Bitcoin Forum

could it still reach those incredible highs of $1000/btc and beyond, in some years?

Depends on the userbase, if your underground economy is huge the price will be high too, if it's 100 people, it will be very low.

For various reasons it wouldn't hold the whole underground economy if it had none of the "regular" economy, but it could grow the size of the underground economy too. I mean what's more important than a secure money for that?

If our governments continue to erode the value of mainstream currencies, absolutely.  Otherwise, I'm not sure, but hopefully BTC becomes widely adopted so we don't have to find out.

statistics are hard to come by but consider the fact that marijuana is widely recognized as being the largest cash crop in california...

bumping like a jerk because i want this topic to get some more love.

anyone care to comment?

The underground economy will soon be the most important economy. http://www.foreignpolicy.com/articles/2011/10/28/black_market_global_economy?page=full (http://www.foreignpolicy.com/articles/2011/10/28/black_market_global_economy?page=full)

a mixture of underground and 'above-board' might produce a very interesting BTC valuation indeed then

What if Bitcoin gets replaced by another cryptocurrency. I think it is quite likely.

Your math doesn't make sense, but you're not the first that I see making such mistake so I decided to reply.
You're comparing apples and oranges.

When people estimate that black markets are "10T USD large", they're trying to estimate the amount of production outputted by such black markets. A summed value of all goods and services produced, normally in a year time. This has nothing to do with the amount of money that circulates in this market in a given instant, i.e., its "money supply".

For example, an (arguable) estimation of US total economic production is it's GDP of ~14T if I'm not mistaken. That's much more that the entire USD money supply. Granted, you must better define "money supply" as many things may be used as money... but if you take for example the M2 aggregation for USD, that's around ~10 bi according to wikipedia. More than 1000 times lower than the GDP...
EDIT: Oups, my mistake, USD M2 is actually close to 10T... so yeah, not that far from the GDP, but that's still just a coincidence. :D The M1 is lower. And bitcoin's 21M cap is the M0 of bitcoin. USD M0 is around 2,8T (http://research.stlouisfed.org/fred2/series/BASE/).

Anyway, my point is, money supply != economic production in a year. You can't compare "black market production" with bitcoin's monetary base of 21M and reach any meaningful number.

Thank you for that link, it's a very interesting text!

One could produce an approximation by making some assumptions about velocity. The simplest assumption is that velocity is roughly equal in the underground and official economies.

I doubt that that will happen absent either a failure of the system (including significant exploitation of the user-base and technical difficulties associated with load...which could actually go hand-in-hand) or changes/shifts in the core development team.

I don't see Bitcoin being totally replaced in most circumstances, and if it is, I theorize that BTC themselves would play a role in ushering in alternatives.  That is to say, I suspect they Bitcoin could continue to act as something of a reserve currency backing alternative crypto-currencies.  The (theorized) load issues and excessive transfer fees would disappear if BTC were used mostly for infrequent account re-balancing in significant per-transaction chunks.

Why would Bitcoin be replaced by another cryptocurrency if it can simply "evolve" to include the new features if they are good?

The "old money" interests in the core development group are hampered by need to maintain backward compatibility and the needs for security that is ratcheted up near to the paranoia level. There's also the bunker mentality: all other coins are pump&dump scams. The combination of the three makes for a very powerful handbrake.

Older thread about the same:

https://bitcointalk.org/index.php?topic=101686.msg1113732#msg1113732

1. Marketing. Some company could throws millions and billions of money marketing their cryptocurrency alternative.
2. Infrastructure. Money transfer companies like Western Union could adopt their own cryptocurrency, and therefore enable superior access to black markets. (The black market already uses these companies, so it would be easy choice)

Edit: before anyone gets defensive, I'm not saying that these will happen. Just wondering about possible different scenarios.

I'm a big fan of 'evolution' generally, but NOT in a currency system which I hope to rely on in even a modest way.  For that I value:

 - highly static and well documented rules and function.

 - stone simple specifications and implementation.

 - a high degree of attention to detail in development.

I am a big fan of modularity.  I'd prefer to see 'bitcoin' be a bare-bones reference implementation of the protocol and let other efforts fill in the gaps when it comes to GUI's and that sort of thing.

That still doesn't mean that if some new cryptocurrency comes out with a killer feature, and more and more people and vendors start to use it, that Bitcoin can't just implement that feature as well, and once again overtake the newcomer due to already having established hardware/software/merchant support. It could happen, but I really don't think it's likely.


This would make their currencies no different from Beens and Flooz, and will likely result in the same levels of adoption, trust, and eventual/inevitable conclusion.

They sure need those billions because they would compete against PayPal or maybe MintChip, not Bitcoin. I just can't see the business model for a company developing a truly decentralized cryptocurrency like Bitcoin.

I don't think they'd want to risk even more involvement in black market financing - such a move would most likely backfire.

;) Not at all - just tossing ideas around...

You are 100% right. Bitcoin and its developers could somehow become inclusive. It isn't impossible. I just find it extremely unlikely. The not-invented-here vibe is just extremely strong. The current mindset is highly exclusionary.

Depends upon what we are talking about.  If you mean small tweeks such as the block interval or hugely disrputive changes such as last-most-difficult-hash which can be achieved with a parrallel blockchain, then yes the developers aren't keen on playing games with a system that just works.  Besides, there is test-net for that kind of thing.  If you mean something disruptive, but truely innovative that cannot be practically implimented without a breaking change, then maybe.

You just don't go around breaking a running system to try out your theories.

Totally agree. However, this is going to change fairly soon when a serious competitor arises.. they will have to become more nimble, more adaptable and shed their ponderous ways. Or they will lose.

Well, I'm thinking more of a mindset that any particular technical detail. It is more of a human factors issue than a technology issue.

Example: I used to wonder why Gavin was so against Genjix's (and others) idea of refactoring the Satoshi's code that lead to libbitcoin. After about a year of kibitzing on this forum I finally understood after seeing how the Bitcoinica Consultancy/Bitcoin Consultancy/Intersango fiasco had turned out.

Those are really hard choices to make, especially since this isn't a for-pay project but an association of volunters. Of course it is better to err on the side of safety when working on a financial software. But where to draw a line?

Bitcoin is bigger than 'the bitcoin devs' anyone with the skills to write a client and other cryto currency apps can just make a newer better bitcoin client/apps and be years ahead of where they would be on their own in terms of bootstrapping an economy.

Here's an example using order-of-magnitude estimation to expand on my previous comment.

The size of the US economy and the underground economy are the same at 10^13 each.

There are 10^12 USD in circulation but will only be 10^7 BTC in circulation.

Assuming similar monetary velocity a BTC economy the size of the entire underground (or US) economy would create an exchange rate of 10^7 ($100,000/1BTC).

How does this compare to current conditions? First we need to estimate the size of the current Bitcoin economy. If Silk Road is moving $2000000 per month that puts the size at >10^7 so for calculation purposes let's call it 10^8. This would imply an exchange rate of $1 USD/BTC, except only about 1/3 of the bitcoins are mined yet. This isn't quite enough to justify the current price of 10^1 USD/BTC, but it's relatively close. Apparently velocity in the bitcoin economy now is lower than the general economy but velocity should increase as the total amount of bitcoin commerce increases, so this estimation method should get more accurate over time.

Based on that I expect to see $100/BTC when Bitcoin "GDP" reaches $10 billion equivalent per year and $1000/BTC at $100 billion equivalent per year.

While I can't falut your analysis, I think that you are overlooking something very important.  All things equal, and increas in velocity implies a decreasing time preference, meaning people in general are more inclined to spend now than wait for a better deal.  Right now, the time preference is very high in bitcoin, as many of us have been sitting one some considerable funds for moneths to years.  While this is bound to lower as the economy grows, the increases in velocity would tend to cancel out the price increases that a growing economy would otherwise imply.  And this leads to my final point; for all practical purposes the velocity of US $ is limited to the rate at which the middle class worker is paid for his labors.  SInce the average worker is paid weekly, this effect slows down $ velocity overall and drives consumers towards credit to improve the interval; but even credit can't cycle as fast as Bitcoin is capable of, since bitcoins can be respent roughly every hour.  So, theoriecally, a bitcoin can be priced an order of magnatude lower than $ (with an equvialnt monetary base, which we don't have) and move the same value in the same time frame due to the very real possibilty that employers could pay employees for work on a daily, or even hourly basis, using funds spent at POS the very same day.

I agree that Bitcoin is technologically possible of sustaining a higher monetary velocity than current currencies but I'm not sure that it would actually increase. Governments do a lot to cause people to spend money faster than they would choose otherwise via tax codes that give people an artificial incentive to put their savings in the stock market, inflation reducing the value of savings, easy credit that gives consumers the illusion of increased purchasing power, policies that reduce the incentive for personal savings (old age pensions), etc. The inability to do all these things with Bitcoin would tend to reduce velocity to a more natural level.

Which effect will predominate? We won't know until it happens. One thing is certain, however: a higher bitcoin velocity would indicate health in the BTC economy as a whole but would have a disappointing effect on exchange rate for the speculators.

I'd rather see mainstream acceptance. I'd even settle for more places using Dwolla so I could convert bitcoins to products without having to fill up my bank statement with withdraws and deposits.

The bitcon economy is still very small.  Most of the activity on a daily basis related to bitcoin is trading, arbitrage, and money transfers.  The number of people using bitcoin to actually buy things (legal things) is still quite small, but we sign up new businesses every day so the numbers are growing.

PayPal alone does $5 Billion per year in online payments.  If Bitcoin can get 1% of that business, that is $50 million per year. 

Alsao, early investors in bitcoin will experience the "wealth effect" as their value grows.  So, people will be more likely to spend their bitcoins after they have held them awhile.

Do you think that legal trade will overtake Silk Road relatively quickly, or is it going to be a while?
I don't see that as being realistic. Based on the known volume of bitcoin commerce I think the exchange rate is too high, possibly by an order of magnitude. Signing up new merchants and convincing more people to use bitcoin for purchases could lower the exchange rate due to increased velocity before it increases it.

Another big speculative bubble like last year wouldn't keep prices high for very long, especially if early adopters started spending their coins, so any wealth effect would be short-lived.

I think it will happen within a year.

Do you think that the current price of gold is related to its use as a facilitator of trade, or to its use as a means of preserving - or even increasing - value in an uncertain future?

The same applies to Bitcoin. Only that Bitcoin is indisputably better as a facilitator of trade, and might be better as a means of preserving - or even increasing - value in an uncertain future.

I think it's far more accurate to treat gold like a luxury good than a currency.

You are welcome to think as you like and treat gold accordingly.  A lot of people including myself, and entities like central banks, consider gold to be a standard reserve and a currency insofar as it can be used perform settlements and balance accounts so you may or may not be in good company.  The one thing I don't do is wear a lot of gold on my body or have it kicking around the house as a luxury item.  Doing so makes one look like a jackass in my opinion.

@abelsfire:  My best guess as to the current price of gold is that it reflects confidence in other forms of wealth preservation.  Like many, I think it probable that the newly developed paper-gold market is distorting the price of physical downward...and have been capitalizing on this happy state of affairs starting a decade ago.  Of course when I saw on opportunity to mop up some BTC for a bargain that cut into my PM acquisition regime to some degree.

No, again this is comparing apples and oranges. :)
Savings != money.
A lower time preference imply less savings. But savings have many forms, not only storing money.
A higher velocity might simply imply people are more "certain" about where to place their money. If you could know everything for sure, you'd likely never hold liquid money. As soon as you'd receive some, you'd exchange it for something better right away (either an investment or something you know you'll need/want). We keep liquid money because we cannot be 100% sure of when we'll need it, nor how much. Neither we can be 100% about which investments are good or bad. Keeping money is a form of protection.
Velocity might also be linked to the actual speed in which we are capable of transacting, as you and others have noted. The fact that we can easily transfer any amounts of bitcoin anywhere in the world in ~1h will probably contribute to a higher velocity.

A healthier BTC economy might also imply in better BTC-quoted investment opportunities (stocks, bonds etc) in which these speculators could invest.

+1

The killer app for Bitcoin is not commerce.  For most things we want to buy and sell, we can already do so almost instantaneously and worldwide, via legacy methods such as credit cards.  The current fiat monetary system, as corrupt and unstable as it is, is mostly "good enough" for 99% of day-to-day transactions.  Anything you want to buy, you can, with enough effort, by using state money.  Bitcoin adoption might shave off a few percent in commission, or a few days in speed, versus credit cards and money transfers, but that's a quantitative, not qualitative, change.

Instead, the "private store of value" premium in Bitcoin is (and will continue to be) the driving force behind its price.  Bitcoin is your digital gold and personal offshore bank, at no cost to you, and without leaving your house.  That's Bitcoin's disruptive killer app: intangible, transportable, mathematically guaranteed, financial security and privacy.  A service not available anywhere else, at any price.

Which means there is no meaningful upper limit on Bitcoin's valuation: if personal privacy continues to erode, if draconian asset taxes and capital controls become widespread, fear could drive every single penny in global savings to Bitcoin, and they would stay there with a velocity of zero.  Indefinitely.

Total global wealth is approximately $150 Trillion.

Divide by 21 million.

That's the upper limit and current trend on the Bitcoin price. Completely independent of how much commerce is transacted in Bitcoins.

For more thoughts on this topic, replace the world "gold" by "bitcoin" in the following article:
How Can We Possibly Calculate the Future Value of Bitcoin? (http://fofoa.blogspot.com/2010/06/how-can-we-possibly-calculate-future.html)

And read this great blog post by BrightAnarchist (whom I believe is a member of this forum):
The *Real* Advantages of Bitcoin (http://goxxed.blogspot.com/2012/01/real-advantages-of-bitcoin.html)

The only problem is that a "store of value" doesn't exist. It's a convienient model that works only under certain conditions.

The economy is the production and subsequent consumption of products and services. When people talk about "storing value" unless they are stockpiling canned food what they mean is storing a claim on future production. Obviously the claim is only worth something if the future production actually happens AND the producer chooses to honor the claim.

Commerce is the economy. Under favorable circumstances we can build higher-level abstractions on top of that commerce like "saving" deferred consumption, but those abstractions are only valid under the right economic conditions.

Totally agree.  Hubris isn't smart when facing innovation.

There's a big difference between bitcoin and the typical Hubris v.s. Innovation. Typically that hubris comes from large established companies that are comfortable with what they do, that get taken by surprise when someone with more innovation brings a competing product that customers want. Bitcoin is open source, with the developers and the customers often being one and the same, and no single entity really being in charge. So in this case, it would be like accusing the who e Linux ecosystem of having hubris and not being able to face innovation.

I can't fault you for repeating this Linux comparison, but it is completely wrong. The visibility of the code matters relatively little to the future, the thing that matters the most is what type of changes get accepted to the mainline branch. The next thing is the mainline developers attitude to the branch/fork developers.

For the experienced developers those are the two things that distinguish the Bitcoin project the most and make it unlike pretty much any other open-source project. Several of the core developers had long careers in the "large established companies that are comfortable with what they do" and transfered their experience to this project.

Those problems don't have an easy answer that can be summed up with single paragraph. It is easier to sum up what's wrong, and I liked the most the cypherdoc's summary: Bitcoin is like Mona Lisa: it is already perfect.

Since the future is inherently uncertain, saving makes sense in all circumstances.

What should matter is whether a particular concept is valid. It doesn't matter if it is more or less abstract. Isn't "capital" also a high-level abstraction?

I can't "prove" it, but my intuition tells me that any fully decentralized cryptocurrency is going to have the same concept of using computing power to secure the network. In order for Bitcoin to get replaced, you'd need to convince all the existing miners to switch over to some new system. Or, your new currency would have to be so appealing that new entities would enter the mining market for this new currency (where they otherwise did not enter the Bitcoin mining market).

I don't think its possible for a new currency to be as appealing as Bitcoin from the outset, considering the ever growing array of goods and services that revolve around the Bitcoin economy. MtGox just grows and grows, new exchanges appear, and software evolves. A new currency will have none of these things, and compare very unfavorably.

So any other fully decentralized cryptocurrency is going to have a very rough time going against Bitcoin, no matter how well funded the entities behind it.

Now if a centralized cryptocurrency comes out, one that doesn't require the proof of work but instead is based on a trusted party, that would be dead on arrival (since its the equivalent to fiat, which no one in Bitcoinlandia likes).

Conclusion? Unless some vulnerability with Bitcoin is discovered, nothing will be replacing it.

pretty interesting discussion guys, but how about we get back on topic now? :-)

another opening question:

what kind of exchange value and stability would bitcoin need to have, for example, to successfully replace "System D" in a single small, third world country? let's ignore the technical challenges of people using it for the moment and speculate.

That would work right now.  Just look at what M-pesa has accomplished.  If a bitcoinspinner style client could be introduced to that low end kind of cell phone, perhaps with some kind of bu.mp app to identify counterparties, that alone would do great things to stabilize bitcoin itself.

It will get there in about 50 years even with zero growth in the bitcoin economy.

Halfway there.  You are right money supply != economic production.  However you can't say the relationship between GDP and money supply is coincidence.  The two are very much linked.

(Money Supply) * (Average Velocity of Money) = (Economic Production)
One reason the US money supply has grown so much is the depression combined with poor govt policies has caused a collapse in the velocity of money.  The two numbers are very close because velocity is only a little over 1 (each $1 in money supply is only changing hands once per year, think about how pathetically bad that is).

We can make educated guesses about the velocity of money in the bitcoin economy and thus solve the above equation for money supply.

Hmm, interesting. A question: when measuring "velocity of money", you'd count the money that changed hands in exchange for goods and services? I'm a bit unclear on this. Let's make an example. I buy raw materials from a miner for BTC 100, pay an employess BTC 50 to produce some good and sell it for BTC 200 to you. What would be the measurements for (Economic Production) and (Velocity of Money) in this example?

It could even reach these highs without serving any economy (think of gold)

So in the example there is 350 BTC of economic activity.  The velocity would depend on how large the money supply was.  Lets assume the entire money supply is only 200 BTC.  The velocity would be 350 / 200 = 1.75.

More on velocity
http://en.wikipedia.org/wiki/Velocity_of_money

Now estimating the velocity of the Bitcoin economy would be difficult.  In any economy velocity can only be estimated and usually entities like the Fed have extensive data provided to them by businesses, banks, govt agencies, etc.  With the psuedo-anonymity of Bitcoin and lack of central oversight the traditional method of computing these stats won't work.  I would imagine if Bitcoin became large enough eventually there will be value in researchers trying to pin down economic data like velocity.

In traditional fiat economies when functioning properly Velocity will tend to have a v=1 as a lower bound and v=3 as an upper bound (so GDP is 100% to 300% of the money supply).  Velocity of < 0 indicates that a substantial portion of the money in the economy is simply idle (it isn't used for new goods or services).  Velocity of 0 would indicate no economic activity (or at least none using that currency).

Honestly, it shouldn't be.  We already have a similar metric that is very accurate, called bitcoin-days-destroyed.

https://en.bitcoin.it/wiki/Bitcoin_Days_Destroyed

With a few cavets, namely the difficulty in seperating out transactions that only involve owners moving their bitcoins around from one address to another for whatever reason, Bitcoin-days-destroyed-overall is a very good indicator of the actual velocity of bitcoin at any given time.

EDIT: To be specific,  the rolling average of (Bitcoin-days-destroyed-overall-today divided by the daily-transaction-volume) should give a consistant ratio to a real velocity for bitcoin.  The problem I see is that we don't yet know what that ratio might be, or if it will change in the future as bitcoin's economy grows and changes.

That's not very similar. In terms of economic activity there is no difference between an old and a new coin.

I think BDD is useful and velocity is not.

Your welcome to your opinon on the relative merits of any particular metric, but my point ws that velocity under bitcoin should be easier to estimate than under any other currency.  BDD is realy very similar a metric to velocity, because if your volume is high but your overall BDD is not this means that a small number of people are moving the same bitcoins around rather quickly.  This is a high velocity by definition, although it's without context, and velocity is a useless metric without context.

I think we mostly agree. Velocity is really incomplete, more data could give enough context, one version of that extra data would be BDD.

I think there may be some confusion.

Velocity =/= moving money around.

Velocity = GDP/MoneySupply.  There has to be real production or the velocity is zero.

If the entire bitcoin network consisted of nodes randomly transfering BTC to each other than regardless of the transaction volume the production would be 0 and thus velocity would be zero.

If I withdraw $500 from my checking account and then deposit it back that is not economic production (GDP) and thus it doesn't contribute to velocity.
If I buy a new xbox360 for $500 then likely Microsoft will build a replacement and that transaction does add to economic production (GDP) and thus raises the velocity of the economy (increase to GDP over no change in money supply).

No, that would just mean that velocity had no relationship to value.  But we already know that is not the case here, so it's a moot point. The kinds of transactions that should not be included in velocity, that would be included in BDD, are transfers between a person's own addresses (and any other kind of valueless transfer), exchange price speculation, and probably in-kind donations.  The problem is we can't work this out of our data set, since there is no way to know why the transfers are occuring.  This is generally true with fiat currencies as well, but it's entirely possible that these kinds of transfers represent a much larger share of bitcoin's "GDP" (which is a meaningless metric, in the context of a global economy that can't realisticly be separated from the national fiat economies in particular regions).  Of course, it's also likely that these same types of transfers will become an decreasingly significant portion over time, if Bitcoin continues to grow.  At some point, the variations in velocity metrics for bitcoin and fiat currencies become small enough that they can be ignored, and the velocities themselves compared against each other to determine a relative understanding of velocity.  Velocity of currency is always a unitless metric, and has no real meaning outside of the context it's being used.

Yes, we likely agree.  BDD is an excellent economic metric, a very useful tool for analysis.  And one that has no corrolary in fiat currencies.  Velocity of bitcoin is most useful as a comparison tool against other currencies and across time.  BDD is a very useful tool for comparing one period of time against another, from within the bitcoin economy itself compared to itself.