Another blast from the past (2013 !!!), from Mircea Popescu. This is a re-post from his Trilema blog, just to be archived here on SN. I post it here for all those stackers that don't know who IS Mircea Popescu and what he did for Bitcoin. Yes, I said IS because he's not dead as media is trying to make us to believe...

Enjoy! Is a damn good article.

The guy's pretty clever and he has a point : if you mentally model what would happen when infinitely elastic ball X hits infinitely heavy wall Y, the result would be precisely what he describes : bounce, then resettle, another bounce, sort of bouncy-track the "inherent value" with a probably harmonic series of bouncy amplitudes.

The problem is that the system described has precisely nothing to do with the practicalities of Bitcoin. Admitting to begin with that the price of anything - even Bitcoin, WoW gold, Diablo 3 gold and other game currencies - is a result of the interplay of their respective supply and demand, let's look into things.

On the dollar supply side, the basis is currently tiny. MtGox reports something to the tune of 1mn USD being brought to the market each day. If we don't bother to notice that likely a large section of that is speculative rather than bona fide USD added to the marketi and if we count MtGox at about 50% of the total exchange market (which may be overstating it but more likely is understating it) we're looking at something to the tune of half a billion dollars yearly.

During that same year gambling in the US alone will have involved something to the tune of 100 billion, or two hundred fold. The total of all McDonalds meals served in the US will have come to about 25 billion, or fifty fold. The Walt Disney Company made about 40 bn from operating its parks and theatres, so that's about 80 fold. And to top everything off, we don't even know what the notional size of the derivatives market is even, but people close to the virtuality guess it must be something over 1`000 trillion (that's two million fold).

So, leaving MPEx out of this equation entirely, if just one percent of discretionary spending is redirected from hamburgers, disneyworlds and one arm bandits to Bitcoin, that's a 3.3x increase of total supply side (330%). If this shift doesn't happen during the course of a year, but during the course of two weeks the momentary supply side spike is more like 85x (8x500 %). If we count MPEx into the story we're already discussing 1000x's (ie 100`000%) even if instead of percents we're looking more at tenths and hundredths thereof.

On the Bitcoin supply side, conversely, things look quite grim. Up until recently Bitcoins were generated via mining at the rate of about three million a year. Starting with the current year mining rewards halved, which means yearly Bitcoin generation is 1.3mn tops. Out of this, a fraction between a third and a half will have to be sold to pay operational costs of the miners - so about 600`000 Bitcoins are meeting the market this year (although part of them are possibly meeting the market straight in the pockets of their owners, who bought mining gear in the first place to acquire Bitcoins, so they've paid for the rigs and electricity in fiat, are registering the tax-deductible loss thereof and keeping the Bitcoin).

Other than this ~4% of the Bitcoin monetary mass, there may be as much as maybe 10ish% that is looking for dollars for whatever reasons. Then again, that 10ish% could be as low as 1%.

Now let's remodel : what happens when a 300 % increase on the supply side meets a 5 % increase in the demand side ? There's pretty much literally nothing those extra dollars nobody wants can do to increase the Bitcoin supply. It's very, very inelastic, and consequently the only stability point is when equilibrium is reached. Two billion dollars divided by 600`000 Bitcoins comes to three thousand dollars and change per Bitcoin.

Will people stop throwing dollars at Bitcoin because Bitcoin prices in dollars are rising ? No, they will not. If anything the converse is more likely. Will people start throwing Bitcoin at dollars because Bitcoin prices in dollars are rising ? No, they will not. If anything, the converse is more likely.

There will certainly be psychological backlash, in the sense that consumers are trained from infancy to get what they want, and so the reaction to badmouth whatever ignores their precious will and desire is quite strong. Nevertheless, the pressure is unyielding : people holding Bitcoins have no practical incentive to get rid of them, and people trying to get rid of their increasingly worthless dollars have no recourse.

This impasse has a few possible solutions.

One of them is that consumers yield and submit, Bitcoin goes to somewhere in the thousand dollars per range and there's a rush to move society away from the dysfunctional standard. Banks start taking Bitcoin deposits, Bitcoin hedge funds pop up everywhere, the FED chairman, ECB chairman and everyone else come to Timisoara whenever they want to make a move to obtain my blessing and so forth.

Another one of them is that consumers revolt, governments intervene, we all spend the remainder of this decade fighting with each other. Bitcoin also goes to thousands of dollars per, but the energy, effort and resources which could have been expended on comfortably yielding and productively submitting are wasted in an ultimately doomed effort to play tough on a weak hand. Neutral and unengaged governments win, and as the dust settles the balance of macroeconomic power has shifted from the Western world to whatever, China, Iran, Brazil, what have you.

Yet another one of them is that consumers revolt, entrepreneurs intervene, before the end of 2015 there's about a thousand to a million different Bitcoin forks, each with its ten million-ish monetary base worth about a dollar, on global average. The size of the inter-Bitcoins market, the complexity and confusion ensuing makes pretty much everything unmanageable for the "ordinary person". Hedge funds and banks (the ones a little ahead of using Excel¹) that trade in this murky complexity make a killing and become the principal driver of economic growth worldwide. Not only is the consumer about as screwed as is currently the case, but to everyone's benefit he has just been clearly proven yet again that revolt = being fucked in the ass harder, longer, with a thicker implement with sharper barbs on it. Also conveniently, the thing to revolt at has become much more vague and intangible. On the balance of probabilities this would seem the most likely outcome, strictly because history unerringly flows in that direction which most cruely rapes the "average person".

Yet another one of them is that everyone goes to bed, sleeps well, wakes up and all about Bitcoins is somehow forgotten, like in a fairy tale. This would seem about as improbable a scenario as proposing that people were going to forget all about the Youkon gold rush sometime after the first newspaper reports of the 49ers' success, but nevertheless, who knows.

Go ahead, make your bets, I'm curious even.