I am thinking, maybe because I have an advanced understanding of the topic I dont explicitly mention the basics. Same way if you are debating with a physicist about the laws of quantum mechanics he will assume you know about the laws of gravity.

Here's how I would explain my thoughts to someone who has no idea about risk & return:

Suppose when Bitcoin was at 1$ per unit probability of success was 5%
and the potential return IF it got successful is 100,000% (I can give you a more complicated model with a probability distribution either continuous or not...but I will keep it simple with these numbers)

In which case, potential payoff is 5% * 100,000% = 5,000% (Sounds like a good investment)
You can even go further by considering different scenarios or even calculate the break-even point for each scenario but again, I'll keep it simple and stop here. For the only purpose of this post is to make my point clear once and for all.

NOW suppose you are doing the same calculation for Bitcoin today, considering each bitcoin is 1000$ per unit, then probability of more success = 80% (notice how probability of success went up significantly) and potential return IF it got more successful is 500% (notice however the decrease in that number).

In which case potential payoff is now 80% * 500% = 400% (lower than the previous 5,000%)

[these are my own chain of thoughts, and may not be reality....but I'm trying to walk you through how some people might think about it in terms of risk vs. return]

Now I agree I might have used wrong wording in my previous post, would have been more accurate saying "less risk and less return, but return goes down in higher magnitude than risk, making the overall equation less attractive" but didn't wana sound too fancy :p

Clear?

I do, as a matter of fact I have a degree in finance. I must admit your previous post makes sense, but we are just looking at things from different angles.

For me buying 5$ worth of Bitcoins when each was at 1$ is less risky than buying it when each is at 1000$. Now if I want to give you the full explanation it would probably take much more than a mere forum post. Long story short, when you know total Bitcoins will never reach more than 21M units, you know that each Bitcoin at 1$ has more potential of going up in value as than if each is selling at 1000$.

In calculating risk vs. return you have to take into consideration two factors: the magnitude of the upside and the probability of the upside (and downside too as a matter of fact). If you take those two into consideration and do the analysis, I see it would make more sense investing in Bitcoin at its earlier stages...

We can talk more about that if you want, but it seems that you don't....boo!



Guys...guys...common! I don't have to explicitly mention all the assumptions I have in my head I'm assuming you guys are smart enough to figure things out by yourselves.

There are several types of risks at play. In the situation you are mentioning, you are adding a type of risk in addition to the ones that are already there.

Risk & Return are two side of the same coin. You mentioned early adopters were taking HIGH risk for a potentially high return, but what were they risking? a couple of cents of electricity bill? I don't call that a high risk.

If you want to buy a Bitcoin today it will cost you more than 1000$, now this, I would surely not call a low risk. Think about it....

Also supposedly what you are saying is correct, people will still look at things from a biased point of view.

The fact that you could get 1 Bitcoin so cheaply in the past, made it look like a good investment even if on papers it was not. Same thing happens when you take a chance at lottery. On paper lottery is one of the worse investments you could ever make, people still make them because the amount you pay upfront is tiny compared to the amount you can be making if you win. Try to sell a lottery ticket for 1 Million dollars with more than 1 million times better winning odds than the ticket you sell for 1$ and chances are no one will buy it (even though it makes more sense from a risk return POV).

We got a deal bro.......

BTW this post is a hands on experience I am facing at the moment. I personally live in the Middle East in a country where Bitcoin is not at all well known.

Now how Can I convince people to start using Bitcoin here?

1- I can ask them to mine it, their response will be: We will be spending months and months for mining a ridiculously low amount of Bitcoins, and it will probably cost us more money in the process.

2- I can ask them to buy Bitcoins in the open market, their response will be: Why would I pay thousands of dollars for Bitcoins if I can't even use them here? if we walk into a restaurant and ask to pay with Bitcoins the owner will probably laugh at us.

If everyone thinks like that, then Bitcoins will never take off here.

To break this resistance I think the area should be cheaply introduced to Bitcoins, so their reaction then becomes: well if it costs me nearly nothing to get it, then yes why not....give me some. And then if enough people start "having some", then the network effect starts building up, and the currency starts acquiring some value.

This is exactly what happened in the first countries where Bitcoin started, the first adopters were getting it very cheaply. Now off-course some people really believe in it and they were getting it because of this strong emotional bond to it, but the vast majority of people got it cheaply hoping it will one day be worth something. They were speculating with low risk and high return potential.

Problem is, now the risk is higher and the return is lower.....

Sure you can live in your dreams, but reality is it's getting more and more difficult to extract each MARGINAL Bitcoin, which is what leads to my conclusion. The givens I have talked about can be broken "theoretically" that's for sure, but reality is, it never will... (I suggest you try reading a little bit more about economics and the science of human behaviors...to get out of your dreams).

Until then, sweet dreams.

Hellooooo

I know that already, but it will still cost money to get a Bitcoin right?

I mean if I want to pay for a Bitcoin now it will cost me a good sum of money (Whether to pay for it directly or to mine it), so unless I think it has value in the area where I reside, I won't take the initiative and do it.

If supply is not widely available in my area, there will be a demand problem as well, since the whole ecosystem here will not be familiar with Bitcoins as a traded currency (i.e. no business and individuals asking for Bitcoins, because of the lack of the network effect).




My bad typo mistake...I mean to say total bitcoins mined today are more than the ones mined tomorrow.... (typo corrected)

It's just a typo, I'm not contradicting myself, my point is still the same!

I don't see how I'm contradicting myself.

Anyways, in every technology there are early adopters that will get it even if its costly, the problem is always crossing the chasm to get the technology to the mass population, for technology it works when the technology becomes cheap enough. When I mentioned the telephone example, it's the average person that I was referring to who will not be willing to pay much for it, unless he see's the real value (when the network becomes big enough).

Now the problem with Bitcoin is that it's evolving in the reverse direction as to how usual technology evolves. That is, it's getting harder to acquire every day (And here I'm talking about mining), whereas for usual technology what happens is that it becomes easier to acquire with time. This is the real problem IMO. The early adopters as in many technologies already got it cheaply, and now the mass population, especially in virgin areas can only get it at a high cost....this is in my opinion where the chasm is created.



I understand that, physical boundaries are not the issue, the issues here are "awareness" and "return on investment" boundaries..This is the whole point of my post

How can a virtual currency traded over the internet not be a global currency you might ask? keep on reading...

If we look at how Bitcoins have been created over the past couple of years, it will not be long before we notice that it logically entails that the currency today will be concentrated in certain geographical areas in the world. To see how this is so, think about the dynamics and the rules of how Bitcoins are created:

- Bitcoins are mined by users having a certain type of hardware
- Total Bitcoins mined on a daily basis decrease in a increasing fashion (i.e. total Bitcoins mined today will be more than the ones mined tomorrow)
- The more users mine Bitcoins, the less share each of those users will get
- As time progresses, it becomes more difficult to mine each unit of Bitcoin, as the codes to solve becomes more difficult

Following those rules, it then becomes logical to notice that since Bitcoin spreads faster in the earlier days of its creation, the geographical areas where Bitcoin miners emerged (where Bitcoin started to spread), are the areas with the largest concentration of Bitcoins; not only that, but it's now extremely difficult to get those Bitcoins out of those areas, here's why:

1- For Bitcoin to become widely used in a given geographical area there first must be an abundance of Bitcoins in that area; that is, a sufficient supply of Bitcoin in that area. Since it is now much more difficult for a user to mine a "new" Bitcoin, it is unlikely that supply will take off in currently virgin areas. This in return creates a supply problem (i.e. no enough users having Bitcoins in certain geographical area).

 2- The lack of sufficient supply of Bitcoins in a certain area, will create a demand problem of Bitcoins as well, since the whole ecosystem in that given area will either not be familiar with Bitcoin as a traded currency, or will not be willing to take the risk and start accepting Bitcoins as a means of payment in fear of getting stuck with those Bitcoins and not being able pay with it in return.

This is the network effect at play. To give you another example portraying the same effects think about the following:

If you were to acquire the first telephone in the world, how much would you be willing to pay for it? not much, since it will be nearly worthless (you cannot call anyone with it), but the more telephones in circulation, the more desirable a telephone will become. The reason why Bitcoin first took off in certain areas is because they were easily and freely (nearly freely) distributed (mined). This is like giving out telephones for free. But once Bitcoins started to become more and more available and popular, people started to become more willing to pay for them, since they started acquiring more value (Like paying for a telephone after it became more widely available). Problem is, this network effect is only present in certain geographical areas and not in others, and since now one has to pay a large amount of money to acquire a "New" Bitcoin, it is only worth acquiring it in those areas where it already has value (Network effect value that is).

So what are the implications of that?

It simply implies that Bitcoin is not as global a currency as you might think! It will remain in certain geographical areas (At least in the short to medium term). Try to spend a Bitcoin in the US and it will be a relatively easy task, but try to spend it in the Middle East, and I will wish you good luck with that.....


How can this problem get solved?

Well the only solution I can think of is to make it cheaper for people in virgin areas to acquire Bitcoins, and progressively make it more and more difficult as time goes by as they catch up with the areas having an abundance of Bitcoins. This can be done in 3 different ways:

1- Make it easier to mine Bitcoins in Virgin areas.

2- Create a new currency in Virgin areas that undergoes the same evolution as Bitcoins, and make those different currencies exchangeable at a certain rate

3- Create a flow of Bitcoin donations to users in virgin areas. Not only will this introduce Bitcoins to new areas, but it will in return strengthen the value of Bitcoins worldwide. The more traded Bitcoin becomes, the higher it will go in value and so the net effect will probably become an increase in the total Market Cap of Bitcoins, enough to get back in value what is donated.

Hope this makes sense