Bitcoin Forum

Everyone knows that market demand for bitcoins sets their price.  But there is a lot of debate over what creates that demand.  Who is buying all those coins from miners?

Proof-of-work systems are a little counter intuitive.  We will look at the similar asset gold to explain them.  People dig gold out of the ground, sell it to others who put it in a vault in the ground and sit on it.  Why bother?  Proof-of-work guarantees scarcity.  I know that nobody can magic more gold into existence.  It's going to take X amount of time/labor/material/human ingenuity to get more gold.  Therefore I know gold won't suddenly become common since those other resources are limited.

So you have this scarce resource.  Is scarcity enough?  

No.  It must be scarce and in demand.  People buy gold because they think they can sell it to someone else later for the same or more of other things they want.  Gold is a way to transport value across time.  

Why does the gold buyer assume there will be equal or higher demand in the future when the person they sell it to also just wants to sell it for the same or more than he paid?  At the end won't someone HAVE to be left holding a bunch of useless rocks?

Not if the supply of gold increases more slowly than the class-of-people/number of dollars seeking to transport their value over time.

What prevents a sudden crash?

Nothing! The check on this is that people don't want to transport value over a week typically.  They want to transport value over a span of years.  The longer this investment window the more the supply of a good will be restricted.  Restricted supply of existing gold (in addition to new mined gold, the buyer doesnt care) relative to the total amount of gold in existence helps ensure that there won't be a sudden drastic price decrease.

Now you can go back and replace the word gold with bitcoin.  The creation of new bitcoins is similar to gold in that it is a small amount relative to those coins already in existence.  But what about the other factor?  What is the investment window of bitcoin?  No one knows.  Many proclaim it to be a bubble and will sell at the first sign of correction.  Many hoarders claim they are in it for the long haul.  Whom you believe will sway the market more is up to you.

The fundamental value of bitcoin is that people want to use it to transport value over time.  The characteristics of bitcoin generally discussed such as a lack of inflation and decentralization merely make it more attractive as an asset to fulfill this role.  If the number of people/dollars willing to hold bitcoin for this purpose grows faster than the rate of creation of new coins plus the rate at which current holders decide to sell theirs price will continue increasing.

I'm actually not sure how clear this is.  I'll answer questions but don't be surprised if I simply point you to a wikipedia article.

Your thoughts were indeed clear to me, thank you for sharing.

In the end, it'll be supply versus demand.  Over 7000 new BTC are mined per day.  If even 10% of that is sold, plus normal sell orders, that is a lot of $ value that must be coming into the system on a daily basis.  Will that continue?  I don't know, but I hope so!  :)

Don't forget that Gold was valued at it's cost of production for almost 10 years.
Right now gold is 5 times it's cost of production.

Bitcoins cost of production are about $1

How could this be? What will it cost me to mine an oz of gold? $300? no. 100oz? $30000? No. 100000oz? Why wouldn't someone be taking this free money if it was there? Maybe you don't consider buying the mine part of the cost?

Interesting read

$300 per oz cost of production was for year 2000 and gold was trading at close to that. The production cost of gold is higher now $450.

I was going off of memory for production costs and just looked it up and saw it has gone up. So gold is 3 times production cost not 5. And yes that includes all costs

If I could I'd be rich.  Human value subjectively and that is subject to the standard cornucopia of bias chief among them hyperbolic discounting.  It could be tested empirically to see how people react under certain sets of conditions.  Whether or not those conditions told us anything useful about the real world would then again be open to interpretation.  It is the dismal science.  Not science proper.

No, a lot of people seem to think that, but it's not the case. Bitcoins are a poor long-term store of value.

Their fundamental value is that people want to use it to transport value over space.

Like from the U.S. to Africa. People also want to do it securely, anonymously, and without a central authority.

THAT is the inherent value of bitcoins, folks. Forget it at your own peril.

So any one with (how much?) money can dig up an ounce and sell it for 3x as much? Unless it takes 30 years this kills everything and everyone would do it. There are no free 200% auto-profits sitting there.

Im usually not into blog spam but this is a good read.
http://samablog.robsama.com/?p=5559

Basically the tipping point is when amazon accepts bitcoins straightup. I do see this happening in less than a year. What attracts big business to accepting bitcoins is their transaction costs they pay to the credit and debit network dissapears. The transaction network becomes the bitcoin network. I also see bitcoins going onto phones to be transfered over rfid or qr codes...

it isn't secure. bitcoins are like cash.
it isn't anonymous.

large cash transfers can't become a motivation until the market thickens up.

Secure in the sense that cash is. When someone gives it to you, provided you wait for enough confirmations, it's extremely safe from being "recalled".

And no, it's not totally anonymous, but anonymous is what people want, and right now their best bet for transferring value across space and not having the transaction traceable to them is bitcoin.

The original value of gold was primarily as a status marker. It wasn't tremendously useful for anything but communicating the amount of resources a person could afford to devote to non-essential pursuits.

Bitcoin originated in exactly the same way, basically "nerd points" or status markers that communicated the ability to devote resources (intelligence, time, processing power) to a non-essential pursuit. The obvious difference is that gold accomplished it's transition into money over millennia, while Bitcoin achieved this status over mere months. 

The fact that some people (like myself) will also hold Bitcoin for ideological reasons, adds to their value as long as we "fundamentalists" hold to our ideology as well. We are working to make bitcoin more useful and usable for a larger market at the same time, which may speed adoption as well as increase our wealth.

Kind of like mining for BitCoins huh

1.5$ - 2$

You forget the extras needed for production, on small scale or large scale bitcoin mining.

Even at $2 cost of production the price of bitcoins has overshot any sense of reality.
Even with a couple of months worth of increased difficulty built into the current price it's current price is a bubble.

What are the barriers to entry a $700 -$1000 machine.

It takes very little knowledge to start mining for bitcoins.

This will end very badly for anyone who has invested in bitcoins in the last 30 days

How long until a bubble is not a bubble anymore? When you start calling it dolar?

Anybody with $700 can start mining for a current cost of $2 per bitcoin and sell it for 13 times the cost.
So yeah it's a bubble.

If you could setup a gold mine today and mine gold for $115 an oz and sell it for $1500 oz how long do you think gold would continue selling for $1500 oz.

Wake up

~165,000 tonnes of total gold mined (wikipedia), ~2,500 tonnes mined per year = 0.01% increase in gold / year

6,492,950 BTC in circulation, ~2,628,000 will be mined this year = ~40% increase in BTC / year

I wouldn't say 40% is a small amount relative to those already in existence.

But bitcoins are not infinit, as gold.
As far as we know...

It's simple the ease of entering the market means more miners are coming.
I'm sure there's a endless supply of people in the world who would be happy to make 30% on their money mining bitcoins. Which means say goodbye to 15 times your cost of productionin the near future. It doesn't matter about the end supply number of bitcoins. Competitive mining is coming which will lower the price of bitcoins.

The Mining forum is full of people saying mining isn't worth it. They're only saying that to discourage people to mine(they want it to themselves) by saying that it encourages people to buy bitcoins which miners are selling to cover their costs.

Keep in mind, that because of the difficulty adjustments, more miners does not mean that the supply will increase at a higher rate.  The more miners there are, the less each will get in return, thus making it less economic to generate bitcoins and if anything would increase the price.

The bottom line. Mining is so profitable at the current price it will never sustain it's current ROI long term.
Mining competition is coming at current bitcoin prices and difficulty. And people will invest money in mining until it becomes unprofitable. To me a in a speculative market like bitcoins at the current difficulty 3 times cost of production seems reasonable.

Do you really think this anomaly of mining for almost free money will continue very long?

Well, for how long do you think it will continue? Do you think all miners will mine at unprofitable rates? Or will they stop? What happens when miners stop?

It's the profit margin of mining that will go down, not the bitcoin value. Growth of the bitcoin supply stays the same.

As I understand from this chart http://bitcoin.atspace.com/income.html the daily income per Mh/s is decreasing since October 2010, doesn't seem like a bubble to me.

Am I missing something?

ok so it seems everyone has taken the OP's word as "gold" (pun intended) and ran with it.

you have forgot something rather crucial, gold indeed is a way to verify your worth by how much you have. you keep it because it is valuable, and its valuable because it is rare AND in demand. it is NOT in demand BECAUSE it's rare, its in demand because it is a very pretty rock. else people would just use celebrity poop as a rare currency that is valuable and in demand because it's rare and celebrities can only make so much over time.

gold is rare and always will be. gold is always in demand because it makes pretty jewelry. this makes it valuable.
BTC is rare and always will be. BTC is not in demand right now (not like it would be under ideal circumstances).
BTC WILL BE in demand when you are able to USE them. when you can spend them like you can the USD at many places. else you're just trading celebrity poop.

maybe one day people will think gold looks ugly and switch to celebrity poop and i can change a few words in this post for great humor!

basically rarity and cost to produce doesnt create demand or value. else the 89 VW Jetta i restored (esoteric reasons) would be worth a shit ton of money to anyone, not just half of what i put into it to the right guy.

actually gold has other properties besides being pretty that are more important.  it is fungible and easy to measure the purity of.