A few thoughts - Friday, September 19, 2014

[Steve Sokolowski]

Good afternoon! A few thoughts for lunch today:

Altcoins are not following the decline because they are a better store of value?

While many people are focusing on the bitcoin price tanking, altcoins are not following in bitcoin's footsteps. Not only are altcoins holding, but many of them are actually advancing versus the dollar!

Given that there is no bad news for bitcoins, one could suggest that a significant portion of the money is going out of bitcoins and into altcoins. While I think this is a bad move for people who are making that investment in the long term, those who are mining altcoins or selling them at the moment are making a fortune. Given the current payout of 0.0016, our 42MH of ASICs are making an astonishing 0.0672 per day. Investing in mining equipment a few weeks ago was possibly the best investment you could have made in the bitcoin industry of the past few months.

The reasons for the altcoins staying so high are difficult to comprehend. Surely nobody thinks that Shadecoins are going to be the next bitcoin, right?

There is a theory as to the prices of altcoins on some of the news sites. The idea there is that the number of people buying things with bitcoins has picked up dramatically (which makes sense given the increasing localbitcoins volume and the number of merchants accepting them). Meanwhile, litecoins have not declined as much because there aren't as many things to buy with them. The coins that have fewer opportunities for purchasing goods are turning out to be better stores of value. If true, this evidence flies in the face of economists who believe that bitcoin needs to have a strong transaction network in order to be valuable.

Further supporting the altcoin store of value idea is that coins with even fewer uses than litecoins, like CHNcoins, have been skyrocketing. It seems that this decline is inversely correlated with the commercial volume of a coin.


1MB transaction limit is being hit

The 1MB transaction limit is close to being hit. There was a period where no blocks were mined for close to an hour, and then the next block was 911Kb in size. There are thousands of unconfirmed transactions waiting to be mined.

A few months back, I suggested that the action at the top of the next bubble would prove too much, and the network would come to a halt because of the 1MB transaction limit. What seems to have actually happened is that, regardless of the cause for this decline, the network is struggling because of the limit at the bottom instead. There has been growth in the usefulness and acceptance of bitcoin over the past year, and now it is clear that the normal commerce is competing with the huge exchange volume. Those, like me, who believe that the bitcoin protocol does not have the technical development to handle widespread usage yet are starting to see these limitations unfold.

This is a bad sign. People who are looking for what "news" could have caused the crash are not looking at the right information.

If I had wanted to sell my coins before this morning's drop, I wouldn't have been able to. If an exchange requires three confirmations before a sale, that means it could have taken over 80 minutes for my coins to arrive on the exchange. 80 minutes in trading is too long to wait. More likely, it would have taken me 90 or 100 minutes because not all of the transactions were included in that huge block after the long lull.


The capitulation hasn't happened yet

Despite all that's happened, I still don't believe the capitulation has occurred yet. Yesterday morning, it looked like it could happen as early as last night, but the slope never reached that freefall that continued for hours. The downturn is still too slow and the recovery this morning is just temporary.

The trend reversal isn't going to happen until we see amazing downward movement, perhaps 15-20% in a matter of hours. If true, that means that the reversal couldn't happen above $340, simply because that's 15% below even the current price. But it will probably be lower, and it's not going to be long before it happens. I was not planning on buying more until I started to see this panic, but consider that making a purchase at $290 means that the price only has to rise $29 to earn 10% on your investment. Buying at $600 means that the price has to rise $60, so you can make a lot more money at these low prices.

It will be very obvious when the capitulation has ended and it's time to buy. If there is any doubt about whether the bottom has been reached, the rule of thumb should be that the answer is "no."

Does anyone else see this as excellent news? It means that this cycle is finally coming to a conclusion and things are going to take a positive turn in a few months. Times of positive growth are always more interesting than the periods of steady decline.


Weird PayPal video

What's up with that weird PayPal video that was posted on their front page? We already know that PayPal is big into bitcoins, and the video almost seems like an advertisement to use bitcoins. Of course, that's if you can actually understand what is being said, because it's so difficult to comprehend what the people are saying that it's almost farcical.

That said, every time that PayPal has made an announcement that is positive about the bitcoin technology, there has been a crash. The first crash occurred immediately before the Braintree announcement. This latest crash started right around the time that video appeared. Those who are well-versed in conspiracy theories might be inclined to say that people who know a lot more than we do are aware that PayPal is doing something behind the scenes, and that whatever they are doing (like a merchant platform to compete with Coinbase or Bitpay) is likely to increase sell pressure.

[adlai]

I believe the video was uploaded to YouTube a day before the Braintree announcement.