  the difference between the stock market and say the bitcoin market is just the long history of the stock market.  that's it.

So you disagree with the distinction that stocks, unlike bitcoins, have an intrinsic value apart from the price that others are willing to pay for them?  Apparently not, based on the next paragraph of your post (which seems to concede that stocks do have a fundamental value apart from their market price, but questions whether, in practice, their market price generally reflects that fundamental value):

Quote
the stock market has apparently not run out of "greater fools".  the average stock is priced 3x its book value, meaning 2/3 of the market price of your stocks is pure speculation.  you are absolutely hoping a "greater fool" comes along to buy your shares of stock/VTSAX/whatever some day.  the stock market is not converging on the book value of your stocks.

For most publicly traded companies book value is a poor yardstick for measuring fundamental value, because balance-sheet-based book value does not necessarily reflect ability to generate profits (or even the actual value that would be realized in an immediate liquidation of the company, given that asset value on the balance sheet is generally locked in at cost (as adjusted for paper depreciation and the like) without being marked-to-market to reflect real-world appreciation).

But thatís all beside the real point, which is simply that stocks do have fundamental/intrinsic value, while bitcoin does not.

i agree that stocks do have a fundamental value and bitcoins do not.

the "intrinsic value" of your stocks is, the book value, is on average 1/3 the price of a share.  it's a slice of the company's net value (assets-debt).  the "ability to generate future profits" is speculation -- an educated guess.

my point is that most of the market price of stocks is speculation, not intrinsic/fundamental value.

sol

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Re: Is it too late [bitcoin]?
« Reply #703 on: January 13, 2018, 11:11:29 AM »
my point is that most of the market price of stocks is speculation, not intrinsic/fundamental value.

You've misunderstood how stocks are priced.  You're not buying the book value, you're buying a share of future earnings.  You're buying passive income from ongoing corporate profits, not a share of the company's assets. 

If the future earnings are expected go up, the stock price goes up regardless of book value.  The book value is merely the backstop, the absolutely minimum future value you can expect if the company is never profitable again and just has to liquidate all of its holdings.  If the price ever falls all the way down to the book value, that means the company is having a fire sale and is doomed to immediate failure.  So the difference between market cap and book value is not due to speculation that a greater fool will come along to buy your share, it's due to how much you are willing to pay today in order to get paid back quarterly in the future.

PDXTabs

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Re: Is it too late [bitcoin]?
« Reply #704 on: January 13, 2018, 11:48:44 AM »
sol and phil22,

I think that you are both right, and both wrong. A stock's value is primary speculative, in that you are betting that the company is going to do better in the future than it is today. If you buy BP the day before the deepwater horizon disaster, you were speculating that the deepwater horizon disaster would not occur. Similarly, if you buy a broad based US mutual fund you are speculating that tomorrow the US won't hamstring itself while some other country such as Japan or Germany does really well. Likewise, there is speculation built into all stock values that the world economy is going to keep growing (which actually, with worst case global warming may not be the case 80 yeas from now).

However, while you are speculating on future returns, business decisions, and the global economy, you are not betting that a greater fool will come around and save you from your purchase.

aspiringnomad

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Re: Is it too late [bitcoin]?
« Reply #705 on: January 13, 2018, 03:16:59 PM »
sol and phil22,

A stock's value is primary speculative, in that you are betting that the company is going to do better in the future than it is today.

Not necessarily true. If you're long, you're just betting that your more bullish (or less bearish) analysis of the company is more correct than the broader market's less bullish (or more bearish) analysis. But the broader market is also forward looking, so you taking a long position may or may not be a bet that the company is going to do better in the future than it is today - that's almost irrelevant.

Sol mostly has it right, except that lots of companies have traded below book without being doomed to immediate failure. Some of the largest banks, even those that had already clearly stabilized post-crisis, for example. The market valued these banks below their book value because it didn't believe that their reported book value was accurate (i.e., assets were not properly marked to market). BAC, for example, just crossed a P/BV ratio of 1.00 last August after spending most of the previous decade below that.

simonkkkkk

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Re: Is it too late [bitcoin]?
« Reply #706 on: January 14, 2018, 04:50:04 AM »
No it not to late

Indexer

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Re: Is it too late [bitcoin]?
« Reply #707 on: January 14, 2018, 07:15:45 AM »
Bitcoin is trying to solve problems that don't exist. Let me rephrase... people are trying to justify Bitcoin's existence by making up problems that it could hypothetically solve if those problems existed. You can transfer money electronically really easily. That isn't a problem that needs to be solved. Bitcoin let's you do it with a numbered account which is great for illegal transactions, but other crypto currencies are doing that better now.

bitcoin stands on its own.  it's a self-contained secure system.  no one needs to justify its existence, it just exists.  no one needs to justify the market price of bitcoin either.  if you personally think the market price is too high, don't buy any.

Oh, I won't by buying any. For it to have a value it has to actually do something, preferably something legal. The post I replied to was someone stating several uses for bitcoin. I merely pointed out that our current means of transferring money electronically worked better in every case.


On the topic of intrinsic value and stocks. Yes, part of a stock's price is speculative(what you think will happen in the future), and part is intrinsic(what is it worth based on information today). There are a few means of calculating this, the oldest probably being the dividend discount model. Intrinsic value really comes up with stock options. Their intrinsic value is known. On the day the option expires the value of the option = it's intrinsic value. If the market value is different from the intrinsic value leading up to the expiration date we call that difference the time value(the speculative piece). High quality bonds also have an easy to measure intrinsic value.

Whether most of a stock's value is speculative is debatable. If you look at stable stocks paying high dividends, utilities will be a good example, they are likely primarily intrinsic value. On the other end of the spectrum, stocks for tech companies who don't pay dividends are likely primarily speculative.

What we can agree on is that stocks have an intrinsic value. The market price doesn't equal the intrinsic value, but they are related.

A consequence of bubbles is that the market value becomes unhinged from the intrinsic value. Tech stocks were not worth their market prices back in 1999. Most of those companies had an intrinsic value near zero. Bitcoin, from what I can see, has an intrinsic value of $0. The market value of bitcoin is therefore 100% speculation.

waltworks

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Re: Is it too late [bitcoin]?
« Reply #708 on: January 14, 2018, 08:45:14 AM »
FWIW, the best estimates I've seen today using the variables in this equation put the price of bitcoin justified by the amount of activity conducted using the currency in the dozens to hundreds of dollars per bitcoin (and that was before transaction fees spiked and major merchants started either dropping bitcoin support or switching to other cryptocurrencies), implying the vast majority of the USD price of bitcoin at the moment is driven by either informed speculation that there is a small chance T will increase by a fair number of orders of magnitude in the future or uninformed speculation that things which have gone up in price will continue to go up in price.

It's too bad nobody was interested in this post, Maizeman, because it's really the same way I've been thinking about it - if the currency has to handle the needs of being used as such, how much do you need, and how much does it need to be worth?

The problem, as you pointed out, is that some of the inputs are pretty much hand-waving guesses at this point.

-W

brooklynguy

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Re: Is it too late [bitcoin]?
« Reply #709 on: January 14, 2018, 08:57:08 AM »
It's too bad nobody was interested in this post, Maizeman

I wouldnít interpret the lack of response as a lack of interest.  I, for one, was very interested in that post because I found it, like almost all of maizemanís content, very interesting, but I didnít respond to it because I had nothing relevant to add.

shadow

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Re: Is it too late [bitcoin]?
« Reply #710 on: January 14, 2018, 11:16:51 AM »
It's too bad nobody was interested in this post, Maizeman

I wouldnít interpret the lack of response as a lack of interest.  I, for one, was very interested in that post because I found it, like almost all of maizemanís content, very interesting, but I didnít respond to it because I had nothing relevant to add.

Same.

aspiringnomad

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Re: Is it too late [bitcoin]?
« Reply #711 on: January 14, 2018, 12:16:22 PM »
It's too bad nobody was interested in this post, Maizeman

I wouldnít interpret the lack of response as a lack of interest.  I, for one, was very interested in that post because I found it, like almost all of maizemanís content, very interesting, but I didnít respond to it because I had nothing relevant to add.

Same.

I'll third that - most interesting post in this thread, IMO.

waltworks

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Re: Is it too late [bitcoin]?
« Reply #712 on: January 14, 2018, 12:54:31 PM »
Well, I thought *someone* would respond to the "bitcoin's value less speculation is in the dozens of dollars" bit!

-W

sol

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Re: Is it too late [bitcoin]?
« Reply #713 on: January 14, 2018, 01:39:13 PM »
Well, I thought *someone* would respond to the "bitcoin's value less speculation is in the dozens of dollars" bit!

-W

What's to say?  It's as reasonable of a valuation as any other, at this point.  At least it was predicated on some attempt to find a real answer, unlike most of the promo media pieces that are pushing for BTC 100k by the end of the year.  Those folks don't even pretend to have reasons.

If crypto currencies are ever going to be a viable mechanism for exchanging money between countries without banks (which seems to be the primary if not the only use case people are talking about), then the actual cost of one unit of currency won't really matter.  You trade dollars in the US into dogecoins into dollars in Thailand, and all that matters is that you get the same number of dollars out that you put in.  The individual bitcoins could be worth a penny each, and all it would mean is that there was a theoretical maximum dollar amount that could be transferred at once this way.  The value of one bitcoin seems irrelevant in this case.  Liquidity matters way more than price, if it's going to get used in this way.

Maizeman's attempt to value one bitcoin based on the number of transactions and the money supply suggests that bitcoins are stupidly overpriced atm.  Does this really surprise anyone?  With all of the media hype, the youtube fanboys, the celebrity promoters, and the lure of get-rich-quick schemes in an unregulated modern day penny stock market?  Of COURSE it's overvalued.  That's the whole point of scooping up ignorant retail investors to buy buy buy.



sol

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Re: Is it too late [bitcoin]?
« Reply #714 on: January 14, 2018, 02:24:21 PM »
This is the funniest thing I've read all day:  https://www.nytimes.com/2018/01/13/style/bitcoin-millionaires.html

Headline:  Everyone Is Getting Hilariously Rich and Youíre Not

I'm laughing my ass off, but my wife is furious.  There are apparently a few hundred 20-something bro-chatchos out there, mostly with modest trust funds from their parents and addictions to 4chan, who have invested tens or hundreds of thousands of dollars in various cryptocurrencies and are now "worth" hundreds of millions of dollars each.  They think they're changing the world order.  They are obsessively paranoid.  Some of them recognize they are running criminal enterprises, but most of them just seem blissfully naive to me. 

I am SO looking forward to watching this all play out.

Padonak

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Re: Is it too late [bitcoin]?
« Reply #715 on: January 14, 2018, 03:51:22 PM »
This is the funniest thing I've read all day:  https://www.nytimes.com/2018/01/13/style/bitcoin-millionaires.html

Headline:  Everyone Is Getting Hilariously Rich and Youíre Not

I'm laughing my ass off, but my wife is furious.  There are apparently a few hundred 20-something bro-chatchos out there, mostly with modest trust funds from their parents and addictions to 4chan, who have invested tens or hundreds of thousands of dollars in various cryptocurrencies and are now "worth" hundreds of millions of dollars each.  They think they're changing the world order.  They are obsessively paranoid.  Some of them recognize they are running criminal enterprises, but most of them just seem blissfully naive to me. 

I am SO looking forward to watching this all play out.

"Data suggests that 94% of bitcoin wealth is held by men".

SJWs have been too busy bashing Trump and trying to censor social networks and completely missed this horrible example of cis white (actually mostly Asian) man privilege. Get to work, people! This can't continue.

GuitarStv

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Re: Is it too late [bitcoin]?
« Reply #716 on: January 15, 2018, 08:08:21 AM »
This is the funniest thing I've read all day:  https://www.nytimes.com/2018/01/13/style/bitcoin-millionaires.html

Headline:  Everyone Is Getting Hilariously Rich and Youíre Not

I'm laughing my ass off, but my wife is furious.  There are apparently a few hundred 20-something bro-chatchos out there, mostly with modest trust funds from their parents and addictions to 4chan, who have invested tens or hundreds of thousands of dollars in various cryptocurrencies and are now "worth" hundreds of millions of dollars each.  They think they're changing the world order.  They are obsessively paranoid.  Some of them recognize they are running criminal enterprises, but most of them just seem blissfully naive to me. 

I am SO looking forward to watching this all play out.

"Data suggests that 94% of bitcoin wealth is held by men".

SJWs have been too busy bashing Trump and trying to censor social networks and completely missed this horrible example of cis white (actually mostly Asian) man privilege. Get to work, people! This can't continue.

I don't think you're right.

It doesn't take much work at all to bash Trump, he does most of the job for you.  You can just repeat things that he says, does, or posts on twitter and . . . bashing complete.

phil22

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Re: Is it too late [bitcoin]?
« Reply #717 on: January 15, 2018, 05:20:46 PM »
For most cryptocurrencies either the number of units of the currency is fixed, or the rate of growth in the number of transactions is fixed. So any guess about the long term price people will pay for a unit of some random cryptocurrency is based on their estimate of the probability distribution for both the number of transactions which will ultimately be conducted in that currency, and the velocity of money for that currency.

would you count bitcoins in cold storage as part of the "number of units" or not?  i would think not, since if they're locked away in cold storage for years at a time (for speculating or whatever) then those bitcoins are not available for creating transactions with.  as of a few years ago the percentage of bitcoin not touched for months/years is very high -- something like 70%:

http://www.ofnumbers.com/2014/11/22/approximately-70-of-all-bitcoins-have-not-moved-in-6-or-more-months/

i believe based on your equation if you for example halve the value of U then you'd double the value of P.

maizeman

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Re: Is it too late [bitcoin]?
« Reply #718 on: January 15, 2018, 05:36:28 PM »
For most cryptocurrencies either the number of units of the currency is fixed, or the rate of growth in the number of transactions is fixed. So any guess about the long term price people will pay for a unit of some random cryptocurrency is based on their estimate of the probability distribution for both the number of transactions which will ultimately be conducted in that currency, and the velocity of money for that currency.

would you count bitcoins in cold storage as part of the "number of units" or not?  i would think not, since if they're locked away in cold storage for years at a time (for speculating or whatever) then those bitcoins are not available for creating transactions with.  as of a few years ago the percentage of bitcoin not touched for months/years is very high -- something like 70%:

http://www.ofnumbers.com/2014/11/22/approximately-70-of-all-bitcoins-have-not-moved-in-6-or-more-months/

i believe based on your equation if you for example halve the value of U then you'd double the value of P.

This is a good question. It turns out the answer doesn't matter as long as you use the same answer consistently for estimating all the variables in the equation, but if you don't realize you need to pick one answer and stick with it, you can certainly get yourself into trouble.

Consider a currency with 10 units, 5 in "cold storage" and 5 which are used for 1 transaction each week. If in one week $100,000 of business needs to be conducted, I can either consider all the coins together, which doubles the size of U, but also halves the size of V (velocity of money) since I'm averaging five active coins with five coins which weren't spent at all during the period in question, or I can subtract out the cold storage coins, which cuts U in half, but makes V twice as fast. In both cases the value for P remains the same.

Now that said, you're right that for most major cryptocurrencies, including bitcoin, there is certainly the potential for units of currency to be irretrievably lost, either when someone loses a private key, or when the coins are sent to an address with no known private key in the first place. In fact, we know many coins have been lost in both ways already. Which answer you pick to the question above just determines whether the growing amount of no longer spendable currency units shows up in your equation as a decrease in the average velocity of money (V), or a decrease in the number of currency units (U). Either way this means that the price per unit would have to increase over time, if we assume the value of actual commercial transactions conducted in the currency remains constant.

It's too bad nobody was interested in this post, Maizeman

I wouldnít interpret the lack of response as a lack of interest.  I, for one, was very interested in that post because I found it, like almost all of maizemanís content, very interesting, but I didnít respond to it because I had nothing relevant to add.

Same.

I'll third that - most interesting post in this thread, IMO.

Thanks, all! Particularly for longer posts it's really nice to hear whether they are being read with interest by someone, or being skipped over in the discussion as dreaded walls-of-text that are just inconveniencing the people trying to debate back and forth.

phil22

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Re: Is it too late [bitcoin]?
« Reply #719 on: January 15, 2018, 05:46:56 PM »
my point is that most of the market price of stocks is speculation, not intrinsic/fundamental value.

You've misunderstood how stocks are priced.  You're not buying the book value, you're buying a share of future earnings.  You're buying passive income from ongoing corporate profits, not a share of the company's assets.

unless you're a time traveler or have a functioning crystal ball, future earnings are unknown.  therefore you're speculating.

If the future earnings are expected go up, the stock price goes up regardless of book value.  The book value is merely the backstop, the absolutely minimum future value you can expect if the company is never profitable again and just has to liquidate all of its holdings.  If the price ever falls all the way down to the book value, that means the company is having a fire sale and is doomed to immediate failure.  So the difference between market cap and book value is not due to speculation that a greater fool will come along to buy your share, it's due to how much you are willing to pay today in order to get paid back quarterly in the future.

the dividend yield for a share of VTSAX for example is 1.75% annualized.  are we really putting 60% or 75% or 85% of our retirement assets into something with an expected 1.75% return?  no.  that wouldn't even beat inflation.  we are banking on the fact that someone else will come along to buy our shares at a higher price, at something more like 7% annual returns.

not only are we expecting the market price to outstrip the actual profits/dividends paid to shareholders, but the price/book ratio has been climbing since 2009.  if things continue like this it means we will be expecting someone else to come along and buy our shares at an even higher price/book ratio than we paid.  this is speculation -- the "intrinsic value" is becoming less and less important over time and "profits" are barely above the inflation rate.

https://www.quandl.com/data/MULTPL/SP500_PBV_RATIO_QUARTER-S-P-500-Price-to-Book-Value-by-Quarter
https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths

phil22

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Re: Is it too late [bitcoin]?
« Reply #720 on: January 15, 2018, 05:57:11 PM »
For most cryptocurrencies either the number of units of the currency is fixed, or the rate of growth in the number of transactions is fixed. So any guess about the long term price people will pay for a unit of some random cryptocurrency is based on their estimate of the probability distribution for both the number of transactions which will ultimately be conducted in that currency, and the velocity of money for that currency.

would you count bitcoins in cold storage as part of the "number of units" or not?  i would think not, since if they're locked away in cold storage for years at a time (for speculating or whatever) then those bitcoins are not available for creating transactions with.  as of a few years ago the percentage of bitcoin not touched for months/years is very high -- something like 70%:

http://www.ofnumbers.com/2014/11/22/approximately-70-of-all-bitcoins-have-not-moved-in-6-or-more-months/

i believe based on your equation if you for example halve the value of U then you'd double the value of P.

This is a good question. It turns out the answer doesn't matter as long as you use the same answer consistently for estimating all the variables in the equation, but if you don't realize you need to pick one answer and stick with it, you can certainly get yourself into trouble.

Consider a currency with 10 units, 5 in "cold storage" and 5 which are used for 1 transaction each week. If in one week $100,000 of business needs to be conducted, I can either consider all the coins together, which doubles the size of U, but also halves the size of V (velocity of money) since I'm averaging five active coins with five coins which weren't spent at all during the period in question, or I can subtract out the cold storage coins, which cuts U in half, but makes V twice as fast. In both cases the value for P remains the same.

i don't agree that if you're considering a smaller value of U then the value of V would be adjusted to counteract that.  the value of V is related to the popularity of the currency (number of users/merchants) and is independent of U.

if you're saying V is "$100k / week" then that is the final value for that.  halving U doesn't then mean V must become "$200k / week".  users would be using half the units of the currency to make the same total dollar amount of transactions, which means the price must be doubled.

Now that said, you're right that for most major cryptocurrencies, including bitcoin, there is certainly the potential for units of currency to be irretrievably lost, either when someone loses a private key, or when the coins are sent to an address with no known private key in the first place. In fact, we know many coins have been lost in both ways already. Which answer you pick to the question above just determines whether the growing amount of no longer spendable currency units shows up in your equation as a decrease in the average velocity of money (V), or a decrease in the number of currency units (U). Either way this means that the price per unit would have to increase over time, if we assume the value of actual commercial transactions conducted in the currency remains constant.

yes i'd expect in "eventually deflationary" currencies like bitcoin the price would be expected to increase over time, all things being equal.
« Last Edit: January 15, 2018, 06:03:38 PM by phil22 »

maizeman

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Re: Is it too late [bitcoin]?
« Reply #721 on: January 15, 2018, 06:07:13 PM »
i don't agree that if you're considering a smaller value of U then the value of V would be adjusted to counteract that.  the value of V is related to the popularity of the currency (number of users/merchants) and independent of U.

if you're saying V is "$100k / week" then that is the final value for that.  halving U doesn't then mean V must become "$200k / week".

$100k/week is the amount of economic activity being conducted. Velocity of money is measured in the number of times the average unit of money changes hands in a given amount of time of time. So, for example, $100k of economic activity in a week could be satisfied with 5 units on currency changing hands an average 10 times a week, at an exchange rate of $2,000/unit. Or it could be satisfied by 10 units on currency changing hands an average 5 times a week (5 at 10 times a week and 5 at 0 times a week), at an exchange rate of $2,000/unit.

phil22

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Re: Is it too late [bitcoin]?
« Reply #722 on: January 15, 2018, 06:13:01 PM »
i don't agree that if you're considering a smaller value of U then the value of V would be adjusted to counteract that.  the value of V is related to the popularity of the currency (number of users/merchants) and independent of U.

if you're saying V is "$100k / week" then that is the final value for that.  halving U doesn't then mean V must become "$200k / week".

$100k/week is the amount of economic activity being conducted. Velocity of money is measured in the number of times the average unit of money changes hands in a given amount of time of time. So, for example, $100k of economic activity in a week could be satisfied with 5 units on currency changing hands an average 10 times a week, at an exchange rate of $2,000/unit. Or it could be satisfied by 10 units on currency changing hands an average 5 times a week (5 at 10 times a week and 5 at 0 times a week), at an exchange rate of $2,000/unit.

that's my point.  the value of V, the dollar value of the economic activity in a unit of time, is related to the popularity of the currency, not how many units of the currency are being used.  why would the number of times the currency changes hands change (10 becomes 5)?

you may have missed my edit above:  if you're saying V is "$100k / week" then that is the final value for that.  halving U doesn't then mean V must become "$200k / week".  users would be using half the units of the currency to make the same total dollar amount of transactions, which means the price must be doubled.

unless you're saying the number of units of a currency affects the velocity, which makes no sense to me.

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Re: Is it too late [bitcoin]?
« Reply #723 on: January 15, 2018, 06:34:03 PM »
are we really putting 60% or 75% or 85% of our retirement assets into something with an expected 1.75% return?  no.

Yes, we really are.  That's the point.  Have you read a single book about investing?  I recommend "The Four Pillars of Investing" as a good primer.  It will explain to you how the price of a share representing future profits is bid down by open market competition until nobody is left to bid it down any further.  If you can do better than the current dividend yield somewhere else, then you should go somewhere else.  That's how markets work, willing buyers meet willing sellers and everyone goes home happy.  Prices are determined by the ratio of those two groups.  Yields are determined by prices. 

Quote
the price/book ratio has been climbing since 2009.  if things continue like this it means we will be expecting someone else to come along and buy our shares at an even higher price/book ratio than we paid.

Sounds like bitcoin.

But no, I'm not expecting anyone to come along and pay a higher price/book than today's.  And this is the key part so read slowly:  I expect book value to increase, and thus for prices to increase, and the ratio to stay the same or even to decrease.  Value in the stock market is created when companies become more profitable, not when speculators bid up the stock price.  See the difference yet?


phil22

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Re: Is it too late [bitcoin]?
« Reply #725 on: January 15, 2018, 07:37:46 PM »
are we really putting 60% or 75% or 85% of our retirement assets into something with an expected 1.75% return?  no.

Yes, we really are.  That's the point.  Have you read a single book about investing?  I recommend "The Four Pillars of Investing" as a good primer.  It will explain to you how the price of a share representing future profits is bid down by open market competition until nobody is left to bid it down any further.  If you can do better than the current dividend yield somewhere else, then you should go somewhere else.  That's how markets work, willing buyers meet willing sellers and everyone goes home happy.  Prices are determined by the ratio of those two groups.  Yields are determined by prices. 

have you read the MMM blog?  perhaps you don't understand index investing and what this board preaches.  index investing is pure speculation.  we are simply banking on the stock market not collapsing for too long while we are retired, not finding individual stocks with a good dividend yield.

i would guess 99%+ of people on this board do not take ANY fundamentals into account when investing in stocks.  we literally pick an asset allocation out of thin air (say 75% stocks) and go with that.  period.  that's pure speculation.  we don't care about future profits or market price or book value or anything about what any company we "invest" in actually does.

Quote
the price/book ratio has been climbing since 2009.  if things continue like this it means we will be expecting someone else to come along and buy our shares at an even higher price/book ratio than we paid.

Sounds like bitcoin.

But no, I'm not expecting anyone to come along and pay a higher price/book than today's.  And this is the key part so read slowly:  I expect book value to increase, and thus for prices to increase, and the ratio to stay the same or even to decrease.  Value in the stock market is created when companies become more profitable, not when speculators bid up the stock price.  See the difference yet?

no i don't see the difference.  i don't get it.  do you divide your stock holdings by 3 when determining your net worth?

the price/book ratio IS going up.  when do you expect it to decrease?

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Re: Is it too late [bitcoin]?
« Reply #726 on: January 15, 2018, 07:48:52 PM »
index investing is pure speculation.  we are simply banking on the stock market not collapsing for too long while we are retired, not finding individual stocks with a good dividend yield.

You didn't read slowly enough so I'll repeat myself.

Price is what you pay, value is what you get.  The stock price is a dollar figure paid by the most recent buyer.  The value is the share of corporate earnings you get in return.  VALUE is not created when the market spikes.  VALUE has nothing to do with stock prices.  VALUE is created when corporations become more profitable, by expanding their markets, developing new technologies, reducing their overhead costs, or otherwise generating more profits that they then pass on to shareholders.

Price is what you pay in order to get value.  The price fluctuates minute by minute, in response to speculators, while the value only changes slowly, as corporations evolve over time.  Wealthy people have valuable assets.  Bitcoin millionaires have expensive assets.  There is a difference.

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Re: Is it too late [bitcoin]?
« Reply #727 on: January 15, 2018, 07:55:02 PM »
that's my point.  the value of V, the dollar value of the economic activity in a unit of time, is related to the popularity of the currency, not how many units of the currency are being used.  why would the number of times the currency changes hands change (10 becomes 5)?

Okay, this is the disconnect. The velocity of money (V) is NOT a measure of the economic activity in a unit of time. It's a measure of how often the average unit of currency changes hands in a given unit of time. In the equation I wrote above -- U * P * V = T -- the $100k of economic activity would be the value of "T" not of "V."

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Re: Is it too late [bitcoin]?
« Reply #728 on: January 15, 2018, 08:02:30 PM »
If it helps to see the units:

U (coins) * P (dollars per coin) * V (transactions per coin per unit time) = T (dollars worth of transactions per unit time)

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Re: Is it too late [bitcoin]?
« Reply #729 on: January 15, 2018, 08:14:57 PM »
my point is that most of the market price of stocks is speculation, not intrinsic/fundamental value.

You've misunderstood how stocks are priced.  You're not buying the book value, you're buying a share of future earnings.  You're buying passive income from ongoing corporate profits, not a share of the company's assets.

unless you're a time traveler or have a functioning crystal ball, future earnings are unknown.  therefore you're speculating.

have you read the MMM blog?  perhaps you don't understand index investing and what this board preaches.  index investing is pure speculation.  we are simply banking on the stock market not collapsing for too long while we are retired, not finding individual stocks with a good dividend yield.

You are taking this line of thought way too far. Assuming human civilization will continue past tomorrow is speculation if you want to take it to the extreme. There are rational expectations we can make about the future for planning purposes. 

If I buy a US government bond do I know I'm going to get the next interest payment? Not with 100% certainty. The world could end tomorrow. However, short of a highly unlikely event, I will get my next interest payment. No rational investor would consider t-bills a speculative investment. You can calculate their intrinsic value based on the value of the cash flows, and the market price will be very close to the intrinsic value. Very little of the price is attributed to speculation.

If I buy VTSAX I know that, short of a highly unlikely event, I will see continued dividend payments. There is also a high probability that those dividend payments will increase over the long term. As I pointed out in my previous post, some stocks do trade more on speculation than intrinsic value. Tesla would be an example. However, most stable dividend paying companies tend to trade more on their intrinsic value. Their cash flows are reliable.

As I pointed out in my previous post, stocks and bonds have intrinsic value. Even if that intrinsic value is less than the market price the value exists and the market price is related to the fundamental intrinsic value. Cryptocurrencies don't have an intrinsic value. Their value is 100% speculation.


Quote
i would guess 99%+ of people on this board do not take ANY fundamentals into account when investing in stocks.  we literally pick an asset allocation out of thin air (say 75% stocks) and go with that.  period.  that's pure speculation.  we don't care about future profits or market price or book value or anything about what any company we "invest" in actually does.

The reason most people on this board act in this manner is that they know they can't outsmart the market, which is already very efficient. Have a better model? Try it out.

phil22

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Re: Is it too late [bitcoin]?
« Reply #730 on: January 15, 2018, 08:40:44 PM »
index investing is pure speculation.  we are simply banking on the stock market not collapsing for too long while we are retired, not finding individual stocks with a good dividend yield.

You didn't read slowly enough so I'll repeat myself.

Price is what you pay, value is what you get.  The stock price is a dollar figure paid by the most recent buyer.  The value is the share of corporate earnings you get in return.  VALUE is not created when the market spikes.  VALUE has nothing to do with stock prices.  VALUE is created when corporations become more profitable, by expanding their markets, developing new technologies, reducing their overhead costs, or otherwise generating more profits that they then pass on to shareholders.

Price is what you pay in order to get value.  The price fluctuates minute by minute, in response to speculators, while the value only changes slowly, as corporations evolve over time.  Wealthy people have valuable assets.  Bitcoin millionaires have expensive assets.  There is a difference.

you seem to be trying to comfort yourself with use of terminology.  when you go to put the 4% rule into practice, all you care about is the current market price.  your perceived notion of "value" is meaningless since you are an index investor.  or perhaps you insist on taking a 66% loss on your stocks and you only sell your stocks for book value?

the point is, the stock market is currently 2/3 speculation, and for a FIRE-focused index investor, is pure speculation.  comforting yourself with the notion of "value" doesn't change that because we are FI when we reach a spending level of 4% of the market price of our portfolios, not 4% of the book value of our stocks.

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Re: Is it too late [bitcoin]?
« Reply #731 on: January 15, 2018, 08:43:49 PM »
If it helps to see the units:

U (coins) * P (dollars per coin) * V (transactions per coin per unit time) = T (dollars worth of transactions per unit time)

yes that does help.

if U and V are not independent, and in fact are strictly inversely proportional, then they should they not be separate variables?

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Re: Is it too late [bitcoin]?
« Reply #732 on: January 15, 2018, 08:44:43 PM »
some stocks do trade more on speculation than intrinsic value. Tesla would be an example.

Even Tesla, the quintessential example of a speculative stock, is expensive solely because people speculate that it will be hugely profitable.  They are speculating on its future VALUE, not on its price.

Price is what you pay, value is what you get.  Repeat it with me and Warren together.  Price is what you pay, value is what you get. 

If you're buying a stock (or a bitcoin) because you think the price will go up, without any expectation of future earnings or profitability or acquisitions or book value (the value), then you are speculating on price.  This is not the same as what people have done with Tesla.  Tesla's price went up because people expected Tesla to make gobs of money. 

Bitcoin does not make anyone money!  Bitcoins have no revenue stream!

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Re: Is it too late [bitcoin]?
« Reply #733 on: January 15, 2018, 08:56:07 PM »
my point is that most of the market price of stocks is speculation, not intrinsic/fundamental value.

You've misunderstood how stocks are priced.  You're not buying the book value, you're buying a share of future earnings.  You're buying passive income from ongoing corporate profits, not a share of the company's assets.

unless you're a time traveler or have a functioning crystal ball, future earnings are unknown.  therefore you're speculating.

have you read the MMM blog?  perhaps you don't understand index investing and what this board preaches.  index investing is pure speculation.  we are simply banking on the stock market not collapsing for too long while we are retired, not finding individual stocks with a good dividend yield.

You are taking this line of thought way too far. Assuming human civilization will continue past tomorrow is speculation if you want to take it to the extreme. There are rational expectations we can make about the future for planning purposes. 

If I buy a US government bond do I know I'm going to get the next interest payment? Not with 100% certainty. The world could end tomorrow. However, short of a highly unlikely event, I will get my next interest payment. No rational investor would consider t-bills a speculative investment. You can calculate their intrinsic value based on the value of the cash flows, and the market price will be very close to the intrinsic value. Very little of the price is attributed to speculation.

If I buy VTSAX I know that, short of a highly unlikely event, I will see continued dividend payments. There is also a high probability that those dividend payments will increase over the long term. As I pointed out in my previous post, some stocks do trade more on speculation than intrinsic value. Tesla would be an example. However, most stable dividend paying companies tend to trade more on their intrinsic value. Their cash flows are reliable.

the US government literally prints money out of thin air, which is why treasury bonds aren't speculation.

the stock market could lose 2/3+ of its value and stay down for decades if there's war or natural disasters or a epidemic or any other black swan event.  we index investors are speculating that that won't happen and that future buyers will continue to prop up the market price well beyond book value.

As I pointed out in my previous post, stocks and bonds have intrinsic value. Even if that intrinsic value is less than the market price the value exists and the market price is related to the fundamental intrinsic value. Cryptocurrencies don't have an intrinsic value. Their value is 100% speculation.

i agree cryptocurrencies don't have intrinsic value, but my point is that's irrelevant and is comparable to the stock market.

we can reach FIRE when we can live on 4% of the market value of our portfolios, not 4% of the book value.  the intrinsic/book value doesn't matter because it's not high enough (33%) to be meaningful BECAUSE we are all FIRE-focused index investors and we buy both solid blue chip stocks and crazy speculative stocks.

Quote
i would guess 99%+ of people on this board do not take ANY fundamentals into account when investing in stocks.  we literally pick an asset allocation out of thin air (say 75% stocks) and go with that.  period.  that's pure speculation.  we don't care about future profits or market price or book value or anything about what any company we "invest" in actually does.

The reason most people on this board act in this manner is that they know they can't outsmart the market, which is already very efficient. Have a better model? Try it out.

i'm not disagreeing with the strategy, and i don't think there is a better one.  i'm just saying it's speculation and hoping that past performance indicates future results.

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Re: Is it too late [bitcoin]?
« Reply #734 on: January 15, 2018, 09:07:05 PM »
I disagree with almost every instance of your use of the word "speculation" in that post.  You seem to think that any investment that is not FDIC insured is speculation.  Just allow me to posit that most people don't agree with your definition, and we can move on.

i agree cryptocurrencies don't have intrinsic value, but my point is that's irrelevant and is comparable to the stock market.

At this point I'm no longer sure if you're defending bitcoin as if it were as good as the stock market, or trashing the stock market for being as bad as bitcoin.

And you know what?  It doesn't really matter.  You get to decide what to do with your money.  You're clearly excited about cryptocurrencies, and you are just as free to buy them as you are to buy any other asset class.

But if you keep showing up trying to convince other people to play the part of the greater fool for you, some of us might keep showing up to argue with you.  Just sayin'.  Purely as a public service on behalf of the forum, I will personally voice my disagreement.  I stand to make no money by convincing anyone to agree with me.

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Re: Is it too late [bitcoin]?
« Reply #735 on: January 15, 2018, 09:41:15 PM »
I disagree with almost every instance of your use of the word "speculation" in that post.  You seem to think that any investment that is not FDIC insured is speculation.  Just allow me to posit that most people don't agree with your definition, and we can move on.

+1


Quote from: phil22
the stock market could lose 2/3+ of its value and stay down for decades if there's war or natural disasters or a epidemic or any other black swan event.  we index investors are speculating that that won't happen and that future buyers will continue to prop up the market price well beyond book value.

OR you just grossly misunderstand why anyone participates in the market. For starters, people don't buy stocks because they want a companies' assets. You are focused on book value for some reason. Stocks don't trade based on their book value. Investors buy stocks because they want the earnings. Those earnings could pass on to the investor in the form of dividends, stock buybacks, or the company could reinvest the earnings back into the company which implies more earnings later on(future dividends). Keep in mind some companies, like tech companies, have significant cash flow while holding onto very little in tangible assets. Their price to book ratio could look very abnormal, while their price to earnings looks fine. Let's use Apple as an example. Price to book = 6.71. Forward price to earnings = 15.6. If Apple's stock price dropped enough for their P/B to equal 1 then their PE would be 2.32, which would equate to an earnings yield of 43%! That's insane. This is why investors care about cash flows and not assets. If stocks drop by 60% I'll still be happy to own them, because of the earnings!!!

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Re: Is it too late [bitcoin]?
« Reply #736 on: January 15, 2018, 10:32:04 PM »
Wow, just wow. I've never heard such ignorance when it comes to stock market investing, fundamental stock valuation and pricing, and index investing. Index and stock market investing is speculation now and basically a Ponzi scheme? I would expect better in the investing section but apparently not in a crypto thread. I mean this is kindergarden level very basic investing knowledge.

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maizeman

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Re: Is it too late [bitcoin]?
« Reply #737 on: January 15, 2018, 11:00:36 PM »
If it helps to see the units:

U (coins) * P (dollars per coin) * V (transactions per coin per unit time) = T (dollars worth of transactions per unit time)

yes that does help.

if U and V are not independent, and in fact are strictly inversely proportional, then they should they not be separate variables?

Happy that helped to clarify things. To answer your question, U and V are strictly inversely proportional only in the special case that you're removing or adding a subset coins with zero transactions per unit of time from U.

If you're removing coins which would otherwise have been used in transactions and holding T constant, either P and/or V could increase.

EscapeVelocity2020

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Re: Is it too late [bitcoin]?
« Reply #738 on: January 16, 2018, 12:57:52 AM »
If it helps to see the units:
U (coins) * P (dollars per coin) * V (transactions per coin per unit time) = T (dollars worth of transactions per unit time)
...
If you're removing coins which would otherwise have been used in transactions and holding T constant, either P and/or V could increase.

That has been a big part of my reasoning behind the speculation, Bitcoin has a fixed limit and get's exponentially harder to create.  The hard fact is that more 'real' resources are being consumed to create the next coin, so either it is worth the expenditure or else the system will tailor / truncate itself.  The fact that nominal resources are cheap enough to perpetuate the system should be an indication as to what Bitcoin is worth to the general population that exchange it.

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Re: Is it too late [bitcoin]?
« Reply #739 on: January 16, 2018, 08:19:44 AM »
Sure looks like the speculation party is over. bitcoin is now down 40%. Feels like 2008 for BTC right now.
« Last Edit: January 16, 2018, 08:21:52 AM by Mr. Green »

Acastus

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Re: Is it too late [bitcoin]?
« Reply #740 on: January 16, 2018, 08:24:09 AM »
No, it is not too late to lose everything by "investing" in Bitcoin.

maizeman

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Re: Is it too late [bitcoin]?
« Reply #741 on: January 16, 2018, 09:20:03 AM »
I tried looking up the quantity theory of money equation and everywhere else presents it as:

MV = PT  which is different than your equation of MV = T

https://www.investopedia.com/insights/what-is-the-quantity-theory-of-money/

Perhaps you dropped the P?

I'm not sure where  M = U*P comes from, but if you were to substitute it into MV = PT, you would get U * P * V = P * T
In this case, P would cancel and you would have units of currency multiplied by velocity is equal to transactions per unit time.

It's useful to list the definitions of variables, not just the letter used to represent them. Otherwise you run into the problem that different people use the same letters to represent different things in different equations. It looks like there are two cases of this in the example you gave.

The first example is T:

MV = total economic value of all transactions.

I wrote that as a single variable (T). In the link you found they're defining the total economic value of all transactions as the product of the total number of transactions (which they're also calling T), and the average dollar value of those economic transactions or the price index (P).* If you multiple the total number of something by the average value of that thing you get the total value of all the things put together. So (total value) = (average value) * (total number).

The second example is P. I define the money supply (M, both our sources agree on that abbreviation) as the number of currency units (U) * the price of each of those currency units in dollars (P). The reason to include this is that we were discussing economic activity (T or T * P depending on which equation you use) in dollars, but the units (U) were some other currency. If the units were dollars and the economic activity was in dollars than the price of dollars per dollar would always be 1, so the term can be safely omitted.

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I don't know that it would be proper to just throw V on the right side of the equation and solve for a P as you've done, since V itself is apparently dependent on price which would be measured.  However if one assumes a value for V and it is wrong, then it would produce incorrect results when one "plugs-and-chugs" through the equations.  GIGO.

Yup. Measuring financial velocities is hard. That's part of why people can come up with such a wide range of estimates for what the price of bitcoin would need to be today to facilitate the amount of actual economic activity conducted using the currency. (The other half being that measuring total economic activity conducted in a given currency is also hard). Add in the third source of uncertainty (guessing the distribution of likely outcomes for both the velocity of money for bitcoin and the total economic activity for bitcoin years in the future), and you can see why people have so much trouble agreeing on what a reasonable price for it today is.

All in all, I'm very happy I don't have to try to outguess the market.

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Re: Is it too late [bitcoin]?
« Reply #742 on: January 16, 2018, 09:47:17 AM »
Sure looks like the speculation party is over. bitcoin is now down 40%. Feels like 2008 for BTC right now.

I think the bitcoin community will rejoice if their losses are only 40% from the peak.

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Re: Is it too late [bitcoin]?
« Reply #743 on: January 16, 2018, 11:34:15 AM »
Yup. If you are using only one currency in the equation, there is no need to separate the money supply until units and price per unit, since if your economic activity is measured in dollars per unit time, and your money supply is measured in dollars, the price per dollar of a dollar is always 1. Did I forgot to write that above? If so, I apologies as I am writing this from a smartphone.

If you disagree with the above way of describing the bitcoin money supply in dollar terms, do you have an alternative measure of the bitcoin money supply youíd like to propose? Or even if you donít have an alternative, would your mind describing in a little more detail what your specific ideas are for when this approach might produce an incorrect result?

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Re: Is it too late [bitcoin]?
« Reply #744 on: January 16, 2018, 11:42:25 AM »
To simply a bit more. There are essentially three points:

1) Whether the velocity of money equation as writing on the investopedia website you linked to is correct.

2) The idea that total economic activity is the product of the number of economic transactions * the average value of each transaction.

3) The idea that if we're looking at the money supply for a non-dollar currency in dollar terms, we need to correct for the price/exchange rate between that currency and the US dollar.

Feel free to disagree with any one, two, or all three, or point out some other assertion from my previous post which I didn't realize I was making. Either way, I'd appreciate it as it'll make it a lot easier for me to understand where our point of disagreement is.

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Re: Is it too late [bitcoin]?
« Reply #745 on: January 16, 2018, 11:45:19 AM »
Sure looks like the speculation party is over. bitcoin is now down 40%. Feels like 2008 for BTC right now.

I think the bitcoin community will rejoice if their losses are only 40% from the peak.

For all the insightful philosophy of money talk on this thread, it would appear the answer was explainable in one word: bubble.

I wonder... when cryptocoin losses exceed the losses suffered by dot-com speculators in 2000 or housing speculators in 2007, will fans admit there once was a bubble? I know arguing on the internet means never having to admit you're wrong, but part of me wonders...

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Re: Is it too late [bitcoin]?
« Reply #746 on: January 16, 2018, 11:59:24 AM »
Sure looks like the speculation party is over. bitcoin is now down 40%. Feels like 2008 for BTC right now.

I think the bitcoin community will rejoice if their losses are only 40% from the peak.

For all the insightful philosophy of money talk on this thread, it would appear the answer was explainable in one word: bubble.

I doubt it.  It's always been super volatile.  I suspect this is not the first 40% price drop for bitcoin, and so far it has always recovered.

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Re: Is it too late [bitcoin]?
« Reply #747 on: January 16, 2018, 12:16:52 PM »
It’s interesting to see this thread is so quiet today.


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Re: Is it too late [bitcoin]?
« Reply #748 on: January 16, 2018, 12:32:03 PM »
Itís interesting to see this thread is so quiet today.


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Re: Is it too late [bitcoin]?
« Reply #749 on: January 16, 2018, 12:42:51 PM »
Itís interesting to see this thread is so quiet today.

Did you expect some informed commentary about how to best play today's volatility?  This kind of thing makes for great books and movies (a.k.a. The Big Short) after the house of cards falls or goes up a few more levels after faltering, but no-one really knows where Bitcoin is going to go day to day.  Pete predicted lots of things (herehere), and here), recommended Betterment and LendingClub, and suggested that Bitcoin was overvalued - looks like he might've been right for once :).