Bitcoin Forum

I'm working on an infographic and thought people here might be able to help me speculate about the current actual value of bitcoin and not just the future market price of bitcoin.

Currently, bitcoin stores some sort of value.
The most obvious store is the electricity from the miners, which is roughly a function of bitcoin difficulty, and of course the price of electricity where you live (and the efficiency of your hardware etc).

This aspect of the value of bitcoin reflects the bare minimum value. Bitcoins should be worth at least the cost of electricity miners put into their creation.

I'm also trying to work out the social and commercial value which is roughly a function of:
how many services are being offered
how valuable those services are to the people who use them
how many people use those services (with bitcoin)

So for example, selling pizza - the market is large, but the number of people offering and using that service (with bitcoin) is small, so it doesn't really add much value to bitcoin. If the number of people offering this service increased and the number of people using it also increased, bitcoin would gain additional value.

I'm thinking as there's increases in point-of-sale infrastructure, international money transfer options, stores of wealth (ie replacement for gold) etc bitcoin value will also increase, and as such it's just as sensible to speculate about these things as it is to speculate about market trends.

Currently these non-mining factors all contribute a tiny  amount to the value of bitcoin, I'd say less even than the electricity cost of mining. As these aspects grow, their value will far outweigh the energy cost of maintaining the network.

So, any ideas of what the current ACTUAL value of 1btc is? Or how to calculate it? Or what will be the big value-adders that are on the horizon?

Any ideas on how to approach creating this infographic are welcome. I have my own ideas of course but I would like it to be an actually useful piece of information rather than just some curiosity that means little.

My guess is currently around the 10 USD mark, but not really based on anything solid yet, I still have to do some data research.

why should the electricity cost represent a 'minimum value' ?

The large part of the mtgox price is represented by a whopping risk-premium that Bitcoin might be more valuable in the future.  To this extent the market-clearing price is rather similar to a call option with a very low strike price, long maturity and very high volatility.

The actual mtgox volume is tiny compared to the underlying free-float, which makes the gox price something of a lottery.  

We hope is it valuable.  Beyond that we have to trust in the market mechanism to help us find our way.  And, the market mechanism can be a real bitch.  Even when we are right.  

No, sorry. This is totally false.

The only value a bitcoin "stores" is the purchasing power it retains, which purely a function of supply and demand. The cost of electricity has little to nothing to do with how much a Bitcoin should cost. To illustrate, imagine if suddenly tomorrow everyone's electricity costs 100x more. Does that mean a Bitcoin must sell for $500 (given current price of $5)?  No.

Supply and demand is all that matters.

Cost of power, price of bitcoin, and difficulty are all interrlated. If the cost of power greatly increases and the price of bitcoin remains the same, the difficulty will adjust over time to compensate (e.g. fewer people will mine and thus difficulty will drop). Generally speaking, difficulty reacts to changes in the other two, though there's probably a minimum difficulty where certain people will always mine because they believe in Bitcoin. As for the price of Bitcoin, it's pretty much based on the perception people have of it's value. If people think it's worth $5, that's where the price will settle; if they think it's worth $20 or $2, we'll see price adjust to those as well. Of course, perceptions change, sometimes rapidly, which is why we end up with rapid fluctuations in the price of Bitcoin.

The extent to which the cost of electricity power plays a role in the price point of a bitcoin depends on how that electricity is obtained and how much of it needs to be used to generate a given amount of processing power.  I can't wait til the Radeon 7000 series comes out, and maybe someday really soon I can afford FPGAs.  Solar panels are in my future and if I can a windmill going in my backyard, I will do it.

I think I should clarify that I actually believe that power consumption plays a negligible role if any in the price of bitcoin.  But, as a miner, the more cheaply I can get my base resources (in this case power), the higher my profit margins, at any price point.

Quite true. If a miner spends $1 creating a bitcoin and can only sell it for $0.01 it only stores $0.01 of value, ie the demand value not the production value. Thanks for pointing that out.

However if price jumped, less people would mine, difficulty would go down, the amount of electricity required would be less, and the price to create 1btc would eventually roughly even out... which makes me think that still electricity is a reasonable estimate of the minimum price of a bitcoin.

dwur, huh???  If price jumped, i'd mine twice as hard.  depends on how high of a jump though... but if (when?) it hits $10BTC/USD, oh man oh man bitcoin mining is gonna be all I do.

Sorry I should say if the price of electricity suddenly jumped so that each coin cost a lot more to produce... as per


So I'm saying that if electricity suddenly jumped up to 100x, the amount of people mining would drop because they couldn't afford electricity; consequently the difficulty would go down and hence the amount of electricity to produce 1btc would correct itself to roughly the price before the jump.

I believe that you're leaving out the "utility" factor in here. A large amount of the value I personally find in bitcoin comes directly from the freedom it gives me to do what I want right when I want to do so with my money.

A good example of that is that I received coins yesterday (Jan 1st my time) purchased on Mt Gox to cover my flying to southern China to do an inspection on a container of noodles for a friend of mine tonight. Using the traditional system I wouldn't be down there until the end of the week or I'd be charging my friend a huge premium for upfronting the cash for this trip.

The power to do stuff like this has a distinct yet hard to quantify value that is one of the driving forces of price apart from just supply and demand.

Ok, you could argue that this is a factor that drives demand. However I'd still define this a being more than simplistic supply and demand  ;D

I see; my bad for the hasty reading

You completely ignore that the supply will go away if the value is less than the cost of production... so in otherwards... a force pushing towards equilibrium actually will be the cost of production.

[edit] rather... low prices push people out until prices equalize.  No one can produce at a loss forever.  Unless they're smarter than the average bear.

This is what I came up with.... https://bitcointalk.org/index.php?topic=48136.msg577080#msg577080

How do you like my analysis? hehe...

I was actually stopping by because I wanted to see what I'd said.

The real price of Bitcoin is the price that it is right now at this second.

Yeah that's the real price of Bitcoin... Everything else is just horsecrap..

<shrug>

The data bared out my predicts pretty well. I did it roughly, but I expected things to happen pretty much as they did.

If you'd like to lay it out and see who's is longer, I'd love to see your predictions and analysis from october.

I edit someone else's formula a long time ago depicting what the price SHOULD be.
I actually don't remember why or how I came up with the formula for what it is now, but here it is.
http://zombietoday.com/dev/pricecal.2.php

For my pricing model, I relied on crudely depreciated estimated aggregate costs and a desire not to lose money to prop up prices.  I figured people just simply wouldn't sell below a certain price because why not lose a dollar if you've already lost .80 and could make 100.

When I want to calculate the proper price I sit in a teepee with burning rubber until I see visions, then extrapolate from that what I need to do. 

currently about 5$ per BTC. That makes a Bitcoin economy worth 21.000.000 * 5 = 105.000.000 Dollar.

my estimation

i'd say bitcoin "real value" is the supple VS demand

supply is their for everyone to see... ~8mill
the demand on the other hand is anyone's guess, and who's to say what effect it will have on price.

my guess is that at 1$ their is way way more then 8mil coins of demand, if you agree, then you can say 1 bitcoin is at the very least worth 1$

finding the "true price" of bitcoin is dead simple, look at the chart!

+1

For me, the true price of 1 BTC is greatly tied to the utility of owning BTC for purposes other than speculation.

It's very similar to a casino deciding how many chips they need to make to keep themselves running.  So I am using a made-up term: "chip base", to refer to how many chips there should be.  A casino needs enough chips to keep the tables stocked and also needs to account for the fact that players will be holding some, and that some will walk away and never come back.

Right now, the biggest killer app for Bitcoin is probably Silk Road.  But there's what, 1500 listings for stuff like drugs on there?  I don't think that those 1500 listings need a "chip base" of $200 million.  In fact, a "chip base" of even $40 million is overkill.  But it's also understandable that a "chip base" of $1000 would be far too small.

Adding to Bitcoin's chip base are those who would like to hold on to bitcoins to conduct regular business, for example, the guy sending bitcoins to China.  For me, with all speculative value aside, maybe having $1000 in bitcoins is a convenient amount to have, just so I can pay with BTC to someone who accepts it.  This isn't an investment, it's more like cash in my pocket, converted to a form that's convenient.  The more people who come along with that mindset, the more demand there will be for Bitcoin.

If a popular legal gambling website starts accepting Bitcoins, that activity will also create a demand for coins, or in other words, it will make a whole bunch of new people suddenly decide that they should hold a few coins for one reason or another, for their utility value.  These bitcoins also won't get sold on a whim just to capture a few percent profit.  I believe this is the kind of demand that will come in like a tsunami: a huge force that approaches as silently as a whisper.

To me, I don't see a BTC over $20 with the goods and services available now.  But all it takes is another killer app.  That could change overnight, for example, if some major publication informs the remittance industry that Bitcoin is a good way to move money, and suddenly check cashing places and pawn shops start trying to get a few.

Are people approaching or creating gambling sites that accept bitcoin?  That seems like a good idea given how much gamblers hate paying taxes.  The govt doesn't recognize bitcoins yet as value...

Yes, switch poker and soon infintipoker.

You have that backwards. The exchange rate of bitcoin divided by the production cost (mostly electricity for now) determines the total network hashing power and therefore, the difficulty, not the other way around.

If you have any doubt on that, just look ahead; the amount of coins generated through mining is cut in half every 2 years and eventually approaches zero. How will it impact the price? It wont. But unless transaction fees become much bigger by then,it will have a tremendous impact on difficulty and hash rate.

BTC is more appropriate and efficient than cash in any transaction involving a virtual good.  Most people tend to think gambling and porn, but then there is the huge video game market, and there are too many niches in that giant market to keep track of.  When niche fans find a quicker way to get that game they've been frothing at the mouth for for months, and be the first to have it and play it, WITHOUT using mom/dad's credit card, well this will help BTC as well.