Price Instability
Price Instability One of the problems with Bitcoin is the instability of its market value in the exchange market. This phenomenon partly reflects the weakness of regulations over Bitcoin. It may also reflect the total issue limit (i.e. 21 million Bitcoin) and issue patterns (at every 10 minutes with decreasing amounts over time). As of February 2014, the total number of Bitcoin in circulation so far was just above 12 million Bitcoin that are traded at a value of approximately 624.20USD/ Bitcoin7.
Once market participants in Bitcoin start considering the terminal value (i.e. the value of the last Bitcoin issue), they would think about the exact date of the last issue, mining cost of the last 7 In February 2012, it was 6 USD/Bitcoin. Thus the price of Bitcoin went up 100 times in exactly two years.
Bitcoin, and the discount rate to calculate the present value of the last Bitcoin, in comparison with the current Bitcoin value. The pricing mechanism of Bitcoin may have some resemblance to pricing to the oil field exploration rights8. Bitcoin values can be expressed in the general form; (1) Where MPC=marginal production cost, V stands for value function. Note that V(Bubble) is not observable ex ante. It can be calculated ex post such that (2) By the construction of the Bitcoin protocol, we do not know anything about the credibility and liability of a specific issuer of Bitcoin, so that V(Credibility)=09. Marginal production costs can be a very small for Bitcoin issuer while marginal production costs for miners cannot be negligible. In this case, we use the marginal production cost of miners10. Given the total final supply limit, the Bitcoin system may or may not create a bubble11.