The recent bubble-and-crash cycle in the price of bitcoins leads, logically, to wondering what their "true value" should be.
The idea is that there is a true value - some amount of something else that 1 bitcoin is actually worth - that the market will be trying to tend towards; but the market price is being distorted by irrational people buying them at above that true price, and panic-sellers willing to sell them below the true price.
So what might this true value be?
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The biggest currency exchange market in the Bitcoin world is MtGox. When it goes down, either due to a DDoS attack or sheer high load due to everyone panic-selling, then people who hold bitcoins and care about their value in dollars get the panicky realisation that they can't easily sell them - which causes two things:
A drop in the value of bitcoins; people care about their ability to turn them back into fiat money, and will continue to do so until lots of things can be bought directly with bitcoins.
Widespread angst that MtGox is a central point of failure for the Bitcoin economy, complaining that they are vulnerable to DDoSes and get high trading lag when under load, and so on.
So, as a high-performance systems developer, I thought I'd write some notes on how to build a more resilient exchange platform. Perhaps MtGox will do something like this, but perhaps more ideally, one of their competitors will, and thereby win some of MtGox's market share, and thus decentralise the exchange market somewhat.
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Oh, dear God, I'm starting to sound like an early-twentieth-century economist with these post titles.
Right, anyway. One of the criticisms that's been levelled at Bitcoin is that the early miners, and speculators who rushed in and bought them cheaply, will end up filthy rich if it succeeds and a bitcoin reaches its potential value of hundreds of thousands of dollars or more.
Why should people who were lucky / foolish enough to rush in at the beginning be rewarded quite so handsomely, while children are starving in the slums of South London?
This is an interesting question indeed.
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A central part of the Bitcoin economy has been the formation of foreign currency exchange markets, where you can trade your bitcoins for US dollars, Euros, pounds Sterling, or many other currencies.
These things are important, because:
- They let people transfer their money from the fiat economy into the Bitcoin economy, allowing it to grow.
- They let people transfer their money out again, making Bitcoin a safer store of value; you're not stuck with it when you want to buy something that can't be bought with bitcoins.
- They let us measure the "current value" of a bitcoin (to some approximation), thus making it easier to price things in bitcoins
- They provide endless pretty graphs and statistics to look at.
However, one particular aspect of "the markets" that is commonly not understood is what is known as "market depth", so I'm going to give a quick introduction to how the markets work to lay the foundations, then dive into what the market depth is all about.
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Currently, there's lots of interest in Bitcoin as a speculative investment, driven by the meteoritic rise in its value this year.
However, to make Bitcoin actually do what it's capable of - working as an international Internet currency for free trade - we need to back that up with a vibrant economy in Bitcoin itself, rather than just trading it to and from ordinary currencies on exchanges.
This economy should be composed of many kinds of activity, all reinforcing each other and together making bitcoins more and more useful.
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Cryptocurrency | alaric | 
Wed 17th Apr 2013 9:53 pm | 
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