Thanks to our northern hemisphere counter-parts I’ve been privy to all sorts of interesting cold weather things from making instant snow to the ingenuity that people come up with when they’re snowed in. Here in Australia we do get the up on the other end of the spectrum quite often during summer however although that doesn’t really drive us to do much more than sit around a pool and drink copious amounts of beer. So you can imagine then that anything involving sub-zero temperatures is going to be somewhat intriguing to us, especially something as cool as this:
There’s nothing particularly complicated about what’s going on here but the demonstration is quite novel. What you’re seeing is the formation of ice crystals on the surface of a soap bubble which starts off slow but ramps up significantly as more crystals form. I think this is partially due to the way crystals form as they usually need a rough surface to attach to. This is how those instant ice videos work as the bottles don’t have any anchor points for the crystals to form but once you shake it up a bit you give them a surface to attach to.
There was one question that was left unanswered due to the video cutting off at the end however: whether or not it’d still float after it was frozen.
Now the bubble isn’t increasing in mass, it’s simply changing forms. There’s the possibility that some of the moisture from the air outside the bubble will condense onto the crystalline surface however I don’t think that’d change the mass by an appreciable amount. The density would also be going down as well thanks to water’s intriguing property of getting less dense as changes into ice. All those factors together would indicate that a frozen soap bubble would behave in much the same way as a regular one but I’d still like to see this hypothesis tested.
Although I do much prefer warmer climates, so this will have to be an exercise that’s left up to the reader.
Much like my stance on Instagram I’ve seemingly been at odds with the BitCoin community ever since I penned my first post on it almost 2 years ago. The angst seems to stem primarily from the fact that I lumped it in with Ponzi schemes thanks to its early adopter favouritism and reliance on outside wealth injection. After the first crash however BitCoins started to show some stability and their intended function started to be their primary use. Indeed the amount of investment in the BitCoin ecosystem has sky-rocketed in the past year or so and this had led to a period of much more mild growth that was far more sustainable than its previous spikes were.
It was for that reason that I held my tongue on the latest round of price volatility as I assumed it was just the market recovering from the shock of the Pirateat40 scheme unravelling. That particular incident had all the makings of another price crash but it was obvious that whilst there was a great deal of value lost it wasn’t enough to make a lasting impression on the economy and it soon recovered back to a healthy percentage of its previous value. The last month however has started to show some worrying trends that hark back to the speculative bubble.
If you zoom in on either of those 2 ramps the gradients are frighteningly similar although the price jump is from $15 to $25 rather than $3 to $10. Whilst the value jump might not be as severe as it was before (~66% rather than 300%) it’s still cause for some concern due to the time frame that it has happened in. When the value jumps up this fast it encourages people to keep their BitCoins rather than using them and attracts those who are looking to make a return. This puts even more upward pressure on the price which eventually leads to the kind of value crash that happened back in 2011.
Others would disagree with me however, saying that its actually a great time to invest in BitCoins. The reasons Anzaldi gives for wanting you to invest in BitCoins however don’t make a whole lot of sense as he doesn’t believe this round of growth is unsustainable (and even admits that the only other thing that gives this kind of ROI are all scams) and that the reward halving coupled with the deployment of ASIC chips are what are behind this stratospheric, real growth. The fact of the matter is that neither of these really has any influence over the current market rate for BitCoins, it all comes down to what people are willing to pay for them.
Prior to the lead up of the previous crash BitCoins had already experienced some pretty crazy growth, going from prices measured in cents to dollars in the space of a couple months. This immediately led to a flood of people entering the market who were seeking fast returns and had no intention of using BitCoins for their intended purpose. This current round of growth feels eerily familiar to back then and with people seeing rapid growth its highly likely that those same speculators will come back. It’s those speculators that are driving the price of BitCoins up not the factors that Anzaldi claims. If they were the price would have begun this current upward trend back in November (it did go up, but not like this and stablized shortly after) and the introduction of ASICs is far more likely to flood the market with more coins as hardware investors look to recoup some of their investments, rather than holding onto them for the long haul.
This kind of wild volatility isn’t helping BitCoins intended use as an universal currency that was free of any central agency. If this growth spurt leads to a new stable equilibrium then no harm, no foul but it really does look like history repeating itself. I’m hopeful that the market is smart enough to realise this and not get caught up in a buy and hold spree however as they’ve managed to do that in the past. As long as we remember that it’s BitCoin’s worth is derived from its liquidity and not its value then these kinds of knife edge situations can be avoided.
In regular financial markets the value of a country’s currency is a great marker for how well it’s doing in economic terms. The surge in value of the Australian currency over the past 2 years demonstrates how strong our economy was in comparison to the rest of the world, mostly thanks to our strong capitalization of our banks couple with some pocket change from the mining and resources boom. However there’s one particular exchange rate where the value of the currency is actually irrelevant to the strength of the underlying economy and a high trading price actually signals that there’s something going horribly wrong. The economy I’m referring to is the one of the online cryptocurrency BitCoin.
Long time readers will know that I was very skeptical about the idea at first as it harked back to the days of other online currencies that were ripe for exploitation and all of which inevitably fell down, sometimes with catastrophic consequences. My concerns were mainly centred around the immense amount of wealth that that was concentrated in the hands of the early adopters but over time it shifted to the crazy exchange rates that BitCoins were attracting which inevitably lead to the price crash that happened in the middle of last year. Since then I’ve been more bullish on the idea of BitCoins because the price has remained steady whilst transaction volumes have started to rise, showing that BitCoins can actually function as a proper currency and not a speculative investment vehicle.
However over the last month or so BitCoin’s exchange rate has been creeping up steadily and the last week alone has seen massive gains in the current trading price:
As you can see for the past 6 months or so the price of BitCoins has been relatively steady, trading at around $5 for a good length of time. However just over a month ago the value started to slowly tick upwards and the last two weeks have seen that value explode in some rapid gains, culminating in a massive jump of almost 20% in under a week. Whilst it’s nothing like the speculative bubble of last year it does raise concerns that the stability of the BitCoin currency was short lived and the speculators have come back to the market looking to derive some more short term gains from the market they successfully pillaged last year.
Increases like this remind us of the unfortunate fact that at its current size the BitCoin market is still volatile as there are strong correlations between large transaction volumes and huge swings in the exchange rate. This is not a desirable attribute for a currency and is much more amenable to speculative trading, something which has burned BitCoin users in the past. Indeed a rising BitCoin value should cause a rational actor to hold off using is as a currency as they would instead want to hold onto them for as long as possible in order to extract the maximum amount of gain out of them. Such thinking is what lead to the BitCoin price to reach such dizzying heights last year and this last bump in the price has the potential to do it all over again.
For BitCoin’s sake I hope this isn’t the case as there are many innovative companies betting their core business on the BitCoin idea and a volatile market could easily spell the end for them. It’s quite possible that these latest bumps are just blips on the radar but the steady rise over the last month or so really has me worried about a repeat of the speculative bubble that happened last year. Can the BitCoin market correct for this kind of behaviour? Will passionate BitCoiners get roped back into the idea that their BitCoins are investment and not a wealth transfer vehicle? I don’t have straight answers to these questions but the next couple months will show if the BitCoin market can learn from the mistakes of its past and hopefully overcome them to become the real virtual currency it has always strived to be.
At the time that I wrote that the BitCoin bubble was bursting I wasn’t really sure just how far the digital currency’s value would decline. Well here we are 3 months on and the value of a BitCoin has slumped to approximately US$3, an order of magnitude less than the dizzying highs it was on all those months ago. I made the prediction back then that once everyone stopped treating BitCoins as an investment vehicle the nascent currency could actually become what it strived to be rather than a speculator’s wet dream. So since one half of my prediction came true (the arguably easy to predict part) one has to wonder, how is BitCoin doing as a currency now?
Image used under a Creative Commons license from BitCoinCharts
The chart above details the dramatic rise and fall of the BitCoin price over the past year. As you can see whilst the value (the line graph) of a BitCoin may have tanked significantly it is still higher than that of what it was a year ago, by a large factor. What’s interesting to note though is the trade volume (the bar graph) which you can see in the months preceding the speculative bubble was quite low, almost non-existent for some months. The trading volume after the peak however as been far more active than it has been previously from which we can draw some conclusions about the BitCoin market.
Now the first conclusion I drew from this graph was that the market is becoming far more liquid with more buyers and sellers entering the market. Of course this high level of market activity could also be people attempting to sell down their BitCoin holdings, but that just favours the buyer side of the equation which is what is driving the price down. The volatility in the price is still very much at odds with its aspirations to become a real currency however so until the price hits a floor and stays there for a couple months BitCoin will struggle to be more widely adopted as a transaction medium.
The biggest impact that the drop in price will have though is the drop in free infrastructure it was getting from people mining for BitCoins. Whilst GPU mining was very profitable in the $15+ range when you’re getting down around these price levels it’s really not economically viable to mine coins. Thus the only people who will still do it are the ones who believe in the idea and want to help out or those who are running BitCoin services like Mt.Gox. Whilst that’s far from the BitCoin infrastructure just up and disappearing it does mean that many people who flocked to the BitCoin idea because of the financial feasibility of it will drop it in favour of greener pastures, whatever they might be.
Thus the burst BitCoin bubble is something of a mixed bag. Whilst the increased liquidity and speculator free market is definitely a great help to BitCoin becoming a serious currency the continued price instability and loss of supporters negates those benefits completely. The price crash also hasn’t addressed the early adopter problem either, leaving swaths of easily had BitCoins in the hands of a small collective of users.
Summing these all up together it seems that, as a currency at least, BitCoin is still just another alternative currency that’s struggling to achieve the goals it set out to accomplish. Technically it’s a masterful system that’s remained resistant to nearly all attempts to break it with all the problems coming from external parties and not the BitCoin system itself. However the economics of BitCoin are the real issue here and those things can’t be overcome with technical genius alone. BitCoin still has a long, long way to go before anyone can seriously consider it as a currency and there’s no telling if it’ll last long enough for it’s teething problems to be overcome.
My opinion hasn’t changed much in the month since I wrote my first post on how I think BitCoin is a pyramid scheme, ultimately destined to unravel unceremoniously when all the speculative investors decide to pull the plug and cash out of the BitCoin market. Still the discussion that that post spawned was quite enlightening, forcing me to clarify many points both in my own head and here on my blog. Since then there’s been a deluge of other blogs and press chiming in with similar opinions about BitCoin and how its intended purpose is far from its reality. There’s been enough noise about BitCoin’s issues that last week saw the first major dip in the exchange rate, and it hasn’t been smooth sailing since.
The image above is the historic trading price for BitCoins to USD on the biggest BitCoin exchange Mt.Gox. The BitCoin “Black Friday” can be seen as the first dip following the massive peak at around $30. Since that day BitCoin has been shedding value constantly with the latest bid offers hovering around the $18 mark. This is not the kind of volatility you see in something you’d class as a currency where single percentage changes are cause for concern and usually government intervention. In the space of a week BitCoin has shed almost half of its peak value which in any sane market would have seen suspension of trade to prevent a fire sale of the asset. The market isn’t showing any signs of recovering either as the market depth report from Mt.Gox shows:
There’s a very large discrepancy between the majority of seller’s idea of how much BitCoin is worth and what the market is willing to pay for it. The vast majority of sellers are looking to cash out at the mid-twenties range when the highest buy offer doesn’t even break the $20 mark. Any rational actor in this sort of market would be looking to get out before the market wipes out all of their value completely and for what its worth I believe the main speculators have probably already withdrawn from the market which is what triggered the initial dip in price. Liquidity in the BitCoin market is fast drying up and that will only serve to drive the price back to (or even below) its initial stable equilibrium.
On the surface this would appear to be the beginning of the end for BitCoin since confidence in the currency is rapidly disappearing with all the accumulated wealth that’s being lost to the diving market. However whilst many who were hoping to make their riches with a nascent currency might be finding themselves short changed the diving price of BitCoins means that those who were working against the currencies intentions, I.E. those who were using it as a speculative investment vehicle, are more likely to leave the market alone now that it’s been pumped and dumped. Once the price retreats back to more stable levels BitCoin could then start functioning as it is supposed to, as a vehicle for wealth that has no central authority regulating it.
It’s not going to be an easy road for BitCoin and its adopters though as confidence in the currency has been dashed with even some of its earliest supporters withdrawing from it. Mining will then no longer be a profit driven enterprise, instead run by those who support the idea and large companies like Mt.Gox who run exchanges. Once the idea that BitCoin’s value would ever be increasing has dissipated we may finally see a point where BitCoins are primarily used as a vehicle for value transfer and not speculative investment. It will probably be another month or two before we reach a new stable equilibrium in the BitCoin market but after that I might finally stop harping on about it being an elaborate (though probably unintentional) scheme.
This still doesn’t detract from the concentration of wealth for early adopters in the BitCoin ecosystem but once their incentive to hoard currency has vanished then the impact of their vast BitCoin stashes means a whole lot less than it did during the speculative price explosion. This will encourage them to put those BitCoins into circulation adding much needed liquidity to the market and hopefully restoring some more faith in the system. Time will tell if this works out however as with market volumes so low on the BitCoin exchanges price manipulation is bound to happen from time to time and realistically can only be solved by having wider adoption. I’m still not convinced that BitCoin is a safe place for any of my wealth currently but once its recovered from this rapidly bursting bubble I may revisit it, should the want arise.
Categories: Finance, Technology bitcoin, bubble, burst, change, crash, currency, exchange, investment, market depth, mt.gox, ponzi scheme, price, pyramid scheme, saviour, speculative, trade, usd