Quote from: de3mka on July 27, 2012, 06:21:37 PM

As not being an economist, I didn't understand most of the analysis. All I have is hope, they are correct with their calculations.

Don't worry; neither did they. It appears that the poor kids have less grounding in either math or English than they do in economics.

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Economics Paper

WOW! The results confirm our hypothesis. Before the bubble burst, the effect of volatility on price is positive statistically significant with a sigma2 coefficient [based on a faulty premise] of 2.772423. After the bubble burst, the effect of volatility is statistically insignificant with a p-value of .512. We believe that this implies that volatility led to a demand for the currency, and after the bubble burst the novelty of bitcoin left, and only market participants who were averse to volatility stayed in the market, leading to no effect of volatility on price.

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With price (ie. the price of bitcoins in US dollars) as a proxy for demand, we see how volatility significantly effects demand, with price increases implying demand increases and price decreases implying demand decreases. Altogether, we have a strong explanation and validation of the existence of a market bubble in the bitcoin currency market.

Their over-reliance on mathematics merely diverts their attention from sound premises from which to argue logically. As Mises wrote:

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However, this is not a dispute about heuristic questions, but a controversy concerning the foundations of economics. The mathematical method must be rejected not only on account of its barrenness. It is an entirely vicious method, starting from false assumptions and leading to fallacious inferences. Its syllogisms are not only sterile; they divert the mind from the study of the real problems and distort the relations between the various phenomena.

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Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories. The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus.

For example, there was not a single discussion about the marginal utility of each additional bitcoin and how market participants valued that compared to alternative assets. They would do well to read some Murray Rothbard like:

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The relative utilities of money units as against other goods determine each person's demand for cash balances, that is, how much of his income or wealth he will keep in cash balances as against how much he will spend. Applying the law of diminishing (ordinal) marginal utility of money and bearing in mind that money's "use" is to be held for future exchange, Mises arrived implicitly at a falling demand curve for money in relation to the purchasing power of the currency unit.

On the positive side, at least they are getting to explore a most fascinating topic. They wrote about a currency generating in the primordial monetary ooze and beginning to crawl out. An example no currently explained by The Regression Theorem; although one could argue that organized cryptographic hash had a prior state as energy and organized silicon. Too bad they had too little experience or understanding to properly analyze it.

It could be argued that there was NO Bitcoin bubble in June 2011 because there was no credit expansion with the resultant credit contraction (bubble burst). Even if there were a credit contraction in the Bitcoin economy with bitcoin denominated credit then there would still not be an effect on the amount of underlying commodity currency of bitcoins.

An example would be a Pirate, Bitcoinica, MyBitCoin, etc. default. The GLBSE, BS&T bank deposits, etc. would all become worthless and that would be a credit contraction (bubble burst). But the amount of bitcoins would be unchanged by it. If anything it would likely cause the price of bitcoins to increase just like the 2008 and current credit crisis has caused the price of USD and gold to increase because there would be an increased marginal utility from having actual bitcoins instead of bitcoin denominated debts with questionable counterparties.

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Glossary

Credit contraction. Reduction in outstanding circulation credit (q.v.); reversal of a prior credit expansion (q.v.). NOTE: Credit contraction has no reference to a reduction in commodity credit (q.v)

Credit expansion. An increase in the quantity of monetary units created by an increase in bank loans over and above the number of monetary units that savers have released to the banks for lending to third parties. In short, monetary loans in excess of monetary savings available for lending. Credit expansion is only possible with a fractional reserve banking system. Other things remaining the same, every credit expansion must create a boom or upswing in economic activity. This boom can only be sustained by a continued credit expansion at an ever accelerated rate sufficient to induce a repetition of the same activities at the increased prices resulting from the previous credit expansions.

CONCLUSION

Bitcoin was a new commodity. Many people began to demand it with future expectations of spending it. As the price rose the marginal utility individual market participants derived from each additional bitcoin unit began to be outweighed by the marginal utility they would derive from goods or services they could purchase in the present with the bitcoins. Therefore, many individual market participants began to exchange their bitcoins and in aggregate the marginal utility of bitcoins to be held as cash balances fell which resulted in a decline in the price of a bitcoin.