Quote from: JoelKatz on October 18, 2011, 12:22:58 AM

Quote from: Ragnar on October 18, 2011, 12:17:48 AM

What is confusing is that people are declaring it dead because it can't maintain a constant price after an increase over 1000 times? I really don't understand this. Somebody please tell me how Bitcoin is suffering right now? From what I am seeing it has had great progress. I don't see anything to complain about.

The volatility makes it less useful as a medium of exchange. If you accept 100 bitcoins in exchange for some hardware and the next day those 100 bitcoins are worth 15% less, you may wind up taking a loss on the transaction. This matters because you typically can't pay your employees, pay your utility bills, pay your rent, or pay your suppliers in bitcoins.

Otherwise, the price of a bitcoin measures a whole bunch of things mixed together. One of the things it measures is the collective opinion of the long-term viability of bitcoins as a medium of exchange. But that's mixed in with so many other factors that you really draw too many conclusions.

I think a lot of people just assume that a high price is good and a low price is bad without really thinking too much about it. They confuse the price of a bitcoin with things like the price of a company's stock.

I think there's a pretty close correlation between the price of a Bitcoin and the currency's popularity. Assuming that the wealth of the average Bitcoin user is roughly constant over time, we can assume that there is a more or less fixed amount of value V per user that the average user wants to keep in BTC form. Suppose there are U users, and the Bitcoin price is P, and the number of coins outstanding is N (currently about 7.5 million, and growing slowly and steadily). The total value of all Bitcoins in existence can then be expressed either as V*U (number of users times average value stored per user), or as P*N (price per coin times number of coins). Thus, we have that V*U = P*N.

Rearranging this equation, we find that the price P = U*(V/N), and thus we can see, the Bitcoin price P (measured in stable currency units) at any given time is directly proportional to the number of active users U at that time, given that V/N changes only relatively slowly over time. Past users who have given up on BTC and cashed in all their coins don't count as "active users."

Since the price has been falling pretty steadily for a while now, and by quite a large amount, this tells me that more people have been giving up on Bitcoin and abandoning it, for various reasons, than are being newly drawn into it. Thus, I'd say it's pretty fair to state that it is dying, at the moment.

(Caveat: This situation could change pretty quickly if there were some emergent crisis in the traditional sovereign currencies, and lots of people were suddenly desperate to find someplace else to put their money.)