Dave is determined to get to the bottom of things. Undaunted by the twists and turns of his Don Quixote like campaign to educate the masses about bitcoin, Dave meets each new dragon in turn, smiting it with his lightning lance of logic.
Today we are going to discuss a question people have about bitcoin. Let’s set it up as a logical syllogysm.
1. The regression theorem, as interpreted by Smiling Dave, says bitcoin can never have a clearly established price that most people will rely on.
2. But bitcoin certainly does have a clearly established price. Just go over to mtgox.com, or some other bitcoin trading site, and it is posted up there for all to see, in every major currency. For example, last week it was $266 per bitcoin. Right now it is $65 per bitcoin.
3. Since 2 contradicts 1, and 2 is a fact, whereas 1 is a theory, 2 wins.
4. Thus 1 is wrong, and either the regression theorem is wrong, or Dave misunderstood it.
That’s the argument one sees over and over on the internet.
Devil’s Advocate: They sure got a slam dunk on you this time, Dave. You have been facialed.
Smiling Dave: Not exactly, Devil. I’ve dealt with this question in scattered places in my articles, and now I’ll tie them all together.
DA: I know you are going to say the price on mtgox.com doesn’t count, right? What lame reason have you for that?
SD: Let me give you a homely little story. At one time, a naive innocent was approached by a drug dealer. A powerful new strain of marijuana is now available, he told the innocent. And we only have it here in California. I’ll sell you a pound for $1,500, and you can take it to New York and contact my pal, Wheelo, a big dealer there. He will buy it off you for much more, because everyone will love that stuff in New York.
The innocent met Wheelo, who laughed at his asking price. But I paid $1,500 a pound for it, Wheelo. I’m not asking anything unreasonable.
That’s the price when you buy from a drug dealer, innocent, not the price when you sell to one.
DA: And your point is?
SD: The same applies to bitcoin. Those mtgox.com prices are phony. Sure, if you want to buy bitcoins, that’s what it will cost you, that price listed on mtgox. But if you try to sell them, you will get much much less, like half or less of the listed price.
DA: What are you talking about, Dave? People sell bitcoins there all the time.
SD: No they don’t. Let me quote from the respected financial website, fool.com:
…only about 3% of all Bitcoins are in circulation at the moment, and less than 1% of all Bitcoins currently in existence are sold on the exchanges…less than 10% of wallet users [are] actually engaged in transacting their Bitcoins…
…if I sell a million Bitcoins, the price will crash through the floor, because there simply aren’t that many people actually looking to buy any Bitcoins.
Very few people want to sell their Bitcoins, even though the user base is already fairly tiny.
DA: OK, so he is saying people don’t usually try to sell. He claims that if they do, the price will drop like a stone. Has he any evidence?
SD: He sure does. Look at what happened this last week. Bitcoin dropped like a stone all right, from $266 to $66. Not the first time it’s happened, either.
DA: But Dave, all things drop in price when there are many of them offered for sale.
SD: The fellow quoted explains the difference:
If I had a million shares of Bank of America, I could sell them and…my sale would barely move the price of a stock that experiences at least 200 times that much trading volume on any given day.
DA: Alas and alack, Dave, we are all suckers. The Regression Theorem is true. Smiling Dave was right!
SD: Was there any doubt?