That's because Bitcoins are relatively easy to buy and very difficult to cash out into real currency. Once enough people see how hard it is to liquidate their Bitcoins back to USD the realization will follow.
Wrong. Have you actually tried to buy a Bitcoin? If not, ask someone who has. At the moment, it's hard for Bitcoin novices to buy Bitcoins, and much less hard to sell them.
Actually, once you've been verified by an exchange (required prior to buying Bitcoins unless you do a private party sale), selling Bitcoins is easy; it's getting your USD wired/ACHed to your bank account that can be time-consuming. This is due to the legacy banking system, and not some problem inherent to Bitcoin.
EDIT: By the way, it's not "very difficult" to sell Bitcoins. If I want to sell a Bitcoin, I log onto my Bitstamp account, put in a limit order. When the sale is executed, I submit a short, pre-filled form for a wire transfer to my bank. I then wait a few days and the money is in my bank account, in USD. Not hard.
I think he's making a liquidity point. It may be easy from a process standpoint to cash out, but the question is how much the value of your bitcoins may change whenever you cash out.
Part of the value of dollars as a medium of exchange is that the value does not fluctuate greatly from day to day or minute to minute. In the short term, you can rely on prices remaining fairly stable.
I'm familiar with the term liquidity. However, you seem to be making a point about Bitcoin's volatility, which is completely orthogonal to its liquidity. An asset could have no volatility, but have very poor liquidity (e.g., a house under normal circumstances).
jnbiche, it's not letting me reply to you so I'm doing it here.
You make a good point, and my above explanation was a bit confused.
I think BTC faces both problems:
There's high volatility, driven by the current level of speculation and the fixed quantity of Bitcoins that exist on the market. This makes Bitcoin a fairly poor medium of exchange since it is unlikely to hold a stable value from one day to the next.
There's also (I suspect) poor liquidity, driven by the low number of people involved in the exchanges (compared to other assets and currencies). While it may be easy to exchange Bitcoin from a process standpoint, you may not be able to get a price sufficiently close to the last quoted price when you go to exchange for dollars. It may be more liquid than a house, but it is much less liquid than USD, EUR, GBP, etc.
Unless you're an investment banker, yes. There are multiple exchanges that handle daily volume in the 10's of millions USD, with order books deep enough that you could cash out millions of dollars worth of bitcoin without moving the price more than a few percent.
That's nothing compared to what Wall St or the city is used to, but it is plenty enough liquidity for all but the most well off individuals, and growing. When the Winklevoss twins get their bitcoin ETF to IPO, I expect these numbers to increase by orders of magnitude.
Also, none of that is counting the significant volume of transactions which occur non-public or off-exchange.
You're absolute (and obviously) correct about Bitcoin's volatility, but you're mistaken about its liquidity.
Bitcoin is quite liquid if you're in the U.S. and many other countries around the world. The only delay is the time required by the legacy banking system to wire or ACH funds in/out of your exchange account.
Interesting. I did some digging and have a few follow ups:
1) Bid Ask spreads vary by exchange and currency, but it seems that with the exception of BT China an MtGox, the bid ask spreads can be quite wide. Prices for BTC/USD also very a good bit by exchange, meaning the price a merchant sets might be influenced by which exchange they use.
2) The MtGox live chart seems to imply that an order of a few bitcoins (or a few thousand dollars) could have a profound impact on the actual price of BTC/USD. This does not seem particularly liquid to me, unless I misunderstand the chart.
Well, your liquidity assumption is quite accurate in comparison to other currencies such as USD/EUR/GBP. For example on the mtgox exchange there seems to be only about 30 million US worth of volume per day which is quite low.
US/EUR seems to commonly be around 100 billion or so a day.
That doesn't account for an imbalance in the number of potential buyers and sellers. It's very easy to buy a house for $100 million. Go to your real estate agent and say "Here's a $100 million. Buy me a house." It is, however, considerably harder to sell a house for $100 million.
What do you think determines the price? If you can't sell a bitcoin, you lower the price til you can sell it. If you can't buy a bitcoin, you raise how much you will pay until you can buy one.
The only reasons it is different with houses is because people are emotionally invested in them, not all houses are equivalent (and thus their value is unique per house), and liquidity is hence really low, and market prices adjust slowly.
Bitcoins are worth a thousand dollars because people who own them are not willing to part with them for less, and people who are buying them are willing to pay that much. This is economics 101. You can always cash out at the market price, unless liquidity is low; the only time that happens is in a teeny market or a crash.
So profound a concept, yet so simple, and often at the root of so much fallacious thinking. Thanks for taking the time to educate our economically challenged friends.
It's only easy to buy a house for $100M if you have $100M you can spare for house-buying. And then you only get to choose from the rather limited range of $100M houses that are available for sale.
Similarly, you only get to sell a house for $100M if you have a house that nice to sell. And then you only get to sell to the rather limited range of people willing to buy a house for $100M.
But perhaps I've misunderstood. If you happen to have $100M burning a hole in your pocket, it's easy to buy a house that would normally cost $1M with it, because most people with $1M houses will happily sell them for $100M. But the parallel to that is that if you happen to have a house that would normally cost $100M, it's easy to sell it for $1M. Which it would be.
The point is the liquidity of houses is less than liquidity of cash. Likewise, the liquidity of bitcoins is less than liquidity of dollars. You can easily buy bitcoins(houses) if you have the money, but the reverse is not true.
>You can easily buy bitcoins(houses) if you have the money, but the reverse is not true.
With the exception of Mt. Gox, this is simply not true. It's hard to both buy and sell Bitcoins if you've not been verified at an exchange, but once you do that (not very hard), it's equally easy to both buy and sell. The only delay is the time needed for the wire or ACH to arrive.
I get the feeling that many of you are talking confidently about something you have no experience with. Where are you getting the idea that it's hard to sell Bitcoins?
Yes, but did they cash out into real currency? There are lots of "US dollars" on MtGox sitting in the accounts of people who sold bitcoins. It's clear someone has the US dollars; it's not clear it's in the hands of the sellers (or ever will be).
Have you tried paying your taxes in Bitcoin? The IRS (or regional equivalent) is not going to accept bitcoin any time soon and they will want you to pay taxes on, for example, profits. There is a need to convert, don't believe otherwise.
Taxes is not the big problem. Try buying a meal or filling up your gas tank or rent an apartment or paying an electricity bill with bitcoin. 99.(9)% of merchants you'll encounter in the course of your regular life accept local money and about the same do not accept bitcoin.
Out of curiosity, are people seriously using bitcoin stocks as a bank? Or are they just investing part of their money in bitcoin and hoping it goes somewhere? This requirement of conversion only makes sense if people are fully and completely invested. I would be shocked if there were such people at this stage.
It doesn't matter, you still have to pay your taxes in USD. Even if you earned your salary in bitcoins you would have to convert some to USD in order to pay your taxes.
I think these kinds of views are what make the bitcoin community seem ridiculous ... It's just constant downplaying of actual upplaying of conspiracy like goldbugs do and it just seems hard for serious and educated people to take seriously.
I'm not downplaying anyting. Bitcoins intention is to be a real currency. You don't turn your dollars into Canadian Tire money to shop at Canadian Tire.
Saying you're not supposed to convert bitcoin is the statement of someone who thinks bitcoin is NOT an investment. So... not a goldbug.
Woo, bacon lollipops, server hosting, and pizza. Truly the essentials.
You need grocery stores, gas stations, clothing stores, and restaurants to start accepting it. Until then, it's really just a novelty for middle class college Libertarians.
If your available merchant options fit in a page, and contain "sriracha-bacon lolipops", t-shirts, honey and donations, you might as well use monopoly money...
Many businesses accept Bitcoins as payment for physical things. The last Bitcoin meetup that I went to was at a bar/grill that accepts BTC as payment. Most of the attendees paid for their drinks with Bitcoin. You don't need to convert to cash in order to buy things with Bitcoin.
well use it as it's intended, buy something in bitcoins.
There's even projects that accept donations in bitcoins, you'll see wallet addresses like this: 1JBEGFXW6ywMtZnCbjvKGJXDtdR6g6KmMi
Their utility isn't tied to the fact that you can turn them into more of your favorite currency later, that stupidity is what's driving the current bitcoin bubble. Wait till people realize what you can do with them.
You realize this list proves the parent's point, not yours? Many categories there have a single provider and none would even breach 1% of providers in your vicinity. I would estimate the probability of not hearing "err... what?" after asking your favorite provider of anything about paying in bitcoins about 1/1000.
The problem right now is that Bitcoin is not (used as) a currency. A currency facilitates the exchange of services of goods. Bitcoin now is more like a plot of land in the middle of London, or gold a few years ago. You buy bitcoins to hold and speculate, not to spend and pay your purchases with it. The resurrection of Bitcoin as as currency after the bubble will be a very interesting transition to watch and it's not 100% sure that Bitcoin will survive it.
Sounds like nonsense to me: if you buy 1 BTC from me, then at the same time I've sold 1 BTC? That makes it by definition as equally hard (or easy) to buy as to sell?
That would imply there are currently more people wanting to sell an IPhone 3G than people want to buy it. Certainly the price of IPhone 3G's isn't rising. And that makes sense.
Currently (and for the last years), the price of BTC has been rising implying that's actually easier to sell BTC than to buy? Moreover there are exchanges that are entirely symmetric (when opening accounts you do not need to qualify as a buyer or seller).
Asymmetry is a nice word but I don't see what's asymmetric here?
I'm not familiar enough with Bitcoin to engage in dialogue about its market dynamics specifically. I only wanted to point out that the mere fact that all sales involve both a buyer and a seller doesn't make it "by definition as equally hard (or easy) to buy as to sell".
If it's easy to buy subprime mortgages with cash does that imply it's just as easy to sell said subprime mortgages for cash? Substitute any illiquid asset(relative to U.S. dollars) if you wish and the statement holds true.
I think the asymmetry revolves around the ease/difficulty in getting USD in and out of an exchange like mtgox. You can take physical paper money to the bank and transfer to an exchange, no problem. You can buy BTC at the exchange, no problem. You can sell your BTC at the exchange, no problem. You can transfer USD from the exchange to your bank and withdraw physical paper money, maybe a problem. Perhaps a slight delay.
