Rough Book

random musings of just another computer nerd

Tag: money

How a Wired article sent the price of Bitcoins skyrocketing

Disclaimer: I am not an economist and I do not claim to have more than a freshman level understanding of it either. Economics was not my favorite subject and I often find it perplexing. What follows is only based on observation; I may not have considered all variables (mainly due to my ignorance of them). Either way, I thought what happened was pretty interesting. If there are any errors in my assumptions or observations, please feel free to correct me.

Bitcoins are a digital currency. Bitcoins aren’t issued by a bank or a central authority. Instead they are generated by computers when they solve complex problems (for more details, go here and here). I haven’t really read all the details about bitcoin exchange rates and how the bitcoin economy works, but at the very least I know that it does follow the law of supply and demand. So when demand increases and there is a fixed supply, the price will increase (bitcoins are constantly being generated, but it appears that demand is outstripping the rate of generation).

About two weeks ago is when I first decided I would try and get some bitcoins of my own. I decided I would try to generate them and assumed I would have some pretty soon (but I obviously didn’t know the details; it’s a little bit like winning the lottery). So I joined a mining pool online at bitcoinplus. I’ve around .04 bitcoins right now (not much). This was obviously taking too long so I thought about looking into buying some bitcoins. I checked the price over a period of days, it was hovering around $8/bc. I didn’t buy any and decided to check up on it later. A few days later (on the 3rd), I checked again, and this time the price had jumped to a little over $14/bc! What caused this spike? A day later, the price spiked again. This time to about $19/bc! I wasn’t sure what was causing the spike because the price had been more or less stable for the last few weeks.

That’s when I came across this Wired article that my friend sent me. It’s about an underground website (that is also anonymous) that lets you buy any drug. The drugs are priced in bitcoins. It would seem that there are a lot of people interested in buying these drugs and therefore these people require bitcoins. I’m theorizing that this is what led to the increased demand for bitcoins and hence the spike in bitcoin prices.

The Wired article was posted on the 1st of June. You can clearly see from the following charts how the price of bitcoins jumped on that one day (it’s about a jump of 30% on the 1st). The biggest spike was on the 4th; essentially a price increase of approximately 350% in just four days! Since the 4th, the price seems to be slowly coming down. Currently it’s sitting at around a little over $18/bc. I’ll probably keep a watch on the price of bitcoins over the next few days to see what happens. I’m assuming that the demand will die down and therefore the prices should eventually come down as well. Looking into this has actually ignited some interest in me to learn a little bit more about bitcoins and the bitcoin economy.

Price: USD/Bitcoin from the MtGox Exchange from 05/01/11 to 06/07/11

Price: USD/Bitcoin from the MtGox Exchange from 05/01/11 to 06/07/11

Price as percent-changes. USD/Bitcoin from the MtGox Exchange from 05/01/11 to 06/07/11

Price as percent-changes. USD/Bitcoin from the MtGox Exchange from 05/01/11 to 06/07/11

Normally you hear of currency values and stock prices rising on falling based on events in the world (positive or negative). It’s amazing to see how one little thing can change the prices of commodities. In particular, I found this (bitcoin) example particularly interesting because it’s a relatively insulated economy (i.e., it doesn’t seem to be affected by factors in the traditional market).

tl;dr version: Bitcoin prices were hovering around $8/bc. They jumped to $19/bc when Wired magazine posted an article about an underground market where you can buy illegal drugs using bitcoins.

Update: I was looking at closing prices and so it was showing only prices from the end-of-day. Here’s a chart that includes yesterday’s data. The closing price was a little over $30/bc. That’s an almost 700% increase since the 1st!

Closing prices USD/bc from 5/1/11 to 6/9/11 from the MtGox exchange as a line graph

Closing prices USD/bc from 5/1/11 to 6/9/11 from the MtGox exchange as a line graph

Closing prices USD/bc from 5/1/11 to 6/9/11 from the MtGox exchange as a line graph

Closing prices USD/bc from 5/1/11 to 6/9/11 from the MtGox exchange as a line graph

It is a great conspiracy

So what am I? I’m this poor student with not much money. I have a beat-up Mazda that decides to have a water leak all of a sudden. So here I am, with a car that’s overheating. Yesterday I decide to go to Sun Devil Auto at 8 in the morning. But of course, I don’t get there till FREAKING TEN O’ CLOCK because my car overheats every few miles. And I’m not talking about the time your car “overheated”. This is like the grand-freaking-daddy of all overheating man, this was THE BOSS. My dial was all the way on the other side of temperature guage. A couple more degrees and my engine would have melted. Serious stuff.

Ok, so a little exaggeration. It sucked eitherway. Anyway, so I give them the car and then they DON’T CALL BACK? I call this morning and the guy was like “I didn’t look at it till 5:30pm”… well DUH! Is it that hard to give me a call to tell me that you weren’t able to look at it?

Then anyway he goes on about all these things that’s wrong with my car “Yeah, there is this tiny ding on the hood, but it is a sign of a greater problem! One day it could become a BIGGER DING! We can fix it for $18,171.29!”. So I gave him the whole spiel about being a poor student. He wanted me to replace every freaking thing in the car. “Oooh! There’s is this splash of oil on your engine block! Better replace the whole engine!”. I just told him to replace the Water Pump and the Timing Belt. Apparently the makers of this car decided that they should put the Water Pump in some terribly inaccessible place. Then he says “Oh yeah, we will flush your radiator for $45 also.” WTF??!! FORTY FIVE DOLLARS?! Do you know what is INOVLED in flushing a radiator? ABSOLUTELY NOTHING! You let the fluid drain out, then fill it with water and let the engine run, drain that out, do it a couple more times and then finally fill it up with coolant and water. FORTY FREAKING FIVE DOLLARS? I said “Don’t worry I can do it myself”. I could sense the disappointment in his voice. He wasn’t going to get the money that I am using to get myself food and shelter. Anyway, so the net cost is still something RIDICULOUS… but it’s not as bad as it could have been.

Well, soon enough I’ll have a job that’ll be paying more. I can get a better car then. It is a freaking conspiracy. I am taking another job in the Army – a Light Armored Vehicle Mechanic. Then I will know how to fix my own car. HAHA!

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