BTC Dynamics

I know! I know!

This one is about another misconception I see flying around, but also some of my own ponderings.

The idea is, that Bitcoin 2 will appear, render bitcoin obsolete, and the whole thing will just be a bunch of tulip bulbs.

What this viewpoint misses is that the BTC chart for the last few months has shot up like crazy, but if you look at the entire BTC history, you'll see a good two years of low level existence which had a bit of spike around June 2011, when adoption of the idea initially kicked off.

If you're an uninformed mainstream media commentator .. or any other kind, you also probably fail to realise the investment for many people, and some subtle economics of supply and demand in the processing power thrown at BTC.

Start with investment. A lot of people have sunk thousands of dollars / pounds in to "Mining Rigs". Even before the current crop of even faster ASIC custom chips are appearing, GPU mining became a thing. That's using a Graphics Card to compute the parts of the block instead of the ordinary main processor in your computer. What some people did, was build computers with as many of the best graphics cards they could in, and mine BTC for themselves with that. So what?

Here's your first economic curve to build in. By saying "best graphics card" it isn't always the fastest. The trade off is against electricity consumed. There's no point spending more on electricity than you mine in BTC. When BTC was in the $12 to $15 range, this was a huge issue. Many people will eventually have done the maths and turned off the miner to play games instead. The effect of the recent huge up for BTC, is that even scraping a hundredth of a percent from a block becomes worth the electricity again. So processing power and investment returns.

Investment? Yup. You might not believe it, but some folk are chucking in the region of tens of thousands of dollars in to systems now that can only mine bitcoins. You can't even run tetris on them. They do it very economically as well in terms of electricity consumption.

Why am I bothering to explain this? Because the investment in technology and time prior to this sudden surge is much larger than some people are considering. Any incompatible rival bitcoin system now will have to attract all that investment away from BTC for a very good reason.

Sure, that could still happen. All bets are off in BTC land. But there is a fair bit more to it than someone saying "Hey! Use this instead!" and everyone leaving.

The other reason for inertia in moving away from BTC, is that over the entire lifespan, it has already proven itself to be a reliable secure system. So far at least, any problems have been overcome and the system has proved itself as at least very robust. Ironically, the more computing power that gets thrown at it around the world, the more robust it becomes. Why change to a new system when this one is secure, works well, and more importantly, has personal investment in it?

Yet another reason for inertia is the simple "It has to be better" argument. There needs to be some compelling reason why an established system should be ditched. At the moment, LiteCoin is the main alternative to Bitcoin. If you dig in to LiteCoin, you find it's simply an adjustment to the parameters of bitcoin. It produces more coins, and they appear faster. But it trades off security. I've seen regular transactions in Bitcoin of around £15,000 or so. If I'm sat there, wondering how to transfer my £15,000, I'm going to go with Bitcoin. It doesn't really matter if it's a theoretical problem and in reality LiteCoin turns out to be as secure as bitcoin. It's certainly not more secure than bitcoin, so why trust it? LiteCoin is basically an attempt to make some cash out of the bitcoin idea for those who can't afford the processing power to mine bitcoin at the expense of a degree of security. I can't see it going far when the security of bitcoin is already constantly being questioned. But who knows? Maybe we end up with parallel crypto-currencies at the end of the day? Some say LiteCoin is the silver to BitCoin's gold. That looks like another flawed analogy to me. Bitcoin isn't gold.

So for MegaBitCoin to appear, it'll need to be substantially better somehow than bitcoin. That's going to take some doing. I'm not even sure how you'd approach a model of something to be better as a currency than bitcoin. I have a vague idea that it will be to do with transaction times, but (and it's a big but! (Sorry ladies!)), it can't sacrifice transaction time to security, and that level of care about transaction time involves having a huge volume of bitcoin transactions, far greater than where we are now.

Finally!!!! On that point!!! Honest!!! If MegaBTC appears, and it does have ultra fast verification of transaction on top of at least equally good security, and it does begin to attract users away from BTC, there's no reason to believe BTC would instantly die. A lot of people would be nervous of moving to an untested new system. It would seem more reasonable to expect a gradual wind down of BTC as people moved to MegaBTC, especially if BTC was still working perfectly well for the majority of users.

Then we come on to the nature of the curve :)

It's a wow of a spike isn't it? But unlike a forex chart, there's no obvious points to whack your Fibonacci scale on it. The moving averages are basically permanently in catch up and meaningless. In trader terms, there's no apparent support and resistance. Or is there?

You'll like this. This is brilliant. (Well to my twisted mind anyway).

Well actually, yes there is. There are plenty of BTC out there that were gained back when it was around $12 to $15. These people are not traders. To them at the moment, nirvana is unfolding. Remember, these guys don't have an accounts manager to answer to. They can decide to cash out with a big smile any time they want. Chances are, not many will while it's rocketing up as it is at the moment, but given a sudden peak and drop? A whole bunch of them will freak out and sell.

I'm predicting when that happens, BTC will drop by a fair whack. Not just the jitters in government clampdown whispers that caused the drop or whatever it is, but a wave of sells from the early adopters.

How far down it goes? Well reasonably we could say back down to $12. Except now we have people who have bought in to BTC from $50 up with big chunks of money (big in comparison to bitcoin), we have people with mining rigs invested in when BTC was just curving up from $30 and are feeling mighty smug. There is support on the way down, some of these guys will keep the faith, see a falling BTC and even buy back in to it assuming the basic integrity of the system remains intact.

I guess here is the chance that everybody really freaks out and BTC gets sold out to near enough $0 for it to vanish. There's no accounting for crowd mentality. That would be a shame and a waste if the basic mechanism was working fine. The world though has done stupider things before, and no doubt will again. But even with the $0.01 scenario, if the thing still works .. people are still going to use it. That in itself prevents a 0.01$ situation if even only a few million $ across the globe still want to use it. There is a bottom end in value for utility built in to bitcoin. I have no idea of it's value. But it's there as long as it reliably works.

It's going to be choppy! It's going to be fun! But when it does spike and drop? Watch for the BTC is DEAD! Foghorn's. If the integrity of BTC remains. They will still be wrong, and we should see a more reasonable curve back to actual value.

That's my theory anyway and I'm sticking to it.