Bitcoin Forum

Is Bitcoin primarily a medium of exchange or a store of value? No financial instrument can be both things equally well. Despite what some Bitcoin proponents believe, specialization in one direction is inevitable (many people who seem to think it can somehow be both are the same ones advocating 'buy and hold forever'...).

The BTC paradox is that when it was created, it was intended to become primarily a medium of exchange (so Satoshi claimed) but the manner in which the protocol was devised makes it far more suited to be a store of value.

If it does become a significant store of value what might it be worth? Obviously we still cannot say with any certainty, but to determine the upper limit assume Bitcoin somehow fully replaced gold. Then the price of 1 BTC would roughly equal $330,000 (5.6 billion ounces*1250/21,000,000). Of course that is the upper limit and not very realistic.

It is both a currency and store of value.
If you run through the numbers of calculating
a) Bitcoin's market cap provided it captures 10% of internet transactions
b) Bitcoin's market cap provided it captures 10% of gold market cap.
You will find that valuation for B) is about 10 times greater than A).
According to my calculations Item B), 10% of gold would put it around 30,000$.
That is the potential, but you need to figure in the risk as well.

The OP is basically saying, "Gold CAN'T be both a store of value and a medium of exchange."

Well, yeah, it was.  For millennia.

As bitcoin goes up in price it will get far more stable.  Once it gets very stable, purchasing with it will become very popular.  It will still probably beat inflation at that point, so it will still be better than your fiat for store of value as well.

I see it as three synergistic things:

1) A frictionless means of exchange.
2) A better way of storing and transporting wealth.
3) An investment in the bitcoin network.

I have also seen videos on it's use as programmable money. I guess I am to old to see the value in that, but I can take it on faith that their will be additional uses for bitcoin. The internet has given me things of great value that I could never have imagined.

I am so grateful to be alive at this time in history.

I disagree with your premise. Bitcoin makes a fantastic medium of exchange (best in human history), and due to the predictability and certainty of mining new Bitcoins (at predetermined rates), and the lack of monetary inflation, it will also make a great store of value.

Please explain why one cannot both save and spend in Bitcoin?

Price is too volatile for it to be used as a medium of exchange. In my experience ordinary people only use bitcoin as a medium of exchange when they have no other alternative. For example because other payment systems are not as well developed in that part of the planet.

Bitcoin's deflationary nature discourages spending and encourages saving making it more suitable as a store of value.

So, yes, it can be used as both and some people will use it as both but it will primarily be used as a store of value.

For a modern capitalist economy to function properly the following must hold true, in the long run:

A. currency in actual circulation (i.e. circulating paper money) must be expected to decline in terms of purchasing power in the long run. Otherwise there is no incentive to turn to stores of values (which, as explained below leads to decreased spending and no new investments = economy grinding to a halt).

assuming A is fulfilled, and people turn to stores of value, then:

B. commodity stores of value (gold) must expected, in the long run, to not outperform investment vehicles that provide a return on value (i.e. growth from anticipated real price increase plus dividends). When people no longer believe that to be the case (e.g. because of strong economic or political turmoil) they increasingly turn to gold, thus putting further pressure on the economy (because not enough money being directed to investment).

bottom line: BTC can be both store of value and medium of exchange - but only in the context of a sustained strong economic downturn (or even collapse) of a capitalist economic system. If this is desirable or not - I leave to you to decide for yourself.  

while the historical use of gold as both isn't quite as clear cut as you are making it out to be (for much of that time gold backed instruments were mediums of exchange, rather than gold itself), it doesn't really matter because our present economic situation is quite different than 1000 BC Assyria or even 1840's England.

The function of currency as a store of value is derived from its status as a means of exchange, acceptance of bitcoin as a means of exchange will only enhance it's function as a store of value, this has been the same historically with other means of exchange like gold and silver. For something to be universally accepted as a means of exchange however it must contain properties that give it an advantage as a means of exchange, for gold this was limited supply and high mining costs,  homogeneous and divisible, every unit is the same as every other and it can be blended or formed in any quantity, it's status as a luxury good meant it was sought by humans. Bitcoin has many advantages as a medium of exchange as well, limited supply, infinite divisibility, homogenous and low transaction costs. The problem is governments have forced fiat money onto us by requiring we pay taxes in fiat  money this has prevented market forces from picking a dominant currency which could be anything, hopefully bitcoin for those invested in it, the reason why many are choosing bitcoin as a store of value is because people have lost faith in fiat money and believe bitcoin is a safe haven that will protect them from inflation, or they are just simply speculating.

It's both. Think electronic gold coins.

Gold is no longer a means of exchange and has not been so for many decades already, so it is not correct to make such assumptions because Bitcoin is also used to some extent as a means of exchange (unlike gold). If we take that such reasoning has some value in it, that would in fact give us the lower limit for Bitcoin price...

I like it more as a store of value.  I'll spend USD.  Gresham's Law.

Bitcoin is a store of value, currency and a transfer protocol. That makes it more valuable than any of gold, fiat or paypal.

The upper bound is their combined value. More realistically it will take a bite out of each of them. $300k is my personal realistic goal, with 1 million being the "wouldn't it be nice if..." target.

How could it possibly be "a fantastic medium of exchange" with that type of volatility? For a medium of exchange, it is of utmost importance beyond anything else that its exchange rate to a basket of other main currencies be as stable as ever possible. If you are curious, this stability is predetermined by the size of the economy a currency encompasses...

Strictly speaking, it is not Gresham's Law, rather an extension to it taking into account a floating exchange rate between the currency pairs that I proposed somewhere in this forum (actually in this thread (https://bitcointalk.org/index.php?topic=351712.msg3840684#msg3840684))...

Yeah I just read about that to clarify.

But it does not make sense to spend BTC if people accept (ostensibly inferior) USD--presuming the exchange rate is fair

 BTC is no store of value, it's a highly speculative volatile medium of exchange. And yes, gold coins can be both.

If the exchange rate was fair and only that was counted in, then your assumption wouldn't be reasonable (in fact, it would be false just because of that alone). It is individuals expectations about future exchange rate that make Gresham's Law valid even for floating exchange rates. I edited my previous post giving the link to the discussion about it. So if you are interested you could go there and read my explanation (ant its critique) why Gresham's Law still holds...

The volatility you're talking about is when you price bitcoins in fiat money in which the supply is constantly expanding (fiat), we are forced to use centrally controlled fiat money because that is what our masters demand we pay our taxes in, if we had a system of free banking who would use a currency that was centrally controlled by government? Everybody would be using things like gold, silver and bitcoins because they provide many more advantages as currency one of them being a reliable store of value.

Explain.

And so what? This (and what you wrote after the emboldened text) doesn't change a thing about the fact - it's Bitcoin's volatility, not of the fiat currency you exchange it for. I have already written in my post that volatility (and stability for that matter) of a currency is predetermined by the size of the economy, i.e. the overall volume of goods and services that you can buy or have rendered to you. The money supply being constantly expanding doesn't affect the volatility of the currency (just in case that was your point)...

What's the point, if the price in BTC of the same service or good changes in a minute to minute rate? I could sell my house in the morning and not be able to buy the same house (or a similar one) in the afternoon of the same day.

The fact is the total majority of individuals and businesses wouldn't be selling for Bitcoins at any significant level, given this kind of volatility. Actually, why would they if they could just price their merchandise in dollars and forget about volatility? This has been proven so many times that it's not even worth discussing in serious...

Can't businesses accept BTC at "market price" like restaurants sell fish

I think that would be a viable solution

Nothing theoretically wrong with that, question is if it's legal.

Bitcoin is not backed by anything. Fiat money derives it's value by a government declaring it to be legal tender. BTC does not have legal tender status in any jurisdiction.

In the US, according to FinCEN Final Rule, it's legal to use  it "to purchase real or virtual goods or services" and doesn't require licenses. However, if I'm a store and accept your BTC, I suppose I cannot sell the BTC, I'd have to use it to buy something as well, as to sell a virtual currency requires a money transmitter license.

Of course expansion of the money supply affects the volatility of a currency, look at the exchange value of USD for oil or food it's constantly changing (or getting worse), money is just a means of exchange so increasing the amount in circulation reduces the exchange value for other goods and currencies. If you look at the price of oil in gold you can see it's barely changed, what can we infer from this? Expansion of the money supply increases the volatility of a currency.

Bitcoin is volatile however because it's hard to tell what the owners of bitcoin are thinking, how much faith do they have in the dollar? Are they simply just speculating? But I believe there is a core group of bitcoin owners who recognise the economic problems currently facing many governments and they have lost faith in the currency issued by these governments and the true value of bitcoin lies in how much faith people have left in the current system and whether any competitors can create a currency that functions better than bitcoin.

Caution note: I'm not a lawyer, just a law student. Please for real business use, you should consult your legal counselor.

Been over this countless times just in the short while I have been on the board. Bitcoin is backed by the strength and security of the network as well as the safety compared to fiat. Ultimately it all comes down to trust, even with government "backed" (in that it is not actually backed by anything physical) paper money.

Hi!

At first you say that money supply is constantly expanding, then you tell me to look at the exchange value of USD for oil... Did you look at the dynamics of oil prices yourself before writing this nonsense? It cost somewhere above 140 dollars in 2008 (or was it in  2007?), now it is at 110 dollars for barrel and fell to 30 dollars somewhere in between. How can this ever be possible? To say that just increasing the amount of money in circulation reduces the exchange value for other goods and currencies is meaningless unless you account for other factors, which could make your assumption flat-out wrong in most cases. If the economy is expanding at a faster pace then the money supply, the currency could actually appreciate meaning that prices and axchange rates go down...

Sure oil prices have fell recently, but look at the 50 years graphs and tell me which currency is more volatile, I'm not sure about the dynamics of oil pricing so I cannot comment on recent changes but over the past 50 years oil priced in gold has remained steady wheareas priced in dollars it has increased substantially since 1998 (when the money printing really got going). How can oil prices fall 30 dollars despite rapid expansion in money supply? Perhaps efficiency gains in extracting oil or discovery of a new reserve, I honestly don't know but I never stated price rises always come about as a result of monetary inflation, it does however always leads to an upward pressure in prices that could be offset by other factors. You said "If the economy is expanding at a faster pace then the money supply, the currency could actually appreciate meaning that prices and axchange rates go down..." Yes this is true but the exchange value of money is lower than it could have been if monetary expansion never happened, you see what i'm getting at?

Ok, in that case (BTC  is "backed by the strength and security of the network as well as the safety"), where is the download link where I can redeem my BTCs for that in order to store some safety in my own home, or use it in my laptop once in a while?
See? It's not backed by anything of value. You cannot trade subjective stuff as strenght, security or safety. My 2 bit cents ;)

Define value and explain how governments that confiscate peoples bank holdings provide it.

You seem to not understand what volatility actually means or just intentionally try to confuse matters. It is a measure of price variation of a currency over time (or any other good for that matter), not its overall appreciation or depreciation. Volatility doesn't measure the direction of price changes nor the absolute increase/decrease in prices, it shows the dispersion of prices around some mean value (e.g. standard deviation in relative terms) for a given time period...

The volatility of prices measured over 50 years just doesn't make sense (you would be tracking long term trends instead of volatility)

It is easy to show that the monetary expansion has very little to do with price volatility if at all. If Bitcoin supply is fixed as it is, why then do we see that Bitcoin is volatile as hell in the first place?

This is assuming that currencies that make people mindless greedy drones is a good thing.

Bitcoin is
A medium of exchange that forces people to be engaged in a currency instead of living by the mantra of "Suggested Retail Price".

AND

A store of value that filters out people that try and control it...i.e. greed.

Sounds perfect for spending as well as holding onto a few extra for a rainy day.

To be short and simple, economic "value" is the price of goods and services. BTC is not backed by any good or service. Exemplifying, as some can say miners are providing services,  BTC would be backed by a service if 1 BTC could be redeemed by 1 doctor visit. On the other hand, the service by miners is not value, it is operational cost.
Please understand I'm not against virtual currencies, I think they can be very useful in the future.

If you saved your paper dollars under the mattress, this wouldn't be much different from saving some files on the storage media in your computer. Whether material or immaterial, the form in which value is saved or stored plays no role. What really does is the subjective value people attribute to the things and which you cannot redeem in order to store safely in your home. If security as well as safety are among them, then anything that provides security and safety will have that subjective value (which you just can't squirrel in the backyard because it is purely a mental construct in people's heads)...

So you're actually confusing issues here (I hope unintentionally)

Fiat is not backed by anything at all. Not only that, banks lend out more than ten times the amount they nominally have. I'm close to just writing you off as a troll at this point.

Well, I understand the form in which value is stored is not important: besides paper dollars and metal coins under my mattress, I use credit cards and checks, and I understand my bank keeps dollars in files in their computers. But that's all dollars, legal tender.

So maybe I'm just a confused old guy, perhaps my 50 yo old brain can't catch up with you guys ;)

Don't play that card. My 66 year old dad understands it. Whippersnapper. Address the issues brought forward.

The notion of legal tender is useful only when you pay your debts to banks or taxes to the state (which are debts too). In many jurisdictions, you can be lawfully refused to do business with and may not insist on striking a deal. This would render legal tender (lol) effective only as an offered payment for debts...

Here is my reply (I have made a new thread about it so this might be repetitive.)


Bitcoin is going up in price because people believe it will be used as a medium of exchange and store of value. If they realise this wont happen it will collapse in price. So lets look at these two aspects.

1) Medium of exchange.

Bitcoin is only a medium of exchange when merchants accept it and hold onto it. Right now merchants are dumping bitcoin for dollars, so its not being used as a medium of exchange. This btw. also throws the transaction cost benefit argument right out of the window (spread).

Now will merchants ever accept bitcoin and hold onto them?
No.

Why?

a) Governments have already effectively made it impossible for people to use bitcoin as a medium of exchange, as they expect taxes to be paid on bitcoin gains. Thus it cant function as a medium of exchange (same goes for gold btw.). Unless Government loses its control on its money monopoly this law wont be altered.

b) Governments will prohibt merchants from accepting bitcoins. Again: They will never give up their monoply on money.

2) Store of Value

After people realize that merchants are not adopting bitcoin and that it is not used as a medium of exchange, it will collapse in price. Will anybody store significant wealth in Bitcoin after this spectacular collapse? Not likely.

Also Bitcoin is a technology, that can be outcompeted by other altcoins. Your wallet can be hacked. The average citizen cant judge if the code can or can not be hacked and thus more bitcoins created. If you want to store wealth over a long period of time investing in a technology is not the best and easiest option. Also Bitcoin is not useful or wanted. If you ask a Bitcoiner what can I do with it they will say: dump it on the next guy it will go up in price! Gold and Silver where always wanted (jewlery and nowadays industry) and thats why they became MONEY in the first place! They have unique properties and everybody loves to hold them in their hand. This will always be the case ensuring significant value and acceptance. Nothing like this can be said for bitcoins. Thus I dont believe bitcoin will function as a store of value in any significant way.

Conclusion:

I predict bitcoin to collapse in price (close to 0 worth), as I believe it will not be used as a store of value or medium of exchange.

EDIT: The price increasing shows bitcoin is used as a speculative vehicle. It does not demonstrate bitcoins viability as a store of value or medium of exchange.

(Additional line of attack for governments: If I am wrong about these points government will come down hard on miners. They could make it illegal to mine bitcoins. Then bitcoin will lose all of its advantages compared to alternative cryptocurrencies. It will be a code like the rest of them.)

That's nice. And original. When?

I was just being sarcastic :)

The viability of a commodity as store of value is unrelated to its viability as medium of exchange. A Picasso painting is a poor medium of exchange but a decent store of value. BTC could be a store of value in the long term if it is perceived as rare and desirable.

When speculators decide to sell  BTC short. It's not impossible at all. BTC is like stock of a corporation that doesn't do anything, doesn't own anything and has no real revenue. Like a .COM corp in 2000.

Actually, it is backed by all the goods and services which are denominated in that fiat. The price suggested for an exchange is a confirmation of the trust the producer has in the currency. When you accept payment for your work, you do the same. If you think thoroughly about this, you will inevitably come to a conclusion that such a system doesn't differ very much from a money system where currency is backed up by some hard asset like gold...

Like many on this forum you seem not to understand how FRB actually works. If you think otherwise, please explain how a bank can have more liabilities than assets?

So all that's needed is for people to accept payment in bitcoin and it magically becomes "real"? Cool.

So all that's needed is for people to accept that a piece of paper has value and it magically does? Cool.

In short, yes. But why do you think that most people would agree to receive payments in bitcoins in the first place? The real magic would be if you could persuade them to...

You confuse BACKING with SECURITY, Backing a Currency means giving it value, government legal tender laws and the ability to pay your taxes in a currency, or in the past pegging the currency unit to quantity of precious metal all BACK the currency, aka they give it some minimum value and allow it to act as a store of value.  Security is preventing a currency from being stolen or counterfeited and governments also generally provide Security both by making paper bills hard to counterfeit and punishing thieves, the nature of paper-bills as an bearer-bond put limits on how secure such a currency can ultimately be though.

The BTC computer network provides SECURITY only, it keeps BTC from being counterfeited, and it kind-of prevents bogus transactions by cryptographic signatures, while turning a blind eye to scams, hacked wallets and black-markets making the security arguably inferior to that provided by government (note that all the prosecution of theft/scam under BTC is in fact being done by Government, so BTC security is effectively being subsidized now).  But all of these things are just guaranteeing your continued ownership of BTCs not that the coins will be WORTH anything.  BTC is semi-secured but not backed by anything.

What happens when the government is the thief?

Cyprus was just a test case. All members of the EU are essentially governed by a central authority - somewhere north of 50% of all laws are made by them, and the rest fall within the borders of those 50%+. Any of the member countries could wake up on monday to find their bank accounts have shrunk by whatever arbitrary percentage.

At the level where it matters for the question discussed (i.e. subjective utility), there is not much difference between these two concepts. Actually, at this level security becomes what gives the currency some value (indeed this is not enough) because it all finally boils down to trust. As a counter-argument, I can just as easy say that backing up by gold is simply preventing government from abusing their power. And security, all of a sudden, now begins to play in the same field...

Simple mental exercise, suppose you have to pick up between two currencies. One can be counterfeited more easily than the other, otherwise they are on a par. Which currency would you choose?

What makes you think that a Bank in Cyprus that had held BTCs would have been immune to the haircut?  Once you put a deposit in a bank your trusting not the currency but the banking system and government.  Thus your point is irrelevant, try addressing the actual point I made, if you disagree explain how the BTC network BACKS Bitcoin.

We each hold our own coins. Not some bank. Anyone who lets others handle their money these days, especially governments or banks, are fools and deserve what they get.

Then go tell everyone to stop trading on Mt.Gox and all other exchanges, they are doing exactly that, holding other peoples coins.  Now would you PLEASE address my point on Backing vs Security.

Sure. Government backing is not secure.

Edit: Not even being flippant. This time. It really isn't.

Their is a lot of difference, something can not be an effective store-of-value if it lacks EITHER.  For a person to store value a person needs to do two things, they need to RETAIN an asset and the asset needs to RETAIN purchasing power.  If I had an object with perfect ability to retain purchasing power but it could be stolen very easily it would be a poor store-of-value, alternatively something that's very hard to steal but which has unstable in purchasing power would likewise be bad.  My total risk of loss is Retention Risk (losing the asset) + Valuation Risk (asset loses value).  So any logical and subjective personal assessment of an assets store-of-value is going to need to take both risks into account.

Ok, a real response (albeit far too brief, forcing me to guess at your actual meaning), it sounds like your admitting that BTC is un-backed, but are arguing government backing is so poor that it is equivalent to no backing at all.  If that's your position then I think that's absurd, government backing even if it is not perfect is far superior to what BTC has.

If your a Gold-bug and define backing only as PEGGING to precious metal then sure that ceased a generation ago.  But the other two huge factors I pointed out, Legal-Tender status and payment of Taxes are not remotely in doubt and no one can make an argument for how thouse backings are going to go away.  Even in a government default, it is the BONDS of a government which are not payed, the state continues to enforce legal-tender laws and continues to accept payment of taxes in it's national currency.  BTC dose not have any chance of attaining these two qualities and will continue to be un-backed.

So, in short, you didn't actually say anything that would support your position. Retention of purchasing power (that is what matters here) ultimately depends on what the majority think about something as a store-of-value, whether it is worth being used as that (there is no god out there). And security of a currency does add to this subjective judgment in a positive way, whether you like it or not (see example in my previous post)...

I don't CARE for your definition of backing. It's not important. I can buy stuff from private people with bitcoins if they are willing to accept them, and for anything else I can simply exchange them to fiat. It doesn't matter.

Bitcoin is protocol for storing and transmitting "value" instead of "information" like the TCP/IP protocol. They are essentially opposites because bitcoins are unique and un-copyable whereas internet bits were meant to be shared (copied, at least to browsers).  Bitcoin does not define the value it stores and transmits any more than the internet defines the information value of its bits.  Bit the bitcoin protocol has scripting and n of m features that no one is using right now that allows "value" to be defined by time, other coins, other transactions, are any other data that the script can get access to. The script can be married to the coin so that it can't be removed by future owners, increasing or decreasing the dollar value of the coin, if you can find buyers of an "enslaved" (scripted with inheritance) bitcoin.  I'm trying to think of ways to add value to my coins by adding scripts to the them.

You guys are thinking too small.

If the bitcoin protocol becomes to "value" what the internet protocol is to "data", then the "M2" supply of all currencies in the world is the final value.  That would be about $20 trillion.  $1 million per coin if all of them are used like cash is today.  But most of them are being used like an asset, being hoarded, that maintains value, while all that cash out there today is depreciating and needed for near term transactions.  So not all 20 million coins are going to be available for "M2" uses, maybe 1/4.  That gives $4 million per coin.  I am not trying to be funny or overly optimistic.  The question is this: is this first-to-market player sufficiently good?  By convention it may be crucial that the world adopt a single cryptocurrency in the same way it adopted the internet.  There are other network protocols out there and they get used, but they continue to get taken over by TCP/IP.

Actually stores of value need neither, though our disagreement may be at least partly down to semantics.

A store of value does not have to be inherently secure. Rather the political, legal and economic structure must be such that it would not be trivial to take away your property by force. Actually BTC is the only store of value that has built in security features - but as you pointed out these are not sufficient.

A store of value does not have to be backed by anything to retain purchasing power. The only thing that needs to 'back' it is the expectation that the public perception of its value will persist. 

Lol good point. Bitcoin is as safe as its exchanges can be. The weaker link rule.

Any currency must first qualified as a store of value (during a long period), and then can become a medium of exchange, without the first property, the second property just don't work

Although fiat money lose its value every year, it is still regarded as a store of value, since the speed of its depreciation is much slower than most of the other goods

For bitcoin, since the supply is fixed and the demand is rising, it will appreciate forever, this will greatly reduce its use as a medium of exchange, it will certainly become a digital asset

But this kind of asset is highly secure and mobile, never existed in human history, even a Swiss bank account can not compare

when we talk about back-up, let me ask who has ever seen God, no one, but in dollar we put In God We Trust, moreover, we donate real wealth to church for the sake of God, what's happening here?
Faith! It never appear in financial world during human's history. Bitcoin faith = transparency, freedom, fairness, millions of man hours spent by believers are the backup of this currency for the better future of human being. The true deflation will eventually unlock the entire potentials of human being, because people are able to choose what they love to do, this concur to the productivity trend as well but unfortunately distorted by current vested ruling classes.

NEITHER?  Are you serious?  You think an asset can be an effective store-of-value if it lacks both Security AND Stable value?  Are you arguing that store-of-value is based on NOTHING BUT AN INABILITY TO GROW THE SUPPLY, cause that's what it sounds like.

Lets compare, Crypto-currency is a Fiat currency protocol that provides excellent counterfeit protection and modest protection against identity theft (private key signed transaction, but constantly hacked), and has no backing.  The strength of these features is depended on the size of a distributed computer network and BTC has the strongest network.

National Currency is another Fiat currency protocol that provides strong counterfeit protection, strong identity theft protection, modest fraud protection and  modest theft protection.  And it is backed by legal-tender status and by the collection of taxes.  The strength of these features is based on the size and power a Nation-State and the United States is the strongest State.

So your arguing that throwing away all protection of fraud and theft, AND all backing to get slightly better counterfeit protection will actually give a stronger store-of-value.  This is absurd the huge gaps in BTC's security and lack of backing make it a terrible store-of-value compared to the money of a nation-state.  People need to stop confusing speculative GAIN with store-of-value, easy-come easy-go, a store-of-value dose not FALL OR RISE rapidly, store-of-value = stable value.

And your final comment about 'backing' something by the public expectation of value is simply laughable, no one with a clue as to the meaning of the word 'backing' would call fickle public expectation a backing, that is the exact OPPOSITE of a backing.  Without a backing public expectation is like a ball at the top of a hill, as soon as it begins to roll it accelerates as BTC has consistently done.  Something with a backing is like a ball in a valley, when it moves it's pushed back towards equilibrium.
 

johnyj:  If you were to cease posting entirely on this forum it would raise the collective level of our discussions more then any single person doing so.

Chill out. Read what I wrote closely. Only then reply.


the security features you are describing are not inherent to the currency itself but depend on the issuer (except for counterfeit protection which is not related to security per se, though it is certainly an important, crucial feature of stores of value). That was the point I was making.

I put 'backing' in quotes to signify that this is not really to be considered as a backing feature. Anyone with reading comprehension skills above 10th grade should understand that.

So your trying to throw the power of the nation-state out the window and just looking at a Dollar as a piece of printed paper?  If you want to make that comparison then BitCoin is a file in your computer and nothing more.  If your going to compare the raw OBJECTS of the currencies then do that (and if you did paper is more durable then a computer file), but if you want to compare SYSTEMS and PROTOCOLS with each other then you need to look at the full Protocol and the full issuing agent, in the Case of BTC it's every mining computer and node in the world that is the issuing and security providing entity, in the case of a National currency it is ALL the currency protecting and security activity conducted not just physical printing security features.  Every national currency is protected by a well established set of legal and political practices, that are as much a part of thouse currencies as the BTC protocol is a part of it.

No, I was not saying that at all. The power of a nation state is a strong criteria to consider for stores of value, yet it is not the only one.

 If you think the only possible stores of value are backed currencies then your definition is at odds with any reasonable one. Alternative stores of value (anything from precious metals, to fine art, to wine) are neither inherently secure nor backed by anything - but they do benefit from, and are conditioned on, the presence of a legal system that protects ownership rights - i.e. the power of the nation state, as you said. BTC is an effort to devise a store of value that is not conditioned on external legal protections - and I agree with you that this attempt is not successful - at least not yet.

I agree that a desirable feature of a good store of value is long term price stability - and some of these alternative SOV have been just that.

I never said for a moment that ONLY currency has store-of-value, I've simply been contrasting cryptographic Fiat with National Fiat.

All the things you mention are REAL assets, NOT forms of FIAT, they are not what anyone in this thread has been talking about untill now.  I even offhandedly said earlier that pegging a unit of Fiat currency to a precious metal was one (archaic) form of backing so I would obviously consider the darn metal itself to be a store-of-value.  I'm arguing that FIAT currency needs backing for it to be a store-of-value, as without that you simply do not have any stable basis for a value and thus a poor store-of-value.

What you say here can formally be reduced to a set of qualities that contribute to the strength of a store-of-value making it either stronger or weaker (for the absence of some of these qualities). Apparently, the importance of each of these factors would be different in various conditions, i.e. their contribution to the overall strength of the store-of-value may vary. You are probably right on dollar vs Bitcoin comparison, but you would be on a shaky ground if you just tried to compare, say, counterfeit protection against legal status of a currency without taking into account the actual support they provide to this store-of-value. For example, Zimbabwean dollars had a legal tender status, but did this help them much? Would they be any better than Bitcoin which lacks such status?

His logic is a bit perverted here, but still is pretty clear and correct though its premises may be wrong. As I got it, backing up of a store-of-value is not important in itself, it is the ultimate result it produces that actually matters, i.e "the expectation that the public perception of its value will persist". If we can get there without anything that would help retain purchasing power and the public perception does actually persist, then, yes, he is correct

Whether it is possible in reality or not is another question...

It all hinges on how you define good store of value.

If you just look at the textbook definition of store of value: "Any form of commodity, asset, or money that has value and can be stored and retrieved over time, and be predictably useful when retrieved" -  then currencies are good stores of value, so long as there is a system in place (legal, political economic) that enshrines property rights.

But if you define a good store of value as a commodity, asset or money that, in addition to the above, is expected to retain its purchasing power in the long run - then fiat currencies are not good stores of value.

You keep saying that. It's just not how reality works. Bitcoin is backed by consensus among every bitcoin holder that it is worth investing fiat in. By the will of the people. The strength of the network and the lack of centralization is what allows us to enforce this will upon those who would take it down. In contrast, fiat is backed by states that confiscate peoples fiat at will.

Practical application trumps abstract theory every time.

Impaler was absolutely wrong about security of Bitcoin adding nothing to its strength as a store of value for rather evident reasons which I have shown (it works the same way as taxes and legalization of money do), but this doesn't make your argument more valid. What you say here is a consequence of the factors that back up Bitcoin, but this is not what gives it strength or backs it up by itself. In fact, I have already explained this in one of my previous posts in this thread...

I've said that an asset needs BOTH security and backing to be a good store-of-value, and BTC has security (of a sort) but no Backing.  I'm arguing that no amount of security can compensate for the lack of backing, the relationship is Multiplicative not Additive, a Million x Zero = Zero, you seem to be arguing that if something is just Secure enough that Backing is unnecessary.  If we reverse the relationship and hypothesize an asset that's backing is perfect but is impossible to secure from theft, no one would call that asset a good store-of-value.

Ok, let's start again. A currency in the gold standard is backed up by gold, right? Gold has some value, but this value is subjective in nature as well as for all other goods. This means that it is not determined by some property of gold (or amount of labor required to produce it, for that matter), but is determined by the importance an individual places on it for the achievement of his aims. Without this subjective valuation shared by the majority of people gold would be worth next to nothing. Now, if you agree that security of Bitcoin has value in the eyes of the individual as it does, you inevitably come with logical necessity to the conclusion that security IS backing up Bitcoin. Actually, anything inherent to a store of value that has subjective value will be backing it up, and the more people share this attitude, the more strength the store of value gets

It's a pity really that you went on a path of obfuscating and confusing matters here...

All currency including Bitcoin is a confidence game.

If you are confident that it has value then it has value...its as simple as that.

Grrrr. If I read this stupid idea one more time I will cry. The incentive is that in the long run we are all dead and you can't take it with you.

I will eventually spend part of a deflationary money. Why not? The remaining amount will just increase in value. I just need to make sure that the amount I spend is less than the increase in value of my remaining money.

Why does it have to decline in the long run? Your point B makes it look like too many people turning to stores of value is a bad thing for the economy (ie the currency being used for active exchange). So if it doesn't decline in the long run and people have no need to turn to a store of value (because it stays so stable if it has full investment) then we don't worry about people sitting on it - they have no incentive to do that.

Are you Ben Bernanke or something?

You keep theorizing about inflationary fiat "backed" by governments. I'm from Greece. Do you want to know who's backing our euro (and its motherf... banks along with it)? The pension that I will not get. The youngsters that have no jobs. It is OUR backs backing the fucking euro!!!

NO MORE!!!

Yes all value is subjective including that of gold, even the many industrial uses that we now have for gold ultimately fulfill desires that are subjective (like having a cell-phone).  Heck even FOOD can be considered to have subjective value, we might all desire to be Anorexic Yogi ascetic tomorrow and the value of food would plummet though probably not to zero unless everyone were really planning to starve to death.

But security and backing are still two different things.  Security is a guarantee of ownership, backing is a guarantee of value.  In the case of a commodity backed currency the guarantee rests upon the value of another commodity, it won't ever be less valuable then a set quantity of said commodity, but obviously the underlying commodity could still collapse.  Also states can enforce legal-tender laws and accept only their currency in payment of taxes, this is a very strong backing if the state is strong but it is still dependent on something that can ultimately fail just like a commodity.  Perfect backing is an impossibility, as is perfect security, but it's wrong to confuse of substitute them.

Saying that people have some personal subjective valuation of the security in BTC is a meaningless statement, it can not be quantified into value per unit of BTC.  Security is best expressed in a degree of confidence, the percentage probability that I will successfully retain ownership in the face of the random theft/loss chance, over a period of time.  I am equally secure regardless of how many BTC I own so why is a larger quantity worth more then a smaller quantity?  Lets suppose my confidence level is 99% per year, how do I turn that number ALONE into a valuation?  I would need to multiply it by a value derived from backing and take into account the risks that are inherent in any backing.  The only thing BTC enthusiasts can point to to back the UNIT of BTC having value is the ability to sell them to the greater fool in the future, aka they are not backed.

If we follow your logic, then taxes and backing are yet more different things. If security gives value to bitcoin through positive feedback making it more useful than without it, then taxes add value to legal tender in the opposite way, i.e. through negative feedback. Legal tender gets value by taxes because you will be forfeited for not having it through prosecution due to an alleged tax evasion...

It is absurd really that you deny security in backing bitcoin and at the same time easily accept that taxes are backing legal tender

Subjective valuation reflects usefulness (utility) of some property in achieving an individual's personal ends, whether it helps him to reach these ends or not. If there weren't subjective valuation of security of bitcoin, it would necessarily be equal to saying that security is not a useful property of bitcoin, which is definitely not the case. So, what you say here substantially boils down to whether you admit that security of bitcoin is useful or not...

And how on earth are you going to quantify and measure the usefulness of some property inherent to anything if it may not go beyond simple binary yes or no (whether it is useful or not), let alone quantifying it into "value per unit of BTC"? Are you confusing price and subjective value here?

Great post.

Which is why a BASKET of commodities has always been the "gold" standard in measuring and determining constant "value". 

And as long as you can exchange your fiat dollars for goods denominated in dollars, they are backed up by the whole US economy and part of the world's...