Bitcoin addesses used, reported from Blockchain.info
Before we can accurately analyze his arguments, it’s important that the reader understand an important factor that is causing the dynamic of growth and volatility of bitcoin requires the understanding of the principles of the established and repeated examples of the network effect.
An entirely new ecosystem is developing and thriving in the space Mr. Williams predicted decay. Two examples: Google exploring integrating bitcoin into their systems. And Ebay: http://www.cnbc.com/id/101356642 and rumors of many other big names in the pipeline. His prediction on December 17 began with the price of $700. If we chart a linear drop from that point compared to June 3 - We can follow the actual price movement from week to week. According the actual performance thus far, the trend is not his friend. The linear drop equates to a 30% drop in price charted every two weeks: Actual price labeled is Mt. Gox quoted price.
The explosion in adoption rates was breathtakingly fast. At some point the change reaches critical mass and an irreversible paradigm shift happens. Things never go back to the way they were before. Eventually it reaches a saturation point and the uptake slows. This is commonly known the “S” curve. It starts out volatile as market disruption changes are usually met with skepticism - we don’t give up our old paradigms easily. Disruptive technologies solve problems in new ways that weren't possible before. Read more about networks effects here.
He speaks of bitcoin concentration of ownership but how does he know? It is established that the world does not know who owns bitcoins. The only record is stored on the block chain public for all to see. Units are organized into wallet ID numbers that are not associated with any known person unless they've let it be known. By way of example, the unfortunate person in the UK who found he accidentally lost his hard drive containing the bitcoin wallet password now sits underneath the earth in a landfill. He has probably lost access to his coins for good. Does he still own them? Is he ready to sell them any time? Is he a hoarder? Mr. Williams doesn’t seem to consider that coins can and do still appear on the ledger that are in reality lost forever inside digital wallets long lost and forgotten. In the first two years of bitcoin’s existence these coins were practically worthless and used mostly as a proof of concept. It was not unusual to purposely discard them regularly. These deletions weren’t accidents. Stories of entire hard drives being erased with full knowledge the coins would be lost forever are common. At the time it appeared that it was not worth the hassle of backing them up and there were no guarantees of the future value. Yet Mr. Williams has indicated this may be a conspiracy theory does not allow for the de-facto inventory loss. He’s indicated in his published papers that this all might be a vast conspiracy of techno cyber punks ready to cash in.
The network effect:
Put simply, the value of certain products and services become much more valuable with more people that use that same product or service. It creates a positive feedback loop. If only two people in the world owned a phone, how valuable would the phone system be? But if you could talk to 100 people on the phone, the value rises. If you can reach anybody in the country at any point in time, what new abilities do you have that the phone can give you? How much more valuable is to you then? The same is true for email, Facebook, Twitter, and so on.
Mr. Williams said that 9,000% increase is not something you typically see in a commodity. One might wonder why he chose to compare commodities to the network effect of a new internet technology. Some would argue that this is a classic example of comparing apples to oranges. Only later does he define bitcoin as a payment system. So he calls it a commodity when he referred to it’s meteoric rise in price, but then a payment network when describing the dangers in possibilities of crime. He changes his description and attributes of bitcoin to morph into the boogeyman of his current argument from moment to moment. This article will treat bitcoin as just a unit of data reserved for a place in the public shared ledger database, of which in theory we could have over one quadrillion addressable units as of this writing. Mr. Williams’ inconsistent classification of bitcon ends up being logically inconsistent to own arguments.
In the most basic of economic lessons, we are taught that price is simply an equilibrium point of the law of supply and demand. Put most simply, if more people demand a certain item that is owned by somebody else, they must offer enough in trade that the people that own it deem the amount paid. Each participant feels that they received the better of the trade. So to each party, the trade is equitable. This mechanism is called “price discovery” and it’s a vital function for any product. It is worth precisely what people will pay for it. Sometimes we find out quickly, sometimes not. Speculators play an important role to find what the market will be willing to pay, and what items hold value including expectation of future value.
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