Bitcoin Forum

Economists say that in an effective market price of an item is it's future utility times probability of it happen times our time preference. That is if chances of Bitcoin trading for 500K$ in 10 years time are, say, 50% and we value a dollar today twice as much as a dollar in 10 years time, then Bitcoin today should be trading at 125,000$ apiece. Still it's trading thousand times cheaper. Why?

I can see two explanations:

-We estimate chances of Bitcoin's success around 0.1%
-We prefer a dollar today to 500 dollars in 10 years time.

Both these explanations are obviously untrue. Then why is BTC so cheap?

Edit: fixed typos

To apply such numbers, you have to know about them.
There are a lot of things you have to learn about Bitcoin before you can try to estimate the chance of success.
Also don't trust what economists say xD

There are a lot of people who have learned about BTC. So now we see what the market in a whole thinks about BTC. Ask any libertarian, :) he will confirm that markets are very effective at estimating chances and values.  But the BTC market makes incredible error, it misses at least 3 orders of magnitude! Why?

There are other factors like the alternatives and their risks over that period (e.g. the S&P has nearly doubled in nominal value over the last two years and there are many high yield bonds of questionable risk) but I'd guess 0.1% is a fair estimate of what the market considers the likelihood of BTC having roughly the current market cap of gold in 10 years.

Of course, the market is made almost entirely of traders who have no way to accurately evaluate the risk (if they could, we wouldn't have bubbles). Even understanding Bitcoin itself requires a good understanding of computer science and economics - what % of traders have a firm grasp of both? And who can predict the global economic climate over the next decade or what financial regulation and monetary policies will be chosen? Anyone that could might easily make more over that period than even this potential 5000x ROI on BTC.

That's what you would expect in equilibrium. Right now, you have "bears" who are waiting for a short-term dip in the price before buying, which I only state as one example of a short-term effect that is not captured by the economist's statement.

Well, personally I don't think the market is so effective every time, where it really excels is adjusting very fast after something is known as a good or bad investment though.

Where do you take the number $500k from? Just imaginination, some sort of calculation?

I mean if bitcoin should be implemented into the financial service chain in terms of online transactions from e- commerce or as a "behind the scenes financial vehicle" in services like Western Union then the amount of money transfered by them has to fit into the existing 21m coins. So for that to be possible the price would have to rise. But to $500k?

Aside from that people are just way too risk averse and think that only the fiat in their bank account is real money instead of seeing it a another trading position. (Which it is, its a bet that fiat currency will rise in value- a very stupid one considering the amount will never shrink.)

Falkvinge says it's over valued.

https://bitcointalk.org/index.php?topic=293809.0

Bitcoin money supply is currently at 2.5 billion USD (including future coins). That's not bad! There's just not demand for more at this point in bitcoin adoption.

"Where do you take the number $500k from? Just imagination, some sort of calculation?"

 The world gold supply is valued at around $12T. Should bitcoin effectively replace gold as the global decentralized ledger of choice, each BTC would be worth ~$550K in 2013 dollars ($15T/21M).

Even if that sounds crazy, but the number would be even higher.
I am very sure that at least 1 mio Bitcoins are lost forever.

The real question is, will Bitcoin ever be used like gold/gain gold's market cap?

For some insight we head to:
https://bitcointalk.org/index.php?topic=68655.0

"cheap" is just a perception.

Bitcoin is valuable is the way I see it.

Nothing goes up in a straight line.  It will take time.  Besides, bitcoin is not ready for that valuation yet because no viable solution exists for the average person to use the currency securely.  It takes a certain skill level to safely secure your money at this point.  If bitcoin went mainstream now, you would hear horror stories about how newbies got wiped out.

Gold, M1, etc... It deserves a separate thread (and there are ones around), but it is irrelevant for this thread. Be it 1M or 0.1M, it's still orders of magnitude off. The question is why.

I agree, there are a number of problems to be resolved. But what are chances of them to be resolved in 10 years time? Market seems to think that the chances are only 0.1%.

So, the explanations are:
1. Market is wrong (3 orders of magnitude off!). Because most of market players don't understand BTC/economics.
2. Market is right. Chances of BTC "to make it" are not 20%, as Peter Thiel thinks, not 90% as my recent poll shows, but 0.1%

As a traded currency the price is exactly what one trader is willing to sell to another.  Don't forget that imbalances always exist when discussing huge all encompassing systems and trying to price them as a whole.  Example at the hight of Japan's bubble the forbidden city blocks were considered to be worth more the whole state of California.  Was it true?  Of course not.  Where individual units of real estate both in California and Japan still trading at prices that suggested such an imbalance?  Of course yes.  Or consider the following example that when Nixon closed the gold window the entire stock market valuation was greater then the existing supply of gold on earth when converted to gold at the then mandated rate.  Does that mean that no trades occurred at those prices?  Of course they did.  A currency and especially BTC since it has no physical properties is just a reference.  And while taking a step back and looking at the big picture is helpful there's a saying that the market can be wrong longer then you can be solvent or alive for that matter.

In your calculation do you also assume that all other crypto currency is worthless and remains so?

Bitcoin is valued at EXACTLY what is is worth TODAY.  No more and no less.  The market takes ALL factors into consideration and dictates what its price is at any given moment in time.  Tomorrow BtC will also be exactly right...regardless if it is up or down.  If the equilibrium starts to tilt in any direction the market will correct it within minutes.

It's simple. Less than 0.1% of people know enough about Bitcoin to believe with high confidence that there is a 20% chance it will reach that price in ten years, let alone people with the capacity to risk substantial capital and the patience and time to set up a secure wallet and jump through exchange hoops. Heck, even on this forum few people are truly confident of this, if they believe it at all.

It takes an awful lot of knowledge, understanding, dedication, research, patience, thinking, vision, and even daringness regarding possible legal risks to fill the above prerequisites. On top of all that, most of the people who understand economics (Austrian economics, of course) well enough to get why Bitcoin will change the world are convinced by that same economics they learned that "Bitcoin cannot be money." Moreover, Bitcoin sounds really cheesy/scammy when people first hear about it, and it relies on many counterintuitive, "obviously impossible" facts, like how a private key can be used to sign a transaction without revealing the key when broadcasting it.

The reason is, when becoming more popular, the preparation cost is extremely low. Today, one 300Mh/s SHA-256's production cost is extremely low as few penny when making in thousands.

The is the game of trust. Some people still believe the being means nothing like game token.

The market isnt perfect and there isnt nearly enough use and liquidity for perfect "correction within minutes." Consider prices differences between exchanges: Yes they follow gox, but why is there any but the most marginal difference between all the exchanges? (yes I know why, but for the sake of argument)

Furthermore, yes an asset can be under or over valued. The market does not set a prices for us, we set the price on markets. If for instance, you knew total estimated gold or oil reserves were completely wrong in some way, that asset is under or over valued because of a lack of information to traders.

Maybe the market believes that there will be sufficient credit money built on top of the current bitcoin system for the current bitcoin money supply to sufficiently serve the needs of the future bitcoin users? That way, even as adoption and use of bitcoins grows, the current price could remain stable. In the end it depends on if bitcoins are used more to store value or as way to transfer value. If Bitcoins replace gold, then the monetary value of bitcoins will need to be high and the value of a single bitcoin will be 500k or something like that. On the other hand, if bitcoins are just replacing PayPal and Western Union then each bitcoin will not have to be worth much more than they are now, since you can reuse the bitcoin over and over, and if people use systems built on top of bitcoin that allow instant transfers (like how many webwallets allow instant transfer from one user to another of the same wallet system) the velocity of money can be very high.

economist also say that in an efficient market, the value of something is equal to its marginal cost.
The marginal cost of a bitcoin is simply the electricity needed to run the miner divided by yield. Right now, that is about $2.42/bitcoin.

What about all the other costs?
hardware costs, risks of being scammed, waiting time until delivery, work involved to get the stuff running?
They don't vanish into thin air, even more as Bitcoin mining hardware is only useful for a small time span (due to currently rising difficulty).

So you are saying you can get more bitcoins out of your miner if you just dump a bit more electricity into it? I was under the impression that miners all ran at pretty much the highest possible value?

Or are you saying that if I spend $2.42 on equipment and electricity then I should be able to find a block sometime within the next 25 days?

BTC is a cryptocurrency but its not the only one. Its very likely that in the coming decade other cryptocurrencies come around that will outperform BTC.

So your assumption of 500K$ MAY be wrong.

Less than 0.1% to go to 500k because it's not 100 vs 500000, there should be some kind of "bulk of the probability distribution".
(e.g. when Bitcoin goes to 1k or 10k and struggles against real competition from big tech companies)

But who can look at the Btc price chart and say "efficient market" with a straight face? ;)

Possible explanation:
- My income does not allow me to buy so much bitcoin that I shift the price to 100k...
- Ever heard about those things called demand and offer? Those can be quite pesky...
- What is the utility of a dollar and a bitcoin now? I know it's 10% and 0% respectively for me, how about you?

please explain 10% and 0%?

The velocity of Bitcoin in such a situation would be much higher then the velocity of gold.  Bitcoin is much easier to send around the world.  Even with significant lost Bitcoin, it could fill gold's role with a much lower price than half a million each.

I can't buy anything with USD here. Should I try to use it, only way it might be possible is at an exchange office or paying my various internet service bills which are about 10% of my expenses. Everything else is in another currency.

As for bitcoin, I can only spend less than 1% every month, because nobody and nothing here accepts it.

But isn't the point in gold's role just having it to save your wealth aka store it?
So the duration of the transportation shouldn't have that much influence on that.

All electricity used becomes heat.  It is only a cost if you don't have a demand for heat.  In the winter, mining has no marginal cost since it saves me from burning as much propane.  Hardware, however, is becoming pricey.

It is also used for international settlements.  With bitcoin this can be done more frequently and at lower cost.

From other hand, if you get your paycheck monthly, the money just sit on your account for (average)half-month. Bitcoin won't change this timing.

But it's utility is diminished because it's heavy and must be guarded all the time. Think about a million dollars of gold vs a million dollars of bitcoin, the later is magnitudes easier to keep secure and spend. Bitcoin has the convenience of cash with the security of gold, insomuch as there is no third party risk of a Central Bank.

The equilibrium in determining Bitcoins price is heavily influenced by so many other factors, including the extreme lack of knowledge about it.

I can send you $5,000 if you can mine 1,000 BTC for me. At price $2.42/bitcoin you will have more than 100% return.

+1

Maybe a better comparison would be the exchange fee to convert them. How easy/expensive is it to get USD vs BTC into your native currency to spend on all your expenses?

Big thumbs up for this post !

Would you ever put 125k usd in 1 btc? I don't think so....

And put all your money for 10 satoshi? Lol.
People are only investing what they can lose.

If you can lose 100 - 200 usd, you will spend them into bitcoin if you can buy 1 or 2 btc.
But if you can buy less than 1, you will feel disappointed, and probably won't spend your money there.

That makes no sense.

If I have 100 USD available to invest, and I suspect bitcoins will go up another factor of 10, it does not matter what the current price is. If I look at the calendar and it is October 2010, then I buy 1000 BTC. If it is March 2011, then I buy 100 BTC. If it is August 2011 or November 2012, then I buy 10 BTC. If it is May 2013, then I buy 1 BTC.

Sometime in the future, people who want to put some money into bitcoin will use their 100 USD to buy 0.1 BTC and they will be just as happy about getting a good deal on their purchase as the people in early 2011 were when they talked the seller down to 1.

USD is converted into automatically with a 2% FX fee applied on payments. So for example a 10 USD bill would cost me 10 * USD/RON * 1.02. Some prices are shown in EUR, and paid in RON. Some bills, are weirdly displayed in RON, paid in EUR, but converted from RON, and the conversion fee applies just once, maybe the merchant pays the other side.

BTC would require something like 15 EUR SIPA fee per fiat deposit, or a 4% fee on localbitcoins.com for p2p exchanges. I don't know anyone in the city that exchanges BTC, except me and a work colleague.

There are no local currency exchanges that I can use, and using USD means I pay the FX fee. Currently I will have to pay 2-3% on top of the BTC price, there is no alternative. Ideally this should be around 1% which I wouldn't mind and which would be super-competitive with everything else.

Being a p2p decentralized open protocol and open access currency, I mine my own bitcoins and obtain sufficiently cheap bitcoins (or litecoins) at around 75% of mtgox's price, which I can use for expenses. So paying for things with bitcoin (VPS, hosting, domains, SSL certs, online storage, other services) would offer me a 25% discount. Paying for physical items is impractical as virtually nobody here accepts bitcoins, and paying for shipping cancels the advantage.

I hope my experience can answer your questions.

So the simple answer is that there just is no local currency exchange, and so to use bitcoins to pay for stuff locally you have to convert it first to USD and then use the same currency conversion you would use if you started with USD.

In time, there will be local bitcoin exchanges available for every currency. The fact that these don't exist yet means there is still room for bitcoins to grow.

Yes, in fact bitcoin and bitcoin services have plenty of room to grow. The way Bitcoin started getting adopted (academia, enthusiasts, developers, some companies) means there is no real push, education or presence outside of these niche circles. It started from the bottom up and it can only be adopted by the same principle.

There are no utility or service companies offering Bitcoin payment options, and very few public service venues provide it. The fact that it has a very liberal and open regulated model means there is no option for companies to greatly profit from pushing it or to deploy marketing and MLM structures. You can't really sell an open idea that exposes you to uncontrolled competition.  It benefits the individual so much more that companies will find it harder to adopt. A company needs a very fluid cash-flow, holding on bitcoins slows the profitability and causes problems, individuals don't have this issue as they have a slower cash-flow.

There is a limit however to how useful bitcoin is, and those are the relative proportion of bitcoin to altcoins (once bitcoin was created, there was a limited 21M units, not anymore, each altcoin adds aditional similar* value units), and the smallest divisible unit (you can't split a satoshi up when you decide to pay 2 satoshi or 3 satoshi for a sheep, but the difference 30% makes is significant).

Also at the moment, there is a powerful gradient on the demand/offer sides in each geographical region, and as such varying prices across the globe. It is more like gold than salt, and every week a new mineral can be invented to store value.

Companies are made up of individuals. The same benefits that bitcoins provide to individuals (secure money, quick international transfers) can benefit companies as well.



Currently 1 US cent is worth about 0.0001 BTC, few people would argue that a cent is significant, but that is the granularity allowed by USD. So we still have to go up four orders of magnitude in price before the USD and the bitcoin have the same price granularity. That would mean that if I bought one bitcoin today for about 100 USD, and waited for BTC and USD to have the same price granularity, I could sell that bitcoin for one million USD. And I would argue that you would need to go at least one more order of magnitude before price granularity is a problem, and that is for just the most inexpensive items. If you are going to buy a car using bitcoins, you could go even a couple magnitudes more than that before the granularity becomes a problem. Plus, it would be a very simple fork to add some more digits to the bitcoin protocol and give us another 8 digits to work with.

When 1 BTC == $1,000,000 USD then 1 satoshi == 1 cent. And market cap $21 trillion :-)

This isn't a preference for many people, so I fixed that for ya.

Nope...wrong...

Market is ALWAYS correct at any given moment. It takes into effect "idiotic amateur traders" & "100% efficient market" and EVERY other factor at the given moment in time.  As variables change, so does the valuation of the item.  



There is NO such thing as "overvalued" or "undervalued".  It is a perceived value from the individual making the assumption on the limited amount of knowledge/facts they have and includes their own bias.  Nobody can know ALL the factors that make up an item's true worth.  Only the market can determine the real value.


Let me give you an example.  I go to Mecums auto auction to sell a classic 1967 Form Mustang.  All the past auctions and appraisals say my car should go for at least $25k.  I to believe it is worth at least this much and maybe more from all my research.  But to my surprise, when the hammer falls it only sold for $19,500.  It is easy to say my car was worth more because I "perceived" it as such.  Reality is, at that given moment and time (and location), the cars value is EXACTLY what someone at the auction was willing to pay for it.  No more No less.


The market takes EVERY variable (even inefficiency like Mtgox) into consideration.  This is why there are big differences in prices between the exchanges.  As exchanges become more or less liquid the the value of BTC swings up or down.  


But I totally understand what all of you are posting and trying to point out.  It does "feel" like these factors are distorting the values of BTC (and they may be).  And I to believe BTC is undervalued!  :)

The market is no omnipotent all-knowing sentient being.
It doesn't take every variable into consideration, it is the variables.
Just like the weather "takes all temperatures into consideration".

But in contrast to the weather, the variables are based much more on human decisions.
Humans can be wrong, therefore the market can be wrong.
(wrong in the sense of being a bad decision for the market participants or in accurateness of predictions)

Believe me, the market takes that (bad/good human decisions) into consideration as well!

bitcoin will always be cheap even at 1K each its cheap like dirt because, its a really rare item that is used as money, their is a certain degree of confidence in the money users are holding and a certain degree of fear, this feeds supply and demand and the price is set. truth is there a lot of fear right now and their has always been alot of Fear, mtgox and many others have had huge problems...

even me Uber Bull, when i first hear about the blockchain only put in 25$...


 Fear is high, even among bulls, this is why price will always be low, and the potential ROI very high.

in 10year the ROI might be 6-4% a year and risk will be 0...

but who knows...

Falkvinge makes a mistake in my mind: he only looks at bitcoins current value for transactional purposes.

50% chance of bitcoin being worth $500,000 in 10 years is obviously way too high a guess.

It seems the market gives this a chance of 0.1%. I give it a higher chance personally... that's why I'm long bitcoin.

This article about the stock market does a better job explaining what I have been trying to convey about BTC market:

http://stocks.about.com/od/advancedtrading/a/101208Price.htm

Yes, let's assume you have a bunch of idiots buying something that will mathematically proven give them back less (some of the perpetual mining contracts are pretty close to this *cough*).
They all buy it for $1 and it will give them back $0.5. (maybe it has gold in its name or something xD)
I would call that overvalued or the market being wrong.

The market is always correct by definition.

You can not talk about a perfect market or imperfect market, unless you (as a divine master) decide what is valuable. In the free market, all participants define with their individual view, taking everything (relevant for them) into account. You can not say they are irrational, without taking the master role.

Still there are differences in goodness of a market:

Transaction cost: Different valuations would otherwise incur a transaction, but does not due to transaction cost and other friction like delays. This will lead to a market wiht a spread: The price is different whether you want to buy or sell.

Regulation: Someone distorts the market using force, driving price up or down. There is still a market.

Information: When the actors does not have the price information (the bourses are down). Prices on individual trades diverge more.

Thick or thin market: Thin market is when there are few sellers and buyers. This appears when the goods in question is a distinct object not replacable with others, or nearly so.

I am sure there are other qualification of a submarket that I have not thought about.

When the market in question is money, as bitcoin, there is always the problem of measuring it, as the value is the inverse of all other prices. But we have other money nearly as good: fiat.

The bitcoin to fiat market has a high goodness in most respects, the exception being transaction cost. The transaction costs being bourse fees, transfer fees, fiat-fiat conversion cost, the need for registration and time delays.

For people who might want to invest in Bitcoin by buying them directly, there are two significant issues:
a) Difficulty and delays when trying to convert local currency to Bitcoin.
Where can USB/EU/GBP etc be easily and quickly converted to Bitcoin?
Without waiting days or weeks, without sending in lots of different documents?
b) Risk that money gets 'trapped' in BTC and cannot be converted back.
Even if people don't intend to withdraw money in the short term, being able to do so is a plus, to cover unexpected circumstances.
With all the problems with MtGox, does that even need explaining further?
People will be rightfully concerned that as more regulatory pressure is applied, it will become more and more difficult to extract fiat value from Bitcoin.
Plus the exchanges that people have to rely on to do the exchanging are somewhere between unreliable and shady.
So fiat money that might otherwise be moving into Bitcoin is being deterred by the lack of quick, safe and reliable means of exchanging back and forth.

It seems he thinks that the market is "wrong" if it is higher than it should be according to his theory that the value of the current "real" trade. Of course it is not, speculation is not an error, it is just foresight.

I also think he is wrong in the assumption that the value is related to the trade volume. In my view the value is rooted in the reservation demand. If bitcoin somehow would replace fiat, it is not necessarily so that the value of the bitcoins would be the same as the value of the current fiat supply (including debt). It could be smaller or greater.

Wow...time for someone to take an enconomics class or two.

Your lack of basic economics is really starting to reflect in your posts.  Please post a link that supports your claim. (Would love to see a link to your orbiting teapot theory!)  I can give you hundreds that say the market is always right.  This was taught in economics 101 and is really common sense. 


But like you said....believe what you will & I will do the same.

I think you are arguing different points.
The market accurately reflects the total sum of current sentiment amongst participants. If that is your definition, then the market is always right.
If you feel that the market should reflect some inherent value of the item, then it often fails.

On Cryptsy, the average market participant seems to be an auto selling bot dumping whatever has just cleared from the multipools.
The markets for most altcoins are so far from efficient it isn't even funny.

Why would you say that?
The only one that is about right is "-without much trading experience", as many there are many more technical interested people and ideological people involved (Bitcoin's concept does match quite well with all liberal thinkers).

Vladimir,

I think we are arguing two different view points regarding the phrase "The Market is Always Right".

Read this short article:
http://www.fxtimes.com/commentaries/the-market-is-always-right-even-when-its-wrong/

I believe you are arguing against point number 1 from this article (the market is not 100% efficient), and I am arguing for point number 2.


In essence, we are attacking the phrase from different positions.  If this is the case, then your statements would be as valid as mine and I totally understand your view.  We just have a different prospective of the phrase.


I was just trying to answer the thread title "Why are Bitcoins So Cheap" from a common economic position.   It is because the market dictated the price.  It is not relevant what somebody thinks it should be.

LOL  :D :D

Spot on! I guess Mr. F sold majority of his coins at $40 and now he hopes the price will go down to let him re-enter his position  8)

Soros, who made much more serious money than professors of economy schools said the market is always wrong (Self-strengthened mainstream bias will cause the price of securities diviate largely from true value of the underlying assets for a long time)

Actually the value of money is a totally psychological thing, based on people's belief. If no one believe that the dollar has any value, then it will not be accepted anywhere and lose all of its value overnight. But if more than 50% of people believe that dollar has value, then the rest of the people might just follow

A belief based on mathematics and network should be much stronger than a belief based on bankers and politicians

If it was merely based on belief the US (and other nation states) would have probably already collapsed entirely. It is force and violence that gives fiat money its perceived value. It does not matter what you believe as long as the government is able to force people to use it to pay them off or threaten them with violence if they don't accept dollars for settlements.

I don't think that's true.  Otherwise, hyperinflation wouldn't happen.

There is a limit of what you can achieve with force, sure you can easily force a single person to accept dollars. But if nearly everyone thinks dollars are worthless, no use of force would rescue the system.

During a hyper-inflationary event people riot en mass and government is no longer able to control the masses by threats of violence. When the thread of violence diminishes, belief will become the driving force behind the currency (like with Bitcoin) but that belief is evaporating at an increasing rate during hyperinflation.

I came to the same conclusionas as Falkvinge in December 2012. I sold 2/3s of all my coins for an average of $13.

I overcame my belief system once I read a 1997 ish article on gold and fiat. It is hidden on this website but it explained why Bitcoin has value above that of the velocity of money theory, and will become a store of wealth just because of its limited supply.

so spot on just corect the $40 down by a100%

Yeah, anytime a bear exists, it's because he sold and is chasing missed profits.

 ::)

The markets aren't right or wrong they are just markets.  Also most people who bloviate about the markets are usually "proffessors of stuff" who aren't even participants in any markets but do it to sound smart and get a paycheck from someone.  That's their market/racket.  Think about this conundrum.  Any time a deal is made in the markets the buyer and seller are at the same time the smartest and dumbest traders.  They are smart because they made a deal where no one else did and dumb because a buyer had to pay more then anyone and everyone else offered and a seller had to settle for less then anyone and everyone else was willing to sell only for a higher price.  Figure that one out.  ;)

I don't think that people are forced to use fiat money, it is because that so far they have no other alternative and they never realized that there could be an alternative

The fiat money's value is maintained partly by existing consensus (unit of counting), partly by a balance between scarcity and availability through central bank's OMO

If fiat money can be acquired easily like toilet paper, then it will worth nothing; if people do not get fiat money as income (from top of the financial system: Government spending and bank lending), then it is no difference than a foreign currency or stock, not so many people will care about its value

Some belief affect people's life more than others. If dollar's purchase power dropped 50% in a week, people will lose their belief of fiat money, start to hoard physical goods and refuse to accept fiat money, thus accelerate dollar's fall. But if bitcoin's value dropped 50% in a week, most of the people don't care, since their income will not be affected

Things will get interesting when more and more people start to receive bitcoin as their income, but that might never happen at large scale due to ever rising exchange rate of bitcoin (people tends to spend inflative fiat instead of deflative bitcoin, they might even mortgage the coins and get a loan to spend)

Too few real businesses accept Bitcoins now. For example, there are no Bitcoin-accepting shops, restaurants, workshops at all in Riga (capital of Latvia, EU member).
When this will change, BTC easily will go $1000+ IMHO.

I visited Riga a while ago, I think I only need som good forex exchange at major airport/train station/habour so that I can exchange bitcoin for some euro when I travel to Riga  :)

Yes people are forced to use fiat money for at least one thing...
US Dollars are is required for paying taxes in the USA.  (It is called fiat for a reason)
There are some institutionalized controls in place already for a Dollar -> Bitcoin transition.
I could probably write an article on this, but the germ of it is that with Capital Gains taxation and other taxes in place already, the dollar can inflate against bitcoin and the capital gains paid in dollars will fund the deflating dollar.  Those with assets encumbered by dollar denominated debt will see the debt value diminish and the asset retain its intrinsic value (so the rich get richer) and renters impoverished (except those with Bitcoin income).  There are quite a number of institutionalized mechanisms that will be natural brakes on the transition, not the least of which is the size of the economy as a whole.

And most of us giving much higher chances. But the market in a whole doesn't.

I think the market is wrong. Market is self-regulating, but with BTC the regulating levers reached their limits: the 0.1% of investors that understand bitcoin have already invested all they can afford to lose. When the understanding will spread, market will become efficient and price will match the real chances of bitcoin.

by that logic we'd just need to make the 99.9% understand bitcoin. I doubt 0.1% is correct, more investors understand bitcoin.

Market becomes efficient when knowledge meets money. In case of BTC it must be a lot of money. Probably investors that do understand bitcoin don't have that much money.

Try paying your taxes with gold, silver or bitcoins then and see what happens.

Also: legal tender laws may force people to accept fiat money.

This.  When airport Forex counters trade Bitcoin, we'll be off to the races.

I'm surprised they don't do it already.  They are already licensed for currency exchange.

As long as people's income are in the form of fiat money, tax just mean reduced fiat money income, in fact many people don't even care about the tax since tax payments were already deducted from their salary

But if people's income is bitcoin, then the tax payment will be different. It is possible that people do not pay tax for bitcoin income. FINCEN regulation already said that if you purchase goods/services directly with your bitcoin, you don't need to pay tax. It means if you hold your coins for a couple of years and you can buy much more things with the same coin and you don't need to pay any tax even the bitcoin's purchase power increased many folds

What. That is not my understanding at all, from the tax code. FINCEN is not, as far as I know, in a position to advise on the tax code. Sources?

(I assume from your reference to FINCEN that you mean USA)

Where did you get that from? There are different kinds of taxes that apply to bitcoin.

Taking germany as an example you'd have to pay income tax when you receive your income in bitcoin. You have to pay VAT tax on stuff you produce even if you sell it for bitcoin. You have to pay capital gains tax if you speculate on the value of bitcoin and sell some for a higher price than you bought them for (except if you held them for 1 year). Some even say you have to pay VAT (19% currently) when you sell a "commercially" mined coin.

Even barter is taxed: If a customer buys some product from a company paying with a bitcoin, the company has to pay VAT (in EUR, of course, essentially selling the product for EUR after buying the bitcoin from the customer) and the customer might have to pay capital gains tax (because he just sold a bitcoin) depending on wether or not he held the bitcoin for over a year and what price he had bought it for initially.

Bitcoin isn't somehow tax-free, get over it. It might be easier to hide and cheat, but this is nothing new for tax authorities and companies having to declare taxes and having to have their books in order will go a long way insuring bitcoin income and sales are being properly taxed.

I'm no fan of taxes and/or the state, but this is the reality at the moment.

Sorry, it is my misunderstanding, the original text says only about being money transmitter thus need registration

"A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter."

That is my misunderstanding about the regulated money transmitter, I thought that has something to do with tax

Anyway, tax in bitcoin is totally new for tax authorities, because the value for coin can vary a lot during a fiscal year. I remember that when it comes to foreign assets, normally a tax declaration require an exchange rate at the end of the fiscal year. If a company earned some bitcoin at the beginning of the year but at the end of the year the coin price rised by 10 times, he had to pay 10 times more tax on the same sale, this is not practical

I think all of today's tax system are based on fiat money (which have a stable value over at least a year), if a volatile money like bitcoin comes out, those officials might need to charge the income tax each week, but that will break all the existing accouting and tax reporting procedures  ;)

Currencies are similar to commodities for many tax jurisdictions.  There is a price in the fiat at time of acquisition and time of "sale" into fiat or conversion into another good with a specific value at a specific time.
This is the "unit of account" property of money, and Bitcoin is pretty good at accounting for it with the record of the block chain.
Volatility is not much of a problem for tax purposes so long as the gains and losses are accountable.  No new law is needed to deal with it in most places unless they want to create exemptions to encourage its development (like Germany).

I think you are wrong that many people don't care about taxation. Tax to me and many others is money involuntarily taken away or deducted as you say, but a better word is stolen. If you resist to pay tax, you will be forced or face heavy consequences.

The argument remains, we do not have a choice to pay tax (income tax, capital gains tax, property tax, etc) because force will be used if we resist. We have to pay those various taxes in fiat currency. It logically follows that we are forced to use fiat currency. How can you disregard or wave away the simple facts?

I think fiat money is not forced to be used, just a historical consensus reached among people. If majority of people feel uncomfortable using fiat money, then they will vote a government that use another type of money, but the reality is that they have no knowledge about fiat money and they take it as granted since they were born

This is full of assumptions about "voting" and "government" -- and the possibilities that exist for us lowly people.  :)

Maybe this is an issue of understanding the terms..  "Fiat", "Legal Tender" and "Money"?

"Fiat" means "Forced" or "by legal decree".

While we are free to agree to exchange whatever money we like, we are forced to accept "legal tender" as settlement of a debt (though we may negotiate for something else), and the government is forced to accept it as payment for taxes.  This is the wickedness of "legal tender" laws.

If the type of money is selected by vote and decreed by government, that is then by fiat.  If they just do it and don't bother the government about it that is a different matter.
If individuals negotiate or decide to use what they like by voluntary agreement or contract that may not be fiat...

Bullion, Barter, Bitcoin....  all non-fiat...  Though some US states (notably Utah) have decreed gold and silver to also be legal tender.

I just looked a bit close in details, it is complicated

If I conduct all of my business in bitcoin, at the end of fiscal year when I do the income declaration, I need to subtract cost from earnings and get the net income counted by bitcoins, for example 100 bitcoins. Then this revenue will be taxed by income tax, say 25%, then I will pay 25 bitcoins to government

However, the government only accept fiat money, then I have to convert these 25 bitcoins into dollars.  If I use the exchange rate at the beginning of the year, they might worth a little, but if I use the exchange rate at the end of the year, they might worth a lot. Maybe most of those income (90 coins) are generated in the first few weeks of the year. My capital (exchange rate) gain of those 90 coins will also get taxed by the government if I use the exchang rate at the end of the year. But in current accounting rules, the capital gain only are taxed when you sell the asset, if you never cash out, you never pay tax. So, if I never sell those coins, how much dollars should I pay government?

What about next year ?  Will you again sell 25% of your remaining 75 bitcoins to pay taxes ? :-)

You likely come out better in the short run by using the fiat currency legal tender as your unit of account, and using an accounting package for transactional GL P&L, and then taking the capital appreciation on the "inventory" retained in Bitcoin against your costs.
All business do this sort of accounting, and in multicurrency businesses it is routine.  If you have never run a business, it is complicated, yes.  There are professionals that can help you.

The great news is that now BitPay does a lot of it for you as they have a QuickBooks interface now for Bitcoin.  With the record keeping in the block chain, this can become even easier in some respects (your backup is cloud sourced for free)

https://bitcointalk.org/index.php?topic=295370.0;topicseen

I've been running a business for 7 years and I have an accounting package, and it doesn't know how to handle bitcoin related sales  :D Even some sales in another country is complicated, since local tax experts have very poor knowledge when it comes to another country, that's why multinational enterprises usually pay very little tax

This. The market is efficient.

If you think that explain how at that exact moment out of all market participants only one was willing to buy for such a high price and only one was willing to sell for such a low price?

The market price simply represents the aggregate of supply and demand; in the absence of inefficiencies (illiquidity, insider knowledge etc.) this is, by definition, what something is worth. The fact that particular individuals may value something higher/lower than the market price is wholly irrelevant - indeed, their opinions are already priced in!)

Please clarify your definition of "worth" because you and others here seem claim a bitcoin or anything for that matter is worth exactly what two people made a deal for on one of many exchanges with varying prices and not only that but no one else on that exchange was willing to buy or sell at that price.  Ohh if only it was that simple.  Just so you know where I'm coming from.  I don't pretend to know what something is worth and furthermore I believe in any complex system no one can know what it's worth.  Not any experts and not "the market" either.

The value is what the actors decide for themselves. A trade comes into being the moment one actor changes his mind, and his value assesment increases to a level above the current best seller, or someone lowers his valuation to a level lower than the current highest bidder. Nobody is in agreement of the prices. As long as nobody changes his mind, the market is cleared and no trade can happen. The latest price is only the latest price, it is not the value. There is no defined overall value. This is the market. As long as nobody is coerced into buying and selling, it is a free market. I like it, it is kind of magic.

Maybe a few people with good knowledge in IT and finance can invest a lot in bitcoin, but for normal people, they are interested in bitcoin because they are curious about the mechanism behind it, it is so cool 8)

If the market is efficient, how come price was $266 one day, and then $50 two days later?  What changed?  Oh yeah, nothing but the price itself.  If you claim the market approaches efficiency in the limit, I won't argue.  But at any given moment the market can be super inefficient.

+1

Market price mostly decided by market participants' psychology. Cost helps people to establish a start point of psychology support of its value. It is worth noting that although fiat money cost nothing to make, its value still have some psychology support, because it is believed to be backed by the government (in fact it is only backed by merchants who accept fiat money payment, just like bitcoin)

I feel really special now  ;D

Thanks! :)

There are the scammers and get rich quick schemers who are attracted to the whole idea, and they fleece, the sheep who follow those brave enough to tread in the new Bitcoin world.  And despite all you think you know,  you will be lumped in with them. 

And then there are the faithful soothsayer's, constant warnings of the pending ides of March, who back there predictions with real world experience.   

Great conversation. Some people say the only certainties in life are death and taxes, however i disagree about taxes. We are forced to pay them but doesn't mean it is certain.Revolution is possible.

+1

People always say fiat has value because you need it to pay taxes.

But who values fiat for that? I value fiat because I need it to buy goods & services much more than to pay taxes.

It's the merchant who decides indeed. And currently he decides fiat.


I have gold, not to buy goods since no one accepts it, but to be insured against armagedon. Because then gold will be the only money that merchants accept.

I have bitcoin not to buy goods as barely anyone accepts it, but to have my future secured. Because I speculate in the future bitcoin will be the only money merchants accept.

A free market goes through three stages, boom, bust, stabilization.
The reason for the boom was probably due to the fact that foodler started accepting bitcoins.

I disagree about death. Revolution is possible ( http://sens.org/ ). 

The merchant doesn't decide this. Legal tender laws say fiat has to be accepted for settlement of all debt. Hereby the merchant is forced to accept fiat.

Your own sentences contradict each other.
Buying something is not a settlement of debt. Merchants are not forced to accept fiat currencies for sales.

Yes, for all debt, but does that mean for goods and services too?

If so, are bitcoin shops not breaking the law then?

good point, MurrayPaul and RationalSpeculator.

I guess what I said was wrong.

There are plenty of laws that force certain payments onto merchants.  Not to mention there are plenty of laws that force specific prices on merchants as well so yes there is a lot of force behind fiat.

Huh?  ???

No. Goods and services are not debt. When you grab goods off a store shelf, you don't owe the store anything (unless you walk out with the goods without having bought them, but that has its own problems). Ever wondered how stores are allowed to refuse to accept $100 bills, even though $100 bills are legal tender? It's precisely because they're not required to accept legal tender. Now, if you steal something from the store, get arrested, and the court orders you to pay for the goods you stole, then you have a debt and the store is forced to accept legal tender, but otherwise they don't.

Interesting. When I was in the Netherlands many merchants don't accept €500, €200 and sometimes even not €100 bills due to too much risk for counterfeit.