Please consider the Coin Telegraph article What determines the Bitcoin price?
Coin Telegraph: Market forces called supply and demand influence Bitcoin’s price. The price typically decreases when there are more sellers or vice-versa.
Mish: The first sentence almost correct. It should say “set” rather than “influence” The second is false.
The total amount of bitcoin bought and sold mathematically must match.
However, the physical number of buyers and sellers does not have to match. To offset a one person selling 1 Bitcoin, there could be 100 buyers each buying some fraction at the same price. Alternatively, 1 buyer might buy 100 bitcoins from 10,000 sellers.
The best way to explain things is to say that the price is set at the margin. That means the price the last buyer/seller agrees to pay/accept.
Think of current price collapse this way: Just one large seller, can easily outweigh hundreds of small buyers. A handful of determined whale sellers can easily outweigh tens of thousands of small buyers.
The “number of buyers and sellers” idea is fatally flawed.
What determines the marginal price? Attitudes toward Bitcoin. The best words to describe big price changes up or down are changes in sentiment.
There can be long periods of rising or falling sentiment towards Bitcoin.
Coin Telegraph: The number of businesses accepting Bitcoin is growing daily, giving it a real market value.
Mish: If businesses accepting gave Bitcoin value, the price would constantly rise.
In practice, businesses accepting Bitcoin add price pressures on Bitcoin unless the merchant holds Bitcoin. Nearly all of them won’t hold, especially in this environment.
Consider a luxury watchmaker accepting Bitcoin. That happened last week. If someone uses Bitcoin to buy a watch, that means the watch buyer prefers a watch to Bitcoin.
What does the merchant do with Bitcoin? He puts it on the market and enough buyers need to step forward to maintain price.
Curiously, the more merchants who accept Bitcoin, the more likely Bitcoin holders will be willing to sell some of it for other goods.
This helps meet the original goal of Bitcoin to succeed in transactional purchases of goods and services but adds pressures on price.
Some might define value differently. Here is the latest meme: 1BTC = 1BTC. Lovely. And $1 = $1 as well. More on value below.
Coin Telegraph: Even at the height of its popularity, it was challenging to find precise answers to common questions like what determines Bitcoin’s value, who sets Bitcoin’s price and whether Bitcoin has intrinsic value?
Mish: I explained above how the price is set at the margin, determined by sentiment or attitudes.
Regarding value, if one views value as 1BTC = 1BTC, that is their prerogative. If one considers Bitcoin to be value based on belief it will go up, that is an opinion.
Worse yet is the vast herd of people telling me they “know” the price will rise.
No one knows the future price of Bitcoin or anything else.
Numerous $1 million predictions are counterproductive. So is the widespread meme of mocking disbelievers with taunts “stay poor”. LUNA went to zero with its founder and main proponent taunting people “stay poor”.
Predictions make fools of us all at times. I have my own set of scars. But extreme predictions attract people for the wrong reason, with leverage and smugness.
Coin Telegraph: The same market dynamics, i.e., supply and demand, that affect the price of other goods and services, also decide the value of Bitcoin. Prices will probably rise if there are more buyers than sellers or vice-versa.
Mish: The first sentence is correct. The second is repeated silliness.
Coin Telegraph: Various factors impacting Bitcoin’s price include the supply and demand of BTC, competition from other cryptocurrencies and news, cost of production and regulation.
Mish: Not quite. Supply is set by an algorithm. There are various factors influencing attitudes towards buying or selling.
Coin Telegraph: An event called Bitcoin halving impacts the Bitcoin’s price like the situation in which the supply of BTC decrease whereas the demand for BTC increases. As a result of the high demand, the price of BTC will move upward.
Mish: No! Halving does NOT reduce the supply of Bitcoin. Halving cuts the rate of increase of supply in half. The actual supply of Bitcoin is every Bitcoin ever mined minus lost keys. Similarly, the supply of gold is every ounce ever mined minus that lost or in museum pieces unavailable for sale at any price.
Coin Telegraph: Any upgrades by the existing cryptocurrencies might drive BTC’s price down in contrast to a completely different scenario in which Bitcoin was the only existing digital currency.
Mish: Not likely. Upgrades and support would tend drive up the entire crypto space not everything else up and Bitcoin down.
Coin Telegraph: Production costs for Bitcoin include infrastructural expenses, electricity charges for mining and the difficulty level of the mathematical algorithm (indirect cost). The various levels of difficulty in BTC’s algorithms can slow down or speed up the currency’s production pace, impacting Bitcoin’s supply, which, in turn, affects its price.
Mish: No Again! Once again Coin Telegraph confuses rate of change in supply with supply. Also falling price makes mining unprofitable or at least less profitable. Some miners are now going out of business. The Bitcoin protocol will reduce or increase the difficulty of its mining algorithm to maintain its scheduled halving process. Falling price incentivizes miners to sell immediately rather than hold. It’s competition for Bitcoin that influences mining difficulty, regardless of what the price is. Generally speaking, sustained declining price causes competition for Bitcoin to drop. In turn, the difficulty of solving mining problems drops as well. Coin Telegraph appears to have this point backward.
Coin Telegraph: The price of BTC could decrease if there is concern over a specific government’s decision against cryptocurrencies. Additionally, regulatory uncertainty will create fear among investors, dipping Bitcoin’s value even further.
Mish: Agreed. Rising concern and fear are part of the sentiment and attitude idea.
Coin Telegraph: Uncertainty regarding the intrinsic value of Bitcoin and BTC’s future value makes it a highly volatile asset.
Mish: Agreed with uncertainty. But the whole notion of “intrinsic value” is at best debatable.
Coin Telegraph: A decreasing amount of new BTC is created each day since a finite quantity of Bitcoin exists. To maintain a steady price, demand must match this inflation rate.
Mish: Agreed but incomplete. To maintain a steady price, demand must not only match the rate of increase in supply, but also the propensity of existing holders to sell. Some people are sitting on enormous profits and are cashing out. Others bought in above $30,000 and fear additional losses. When those holders decide to punt, there needs to be enough demand to support the price. Margin liquidation and forced sales also come into play. It is a very real possibility we are only seeing the start of forced liquidations.
Coin Telegraph: So, considering high volatility, can the Bitcoin price go to zero? Technically, it is possible.
Mish: Agreed, but I take issue with the word “technically.” Rather, I consider a price of zero (or near zero) any time soon is unlikely unless there is some sort of collective government action banning Bitcoin transactions. Note that I said ban “transactions” not ban or confiscate Bitcoin directly. Although government could not easily stop “peer-to-peer” barter transactions, government could easily restrict merchant transactions and cashing out for dollars or euros. I used to think a transaction ban was likely, I no longer do.
Alt coins are another matter. There are over 18,000 of them! Most will head to zero and that will impact psychology and the price of Bitcoin.
There is likely to be more institutional dumping on top of forced liquidations happening now. But that alone would not take Bitcoin to zero. It would take a collective governmental ban by the US, supported by the EU. The grounds would be fraud, tax evasion, and money laundering. That’s possible. The question is “how likely?”
Zero is not a “technical” issue but rather a regulation issue or an extreme universal change in attitudes such that Bitcoins = Beanie Babies (for whatever reason).
As a practical matter, $1,000 is not zero but the wealth destruction at that price would be enormous. And that is easily possible even without any major government action. Don’t underestimate extreme changes in sentiment, Fed-induced liquidity events, and margin call liquidations.
Coin Telegraph: Contagion may, at least temporarily, have an impact on the rest of the financial system due to: Downward pressure on other assets such as those sold in a fire sale to raise money to meet obligations, such as paying remuneration, margin calls, maintaining premises, etc., and the accumulation of bad debt or non-performing loans due to payment defaults amid the loss of revenue and capital.
Mish: I am in total agreement, and the paragraph is well stated.
Five Key Ideas
- The price is set at the margin. That means price fluctuates with the latest price the buyer/seller agrees to pay/accept.
- One determined large seller, can easily outweigh hundreds of small buyers. A handful of whale sellers can easily outweigh thousands of small buyers.
- The notion $1BTC = $1BTC is an irrelevant truism, as important in construct as the equally irrelevant truism $1 = $1. What matters is what each buys.
- The notion that Bitcoin rises and falls with the number of buyers and sellers is an easily disproved falsehood.
- What determines the marginal price? Attitudes toward Bitcoin. The single best word is sentiment.
Key Questions
- Why were rare Beanie Babies worth $1,000 one day and $1 later? Sentiment. Attitudes changed.
- Why was one Bitcoin worth $68,000 one day and a short time later less than $20,000? Sentiment. Attitudes changed.
The diehard Bitcoin fans believe they “know” the future. I saw one absurd projection the other day regarding adoption.
Extrapolation to Extreme Levels
Delusional Forecast
Extreme Attitudes
Such projections coupled with extreme leveraged bets are a sign of a major top.
Saylor got a margin call at $21,000. He met that by pledging more Bitcoin as margin, assuming his statements on margin were correct. On top of that Saylor bought another 480 coins at an average price of $20,817.
Let’s do the math on that. As I type the price is $19,000. Saylor is ($30,664 – $19,000) * 129,699 in the hole.
Saylor is ~ $1,512,809,136 ($1.5 billion) in the hole, on margin, and bragging about it.
He bet his company, MicroStrategy, on the outcome.
Looking for a leveraged play on Bitcoin? There you go.
Note that in the year 2000 DotCom bubble Saylor also blew up. The SEC forced him to restate earnings.
For what? Saylor is said to be worth a billion dollars. What the hell is the point of risking it all on margin?
Loving adoration from laser-eyed fans?
Laser Eyes Cut Through the Chaos
That nonsensical statement was retweeted over 1,600 times with over 14,000 likes.
Cult Hero Worship
Pool of Greater Fools
Price action suggests the pool of greater fools is running out. There is a limited supply of Bitcoin, but it takes an increasing number of buyers (or enough large buyers) willing to pay higher and higher prices to drive up the price.
With that, let’s return to one of the key ideas in this post.
One determined large seller, can easily outweigh hundreds of small buyers. A handful of whale sellers can easily outweigh thousands of small buyers.
There is a growing risk Saylor could be liquidated. He claims he has enough assets to protect him down to $3,500 or so. I doubt it.
Saylor himself likely contributes to the volatility at this point. Fear of liquidation is one possible reason larger players may be selling while others wait on the sidelines for a clear picture.
Finally, Bitcoin was born in 2009. Its entire life from inception to the $69,000 peak was one of absurdly low interest rates and Fed liquidity.
The Fed is only starting to drain liquidity and is not finished hiking rates. The more speculative the asset, the greater the risk. Saylor himself may set the liquidation bottom.
Five Crypto Exchanges Halt Withdrawals
De-fi is crazy and the more interest paid, the crazier it is. Pledging or “staking” for interest is a good way to turn money into $0.
There are at least 5 exchanges shut down now, with possible total losses.
People are locked out. I suspect forced liquidation of assets – that means more selling of Bitcoin into an illiquid market.
Here is a non-paywalled link on the WSJ that explains much of what is happening behind the scenes: Celsius Customers Are Losing Hope for Their Locked-Up Crypto
Celsius, Babel Finance, CoinFlex, Voyager Digital Ltd., and Finblox have told customers that they can’t withdraw their money or capped the amount they can take out.
If you have assets on an exchange. Get them out now, if you can.
Impossible for “You!” to Cash Out
My technical support points for Bitcoin are posted here: Fundamentally and Technically the Entire Crypto Space is a Huge Mess
Also see The Crypto Crash and Why It’s Impossible For “You!” to Cash Out
You might be able to cash out , but “You!” can’t.
Understand the difference.
This post originated at MishTalk.Com.
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Mish
One determined large seller, can easily outweigh hundreds of small buyers. A handful of whale sellers can easily outweigh thousands of small buyers.
Mish,
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Let’s go to speculation. Two kinds in my mind. 1) sheer tulips, i.e., greater fools, or 2) those who think that scenario b) above will come true.
I’m laying this out to examine the risk parameters. For the moment, and only for the moment, would this schematic be accurate?
know what the fed will do over the next five years, yield curve
control?
halve in early 24′. That’s how the supply limit is controlled- via a
known emissions schedule.
Tip: I put 1/3 cup in a big bowl, cover it with paper towels, folded underneath.
Put it in the microwave and take it out based on popping rate. Err on the side of too early until you get it nailed.
No mess and no popper needed.
1. I’d like to understand more about bitcoin “mining.” How it sets the growth of supply, mainly, and what that growth rate is. I will keep reading, and might have a question or three later.
2. The following is a mere quibble: I think your slam at “the number of” buyers or sellers, while certainly true, is probably more a matter of semantics than anything. The phrasing you criticized struck me as shorthand, which is often imprecise and sloppy. I’m not sure that Coin Telegraph‘s writer fails to realize that markets are not stores, and that prices are set on the margin, and that any actor’s market power is amplified by volume. That said, ya never know. Given how stupid crypto is, maybe the writer is really that stupid.
Thanks again for your post.
p.s.: Another reason for my reluctance to short the whole market is encapsulated by a mantra that I have repeated more times than I can count: The world’s graveyards and bankruptcy courts are stuffed with the rotting corpses of they who were foolish enough to bet against the United States of America. It’s an unapologetic statement of faith. So be it.
Yammer about the Fed. I do. But anyone who thinks they’ll sidestep it through crypo or other “de-fi” schemes is bullshitting themselves. If the financial system comes a-crashin’ down, the world will fall back to gold and various forms of barter, none of which will be “de-fi.” The very worst delusions are self-delusions, and “de-fi” certainly qualifies as that.
In practical reality, on a larger scale, I think crypto represents the hunger of Generation X for the returns enjoyed by the Boomers, plus as a vehicle for fraud.
How about gold? Can you make some similar statements regarding its value?
I think it’s awful that professional investment firms have given it credibility which encouraged vulnerable people to get involved.
This is a long way of saying that I don’t know what the investment firms were doing, crypto-wise. I thought it was more a matter of the upstarts like Robinhood rather than the established firms. Am I incorrect about that?