... and we're back to the quantity of money formula !

The "side effect of holding bitcoins with the purpose of doing payments" is *exactly* what that formula expresses !

Of course the payments in itself do not drive price.  The payments (Q) plus the "holding" (1/V) that goes with it, does.

But this was also my worry: if bitcoin payments are going to be:
1) acquire bitcoins on an exchange
2) do your payment immediately with it (after a few blocks)
3) the seller receives the payment
4) after a few blocks, converts them back into fiat

Then this corresponds to a very high velocity (a very low time to hold) and you can buy *a lot* of stuff with a few bitcoins at a relatively low price that way.

In fact, if the whole stash of bitcoins in existence were to be used that way, and, say that one such cycle takes a third of a day, then the velocity is about 1000.  Meaning that with the current market cap, one could buy for about 5 trillion $ per year that way.

Bitcoin too, until the year 2150 or something !  Although you are right that bitcoin has monetary mass inflation until then, while many central banks have price inflation targets.  The difference between both is (at constant velocity) given by economic growth. 


I think we're in a chicken and egg problem.  Of course, volume can be small, and value (per coin) large, if velocity is small (if most coins are held a very very long time).  In that case, you are right, volume doesn't matter much, my formula doesn't matter much, and we are more in a "store of value" problem, and the market share of the aggregate demand for store of value.
On the other hand, if bitcoin is mainly a means of payment, then the demand will essentially be to have "bitcoins to pay with", and the inherent time they are held between obtaining them and spending them, is then more described by my formula.  We are then in a market that is essentially driven as "monetary asset" (to buy stuff with).

In reality both will play.  But my personal opinion is that the latter will be more important in the medium term (the coming decade say) than the pure store of value.  As someone else said, that's not a problem because for the moment, speculation "to the moon" is the driver.  But that driver will not - in my opinion - hold on for 10 more years without any fundamental driving it, and only a (pipe?) dream in the far future going for it.  This is why commercial adoption is so important, and it has to become a significant part of the demand if bitcoin is to go somewhere (to the moon).


That's true :-)  However, it may become a self-fulfilling prophecy too.  If people commanding large amounts of value are "too stupid to adopt bitcoin", well.... then bitcoin will not be adopted.  This is why I think the road of commercial adoption is much much more important than long-range speculation of "the moon".  Commercial adoption will rise the demand for bitcoin as a payment asset, and not as a store for value (any longer than the time to spend it).  If *that* can support a higher market cap, it may be the main price drive in the coming decade, over promises of "the moon", which will stay hypothetical, in my opinion, for at least many decades (at least the time it takes for the current generation of financials to take their retirement).

The universe doesn't want any one money.  Even with gold, there was also silver.  And there are many, many other stores of value, such as famous paintings and other artwork, real estate and so on.
I wouldn't be so sure that a few big governments wouldn't agree on banning bitcoin.  For the moment bitcoin has legal problems in Russia and in China to a certain extend.  The day the US government also jumps in, I don't see how bitcoin can become a universal currency rapidly.
Because, after all, as long as there is no general *merchant* adoption, the only gateway to "buying stuff" with bitcoin are exchanges between fiat and bitcoin.  This is why I think that the first adoption has to be merchant adoption.
But it has to be more than that: merchant adoption has to be such that the price is quoted in bitcoin, and is not just the "latest conversion of the price in fiat according to the rate at a given exchange".


I don't think many people would, at the moment.  I wouldn't.  I might change my mind if I could buy most of the stuff directly quoted in bitcoin.  If I could buy a car in bitcoin (and not as "a conversion from $ into bitcoin").  At that point, I would start to trust bitcoin as a store of value.  I think many people would.  Maybe I'm wrong here, but I wouldn't think right now, or in the coming years, that many people with a lot of money would put it into bitcoin as a store of value.


The devil is in the details: it is in the assumption of "stable".  Stable in the sense of buying power.  That can only be taken seriously if a lot of important stuff can be bought directly quoted in bitcoin, I would think.
In several developing countries, you're probably right, and I think that developing countries are probably the potentially biggest attraction pool of bitcoin usage, because their fiat is not very reliable.  But the main currencies, like Euro or $$, I don't think people would bet on bitcoin in the coming years as "safer".


I do consider the speculative aspect, but the speculative big growth expectation has to be based upon something else than "more growth", because that is exactly what drives a Ponzi.  There needs to be something else.

Now, I was given a clear answer: bitcoin is going to be the unique and universal money and value store.

Ok, but I do buy that only at very low probability in the foreseeable future, and I would think, most people with money, too.


That makes me smile a bit.  *Fiat* is forced upon you because you have to pay your taxes in fiat.  As long as a government decides that you have to pay your taxes in fiat, and as long as taxes make up a serious fraction of the economy, bitcoin *can't* take over the whole of payments.  Because fiat will be in high demand to be able to pay taxes with !

Of course, the day that you are allowed to pay your taxes in bitcoin, your hypothesis has come true.  I don't see that happening for a long, long time.  I would think that most people would think that too.


Once you are on the moon, the "to the moon" argument won't work anymore, right.  
Now, I understand your stance here: you say that "to the moon" is a justified expectation as long as not everything monetary isn't done in bitcoin, and once everything is done in bitcoin, the discussion is over.

My point is that that scenario is highly unrealistic in the coming several decades, and if no "moon" is realised earlier, I think many will LEAVE bitcoin if there is no widespread merchant adoption.  

If your scenario is realized 100 years from now, I'm honestly not interested, and I don't think many people would be interested.  I'll be dead, my children will probably be dead, and I don't care further along the road.  I don't think many people would buy into bitcoin if they had to wait for 100 years for "full moon".  

And if your scenario is realized much earlier, I would be surprised.  I don't think that 10 or 20 years from now, this will be the case.  I wonder how many people would want to hold serious money into bitcoin waiting for more than 20 years "for full moon".

So we have to consider something less ambitious, but more realistic as a "fundamental".  This is what I'm after.  What will be the expected market share of bitcoin, say, in 20 or 30 years ?  Because that gives a *realistic* idea of the price of bitcoin to expect.


I have to disappoint you, but the current price doesn't indicate that.  In order to have an idea what price expectations to hold realistically, you need also to have a realistic view on fundamentals in a few decades.  And that's what I wanted to discuss.  Now, you made your point, you think "full moon" is realistic.  In that case, indeed, the real price should be tens of millions of $ per coin.  Fact is, it isn't for the moment, which means that most market players don't think so.  Now, of course, the main reason to be in a market is that one thinks one is smarter than the market - me too.  

In order for a high price, say, $100 000, - to be sustainable, this would mean that enough people need to believe "full moon" with enough money.  I don't think that moment is there yet.  


Ok, at least your views are clear.

I would like to believe them, but unfortunately, I don't.   I do think there is a place for bitcoin, but a much more modest one than you describe here (even though deep inside I wish you were right).  In my opinion, the scenario you describe is at least a century away.  It would be great if not, but I can't believe it.

Yes, but not "to the moon".   Bitcoin will become deflationary when its inflation will drop below the economic growth rate, under the assumption of constant adoption.

Steady is not as in "fixed" but as in any other mature collectable.  It can fluctuate, and it can grow at the rate of economic growth (minus inflation rate, as long as we are not 140 years from now).  It will fluctuate as a function of the fluctuations of aggregate demand for "store of value" in general, and as a function of its market share in that demand.


Yes, but that doesn't give you any idea of its market share in 'steady state', nor as specific parameters such as hold time, and as such cannot be used to estimate a price.  Of course bitcoin has good potential.  But the price is not determined by that.

Government can kill bitcoin very simply, by rendering it illegal: openly, or by putting regulations on it that make it too difficult to handle.  Then bitcoin is reduced to the black market as it was for a good part recently.  I think, btw, that government is the biggest threat to bitcoin.


I'm trying to make you make a gedanken experiment.  That doesn't seem to work.  I'm asking you how much you honestly would put bitcoin at work as a store of value without huge expectations in gain (eventually just fluctuations and economic growth, which is the normal value evolution of any collectable) ; and in how much you think majority of people are going to act like that.  Because *that* is what is going to determine its market share of the "store of value" aggregate demand, and hence part of its price.

The $500 000,- was just a mental exercise to make you think of a situation where "to the moon" growth is not to be considered anymore.  My opinion on that is that most people holding bitcoin are mostly into it for the "to the moon" scenario, and NOT as a store of value without much hope of spectacular rise in the next 10 years or so.  

There are of course people who think that fiat will collapse and so on, but that is certainly not such a big majority that they can carry a market cap worth of hundreds of billions of dollars.  People able to carry such a market cap are probably still into fiat and other stores of value.

My point is not to argue what people *should* do, but what they are *going* to do.  And my claim is, that today, and in the coming few years, there's not enough aggregate demand for store of value in bitcoin (without the speculative 'to the moon' aspect) that could sustain a high bitcoin price.  That can only come much, much later in my opinion, in at least a decade or a few decades, and on the condition that bitcoin has had *another* support, namely as a means-to-buy-stuff.

But that is just my opinion, and to find out for real, you should try to find out for real what is the market cap right now that could be sustained by JUST "store of value" and NOT "speculation to the moon".




Yes, all this is true in theory.  The question is how much people RIGHT NOW and in the few coming years are going to take that argument and are going to put their value according to that statement.

I don't see many people selling their real estate to buy bitcoin because they are afraid it might get seized.  Because the opposite side of the medal is that government renders bitcoin illegal.  Then they cannot seize it, but what are you going to do with your coins ?  Flee to a country where you can still exchange it against something ?  Against what ? Fiat ?  Real estate ?

You see, I also agree with all those potential aspects.  But the price is made in the market, and is a matter of offer and demand.  The part of demand that is speculative "to the moon" is not sustainable.  So one has to have other steady state demands that are the ultimate drive to base speculation on.

My claim is that right now, these fundamentals are:
- the stuff you can buy with bitcoin (growing, but still small, except maybe black markets)
- store of value in the long term, of which I think that for the moment, without speculative "to the moon" drive, there is not much, and there won't be as long as "the stuff you can buy with bitcoin" is not the main carrier of the aggregate demand.


So your claim is essentially, that bitcoin will take over all of the money market, and the store of value market.
That the 50 trillion dollar equivalent worldwide of M2 fiat money will completely turn into bitcoin.  And you think that governments will let that happen any time soon.  And that most of the rest of store of value will be in bitcoin (gold, ...).
When do you think that will happen ?  A century from now ?  50 years from now ?

How many people do you think will think that way, say, 20 years from now ?  Because that is what will determine their speculative attitude at that moment.

Because it is an extreme claim.  It will give you the upper limit of the potential price of bitcoin.  

It is a way to look at things, but I would give it a rather low probability.  It is probably much more realistic that bitcoin will take a small share of the market, and try to estimate that.  That will happen much sooner, a few decades from now at most.

Of course.  But speculation is always based upon an expectation in the future, and if that expectation is wrong, the speculator looses.  So rational speculation is based upon a long term estimate of the fundamentals.

And my aim here is to find out what those fundamentals are.  As you say, it can be mass adoption as "means-of-exchange", and then the "quantity theory of money" jumps in to indicate what will be the price of things in bitcoin, which will inversely indicate what will be the market price of bitcoin (as compared to other monetary assets such as $ that can buy the same stuff).

The market value of bitcoin "as a means of exchange" will then be the fundamental, and it is determined by how much stuff one can buy with it, and what is the average holding time between such buys, as that will determine the aggregate demand for bitcoin, and hence determine its market value.

The *other* fundamental is "store of value for the long term".  In my opinion, that can only come in once bitcoin is established as a means-of-exchange for some time.  Maybe I'm wrong here.

But speculation by itself, cannot be a fundamental.  It has to AIM for a fundamental.  And I'd like, in this discussion, to find out what it is.

You seem to miss the point.  Growth ('to the moon') can obviously not last indefinitely.  At a certain point, steady state will have to set in.  Every form of speculation is essentially based upon a bet on that steady state value which is expected to be higher than right now, so that kind of speculation (which is now the main drive) will have to stop one day.  

So I propose to make the mental exercise to put yourself in the hypothetical situation where you eliminate mentally that speculative purpose, and try to find out your own drive to put value into bitcoin *for store of value* reasons, and not for "to the moon" speculative reasons.  I very well know that the actual situation is the speculative "to the moon" drive.  But in order to find out what is going to be the steady state situation, you have to be able to find out what would be the drive to hold bitcoin *without* speculative "to the moon" drive.

So in order to make that exercise, suppose that six months from now, for one or another reason, the bitcoin price has gone up to $ 500 000,- (and not because the dollar collapsed) and it stays there for 6 other months with fluctuations of 10% or so.  Obviously, at that price, the "to the moon" expectation afterwards is gone.  You do not expect it to rise to 10 million, do you.  You might still hope for a small factor of 2 or 3, but that's it.

Are you going to put your savings at that moment in $ 500 000,- coins ?  Seriously ?
(or are you going to sell part of what you have to cash in ? :-) ).


This, to find out if you *really* consider bitcoin a good store of value for your savings without any "to the moon" speculation anymore, just a reasonable potential to rise somewhat, like other stores of value like gold, real estate and the like.


You are obviously missing the point, right.  *Of course* the speculative drive is the strongest one.  But it cannot last, of course.  Once it is over, I'm trying to find out what would be the drive.  Because ultimately, *that* drive is what is going to give bitcoin any value as store of value.  Otherwise, it is indeed, just Ponzi, if nothing holds it up once it cannot grow anymore.  Just to be clear, I don't think it is Ponzi.  But in order for it not to be, one has a clear view on its fundamentals.  Fundamentals are never "growth to infinity", but are "steady state" arguments that are sustainable.

In the long term, fundamentals always win.  That is why a real Ponzi, which has no fundamentals, always collapses.

So I'm trying to find out what are the fundamentals of bitcoin.  As I said, my opinion is that it is "money to buy stuff".  Some think it is "store of value".  My *opinion* which can be wrong, is that that can only come much later.  But "expectations to the moon" are never fundamentals by themselves.

Yes, that is also correct, but it is the aspect of aggregate demand for store of value in bitcoin.  
In fact, you ALSO have a "velocity" aspect in your formula, but it is hidden in N !  
You are considering people "storing value for a long time" in N.  
But it is in fact the "average number of people at a given moment in time wanting to store value A in bitcoin".
This average could be made up by 100 people holding coins indefinitely ; or it could be made up by 1200 people per year wanting to store value A for a month.  Or it could be made up by 10 people per year wanting to store value for 10 years.

As I said in my earlier posting, I don't believe that bitcoin will be considered as a secure store of value for a very, very long time.  I think the main price drive will come from bitcoin buying stuff.

Honestly, would *you* store value in bitcoin right now, if you didn't have any expectation of growth of its value ("to the moon") ?

That horrible formula is just plain bookkeeping, there's no discussion about whether it is correct or not (it applies always, trivially), the discussion is whether it is useful (that is, whether the quantities that appear in it, can be sensibly estimated in an independent way).

We both agree that what sets the price of bitcoin, is the aggregate demand for "holding value in bitcoin" as compared to the offer.  But that doesn't help us much !  We have to know *what drives that demand*.

In other words, what makes "people fight for bitcoins".  What is their *drive*.

For the moment, the drive is of course "to the moon" type of speculation, but that can only last a finite time, and should normally be rooted in an expectation of a high bitcoin price *for another reason*.

Now, I see two drives to "make people fight to have a bitcoin".  One is indeed, "long term store of value", that is, in competition with gold and so on.  Then my formula is still valid, but doesn't mean much, what counts is what fraction of the universal aggregate demand for "long term store of value" will be taken by bitcoin, as compared to gold, stock market, real estate, and all other "stores of value".

The other is that bitcoin is used as money to buy things with.  That *also* implies holding bitcoin, between the time you get it, and the time you spend it.  And *there* my formula is mightily useful.  Because the amount of stuff bought with bitcoin, together with the average holding times between two of such buyings, determines the value of bitcoin.

And now my point is that bitcoin will, if it succeeds, essentially first have to do the *second* thing.  Nobody is going to trust bitcoin as a long term store of value in my opinion before it has settled as "money that buys stuff".  

Of course, in the real market, there will be competition for bitcoin for both uses (to "buy stuff with" and to "store value for much later"), so the effect will compound the prices.  But I would guess that the first part is going to take a long long long time.  
Gold was for a long time a means of payment ; that is why people also considered it as a store of value.  There was trust that gold would still buy stuff 20 years later.  Now, the buying function of gold has essentially disappeared and it has only kept his "store of value" function.  But there is still this century-long trust in gold as store of value which was build up over many many centuries.   It takes a lot of trust to put value in a long-term store.  I don't think that bitcoin will get that trust immediately.  
However, bitcoin as a means of payment, yes, I hope so.  The idea that you have "international money" that is valid everywhere in the world, yes.  And then, if that is the main usage of bitcoin, my formula applies.


Yes, that's what "store of value" means.  I agree, except with your last statement.  Nothing can be designed to "not lose value", after all, it is speculative, it depends on the trust people put in it.  Especially in the long term.  What you mean is that bitcoin is a collectable: there's a finite, known amount of it.  Similar to gold (if you include mining reserves under the ground), or to land, or to Rembrandt paintings.  They don't make any anymore.



Yes and no.  That is what we are all hoping for, and that is why I think it is a good bet to buy some bitcoin now.  But actually, we don't really *know* and the real indicator is the price.  We really don't know whether we didn't already reach equilibrium between offer and demand.  Most people holding bitcoin (like me) do this NOT as a store of value, but for purely speculative reasons because they hope "to the moon".  
I'm not even sure that if you were in some sense to know that it is NOT going to the moon, you would still hold bitcoin "as a store of value".  I would think bitcoin too volatile and too risky as compared even to fiat.  I'm only in it because it would be silly to MISS the rocket too the moon.  But for the moment I still consider fiat a surer store of value than bitcoin if there was not the "to the moon" incentive.  
I wouldn't place all of my savings into bitcoin for the moment as a "store of value".

So if this "to the moon" incentive would be gone, I'm not even sure that the demand for store of value would be as large as the people holding coins now.  Most of them are in it for the ticket to the moon, not as a store of value in my opinion.  

So if you want to have an idea of the steady state aggregate demand for "store of value" you should leave out the speculative drive, which is probably the main drive right now to hold coins.  And then, I don't know if many people are in it.

This is why I think that that cannot be the support for the bitcoin price for a long, long time.  I think that the main steady state drive will be "buying stuff", with my formula.

Store of value is essential in my opinion.   Short-term store of value is exactly what money (any money) is about: between the moment of earning and the moment of spending.  Money does two things: it allows you to split the problem of finding someone who has what you want AND wants what you have, into two simpler problems of finding someone who has what you want and someone else who wants what you have ; it also allows you to put those two things at a distance in time.

If that distance is short (days, weeks, a few months) you usually just keep the (fiat ?) money.  But it is a store of value !

If the distance in time is longer, we usually consider different stores of value, and investments.  But the main reason why we consider different stores of value and not just money comes mainly because of the inflation of fiat !  
Of course you can invest, and then you can hope to increase the buying power of your value.  You can speculate.   You can do stuff with your value.   Usually you get a trade off between risk and potential gain.
But you might just want to set it aside too.

I've recently looked at the gold price in dollar since about a century: it is a factor of something like 80.  The official dollar inflation is a factor of 23 since 1914.  
That means that gold, as a store of value, has (only) taken a factor of 3 - 4 in buying power over a century.  But fiat went down a factor of 23.

If you think of your retirement, something like gold seems not a bad idea.   A box full of dollars seems a rather bad idea !
Of course you can invest.  In Google, or in Enron :-)

But I don't see how, in one way or another, you could do without a store of value.

But this brings us back to the "fundamentals" in the bitcoin price in the future:

- is it the "value of the stuff we will buy with it" (from the quantity theory of money)

- is it the "fraction of the aggregate demand for storage of value" (competition with, say, gold)

- is it something else ?

In any case, right now it is speculation over that future value which could potentially be "to the moon" which makes us buy bitcoins now, but that is of course something that cannot last for ever (Ponzi).

I stand corrected, I used "speculative" in two different senses.  Of course all store of value and all monetary assets are speculative in the sense "counting on the fact that someone will put some value for it later".

But what I meant with speculative here is "counting that others will put MUCH MUCH more value for it later than I have to do now".  (to the moon...)

I would say that that is the case for bitcoin for the moment.  People buying coins speculate on a MUCH higher value for them later ("too the moon").  Me too.  

If you would know that bitcoin will have a steady value of, say, $700 10 years from now, I'm not sure you would buy any coins now.

Nevertheless, that's more or less what you do when you buy gold or when you buy real estate as "store of value".  

A good store of value compensates for fiat inflation, and follows economic growth.  
An investment does some more (shares in a company will generate also dividend in most cases).  It can generate cash flow.

I would think that not many people buying gold think it will "go to the moon".  They may hope that they buy low, and that it  will rise, but there's no realistic expectation of a real surge in buying power of gold of a factor of 100 or so.  Which is what bitcoin holders are hoping for.  That's what I meant with "speculative".

As I said elsewhere, this formula does work, for every monetary asset.  But you have to be consistent.

After all, what does that formula say ?  It counts a flux of monetary asset over the counter, on both sides.  How much is spend (the M x V side), and how much was received (the P x Q side).  That is twice the same flux.  
On the left and the right side, you have to take into account of course the same events of payment, all concerning the monetary asset under consideration (here bitcoin).

P x Q is ALL the events you care to consider where bitcoins paid it (if you want, including fiat), and exactly the same events should be included in M x V to calculate V.

In P x Q is not included all those transactios where goods were not exchanged for bitcoin.



V is the average, as taken over M.   With fiat money, you have the option of including or not, some kinds of money.  Money that "doesn't move"  can be included in M, but you should then take the average V lower.  Or you can remove the money that doesn't move from M (making its smaller) but then V will be larger.
As long as you work with a consistent set, this formula works (it has to, it is trivial bookkeeping).


You have to include it, if you included those exchange events in your bookkeeping.

Again, consistent sets of P, Q M and V.



No, that would be ridiculous.  It is not BECAUSE miners are spending more money, that other people are going to put money into it !   Miners will simply go broke if the bitcoin market price falls under the mining cost.  That will diminish hashing rate, diminish difficulty, and lower mining costs until mining cost falls below the market price again.

The day that the bitcoin market price is half a cent, the whole bitcoin network will become 5 PC's running a mining software :-)

The point is that if we use the quantity theory of money, we use also the amount of goods bought with the money, Q.  Because after all, money serves in the end to buy goods.  Money that doesn't buy goods isn't any good.  It can be a "store of value" for a long time, but in the end, you want to get something for your money.  Money is by definition an intermediate asset, which is no good if it doesn't serve in the end to "complete the transaction". 
If I exchange two apples for an egg, the transaction is completed.
If I sell two apples today, put the money aside for 3 months, and then I buy an egg, it is only at that point that the transaction is completed.  In the mean time, the money served as "store of value" for that transaction that took 3 months. 
But there's no use in acquiring money that doesn't end up buying goods.  This is why Q is important.


I agree with you.  However, what is the drive of that aggregate demand ?  The storage of value in order to bridge the two parts of a trade.  In our example, part of the aggregate demand to hold money was 3 months, and the worth of 2 apples.

And we're back to Q (2 apples) and V (4 times 3 months in a year).


You can choose.  In that case, you have to put the other financial asset into Q.  But I agree with you that that is not usual.  However, as long as V and Q are consistent, there is no problem.    The sum must always match, because the left and the right side of the equation P x Q = M x V count the same thing, namely the amount of money (the flux) that went over the counter.


I wouldn't say so.  I think it is fundamental.  The formula also works with exchanges of money.
Consider an asset like gold, which is only exchanged for "other money".

You can still write P x Q where Q stands for "all the other money bought with gold and P the price of that money in gold".  I

We then *still* have: P x Q = M x V

Here M is the total amount of gold, and V is the velocity of gold (namely the number of times it has been traded for other money).  P x Q is the amount of "other money" that has been traded for gold, at the money's price in gold.

So it still works.  The only problem is, that there is nothing fundamental in it in this case.  It is essentially just the two sides of the bookkeeping of "all the exchanges in the world".  The traded volume increases just as well Q as it increases V.

But you are dealing with another aspect, that is, the market share of the demand for "store of value" that will be taken by bitcoin, in competition with all other "stores of value".  This is indeed the thing I have no idea for how to estimate , and honestly, I don't believe that it can be the principal driver for the bitcoin price.

If bitcoin were just the "replacement for gold" in store of value, but without any stuff you could buy with it directly, then this price could be just anything.  The current price is no indication.  The current price is purely speculative "to the moon".

This "ponzi" side of bitcoin, which is an essential part in becoming a monetary asset, has of course to stop sooner or later.
You want to buy bitcoin at $100,- because you think people will want to buy it at $1000,- one day.  But people will buy it at $1000,- one day because they think people will want to buy it at $10 000, - one day.  And so on.  This will stop of course.

Because NOBODY is ever going to pay $1000 trillion for a bitcoin.  So nobody is going want to buy  it at $100 trillion.  All the way down.

So one has to consider that in order for bitcoin to have a value X, it means that people will be willing to buy it at X without expecting to resell it at more than X.   Then it would stop being a speculative item, and become a "store of value".  Like gold or the like.

What is that value X ?  It will indeed depend on the share bitcoin has in the general aggregate demand for store of value.  But in my opinion, that could just as well be a very tiny fraction, as well as a large fraction.  Moreover, bitcoin is made especially to do transactions with.  To buy stuff.  I think it is much safer to look at bitcoin as a monetary asset which serves to buy goods and services, and which has hence an inherent store of value in between earning it and spending it, rather than a competition with other stores of value.  This last aspect will probably only become important if bitcoin is already a monetary asset with which you can buy stuff.

I have a hard time imagining people putting a lot of their stored value in, if the speculative aspect (winning value) which is driving us now, is gone (as the ceiling has been reached), if there's no other use of it.

One has to use consistent quantities Q, V, M and P of course.

So in your example, if you include the car in Q, then you have to include the money transfer in V.   Of course, if two people exchange something, you might think that that doesn't influence anything.  That would be correct if they were going to exchange, no matter what happens.  If I'm going to exchange my car with my father, who gives me money he has under his matrass instead, then this might not influence the price of cars on the car market.
However, that is not the case in general.
I will make a decision to buy a car, or to buy something else, or to hold my money, based upon several criteria, like the price of the car, my projections of getting money in the future and so on.  And it are these decisions which determine demand and offer, and settle prices.  If I think I will get money next month, I might consider buying a car.   If I think I will not get much money next month, I might reconsider buying that car.  The person supposed to give me some money next month (my employer) will have to get that money from somewhere.  Maybe by selling goods.  The price he will get from his goods will depend on how much money people are willing to give.  And so on.

So, exchanges, or better, the arbitration between different possible exchanges (or not), determine offer and demand, and hence price.  So they are not "neutral to price" except if there is no choice and they are going to happen no matter what.

I absolutely agree with that, and it is my personal main worry for "to the moon".  If bitcoin is just used as an intermediate asset to buy something overseas, and a typical "bitcoin" buy would be fiat -> bitcoin on one or other exchange -> buying, and the seller receives bitcoin and trades them immediately for fiat (eventually another fiat), then the "holding time" of bitcoins would be very very short.  The velocity would be very very high.  And only a small market cap would be sufficient to do all the buying in the world.  Bitcoin would then just be a sort of international transmission means of value. 

It is only when people keep coins for storage of value, for a week, a month or longer (like most of us keep a monthly salary for on average half a month when spending it), that the bitcoin velocity would be grossly comparable to fiat velocity.  It could also be much lower, if people start having faith in the long term value store of bitcoin (against fiat motions).  However, with current volatility I don't think anyone in his right mind would put all of his savings for the long term in bitcoin.

This is right now compensated by people who are betting on "to the moon" - me too, btw.  The holding times for bitcoins are very very long right now I would think.  In fact, they have to, given the price and the still small amount of goods that is actually bought with it (essentially on black markets I suppose).  It is a reasonable bet to gamble a few coins with a huge potential benefit.  But not a life saving.  That would be madness.

The gamble is now (or was in the past).  It is a once-in-a-lifetime opportunity.


The point with M2 money is that M2 money is indistinguishable from M0 money in fiat.  You don't know if the 200 dollars you spend from a bank account are "the original" ones, or are "on credit" (in the fractional reserve system).  They all look the same.

However, I wouldn't value a piece of paper "I owe you 10 bitcoin" as much, as 10 real bitcoins in my wallet !
It is like paper gold and physical gold, except for the problems of actual physical gold (securing it and so on).

I would rather think that bitcoin is especially suited NOT to do fractional banking with.  There's no difference between a bank account and a bitcoin address.  So nobody can mess with your coins and lend them out multiple times.


That didn't turn out to be a monetary asset, right ?  It was at most a valued collectable.  I have no knowledge of people paying their grocery shoppings with Second Life Dollars.  And as long as we can't with bitcoin, it will not be money either.  But the idea is that one day, we will.  If not, then bitcoin Q will be very low.


I don't believe that it is "for the common good" but rather to pump a lot of production in the hands of a few that central banks print money.  But as you say, that's another discussion.  Although not entirely.  Because in order to try to escape inflating fiat money, things like gold and bitcoin could be a potential long-time store of value.   Because they are collectables.

We are those potential seigneurs.  There's nothing wrong with that, I' d think.

I have been trying for a while to wrap my mind around the price of bitcoin, and as such, it is necessary to understand the price formation of monetary assets in general.  von Mises and Rothbard are a good starting point to that.

With bitcoin, we are witnessing - maybe - for the first time since a very very long time - the emergence of another market-determined monetary asset which has not been issued by a state and as such, imposing the quasi monopoly.  The last time must have been when silver or gold became "money".

When an asset becomes a monetary asset, by definition, its market price will be way above its "usage price".  For gold there remains still a jewelry usage price (which is way way below the market price of gold) ; for fiat and bitcoin, the usage price is essentially zero, so the ONLY price they have is their "monetary contribution".

In a steady-state system, the price of a monetary asset is given by the "quantity theory of money", which states that:

P x Q = M x V, where P is the price of the goods - so the price of the monetary asset is its inverse: B = 1 / P

B = 1/P = Q / (M x V)

Q is the amount of goods bought by the monetary asset, M is the amount of monetary asset in circulation, and V is the average velocity (the number of times per year that a given bitcoin is used to buy something).

V is the inverse of T, the (harmonic) average holding time of a bitcoin: the number of years a bitcoin is held as store of value.

So the "end value" in steady state of a bitcoin will ultimately depend on two things:
how much stuff is bought using bitcoin, and how long one holds one's bitcoins.

The rise in value from 0 to the steady state value B represents a lot of value of course, which "came out of nothing".  

There is indeed an initial "free" transfer of value from the whole economy using bitcoin in the end steady state towards two classes of people:

- those who give out the first time a bitcoin (the miners).  This is called seigniorage.  It is what central banks are good at: printing new money and cashing in on first distribution of it.

- the "early adopters" who stored value in bitcoin before its market value reached B.  This last thing is something that has probably not been witnessed since gold became money in the early days of history.

So yes, there is a steady flux of value from the recent adopters to the early adopters and the miners.  That is part of the build-up of the market cap of the monetary asset.  

Of course, the market price doesn't need to follow the quantity theory of money price: it can *anticipate* it.  If everybody would be strongly convinced that a bitcoin were worth $ 10 000 in 5 years from now, most people wouldn't sell them below, say, $ 4000. People would be willing to buy them for $ 4000. It is because one doesn't really know that the price is lower, or higher, than the steady state monetary value once bitcoin is regularly used as means of payment.  

In the end, however, the bitcoin price will be determined by two factors:
the total quantity of goods that is bought with it, and the average holding time of a bitcoin (as store of value).

This will determine the final market cap of the monetary asset "bitcoin".  It can by potentially much higher than today, or it can be lower.  It could potentially drop to zero if it fails to become a monetary asset after all.

What I'm not clear about, is whether bitcoin could become a sole store of value, without being able to buy goods with it.  

So I have no idea what is the end market cap of bitcoin.  I guess nobody has.  There's a potential for a very high market cap if bitcoin is used a lot as means of payment, and if people hold it for a while.  

I would like to point out something that I wrote in the other thread, but may actually belong more here:

https://bitcointalk.org/index.php?topic=831547.msg9539997#msg9539997

What is somewhat missing in these discussions is the velocity of money (in this case, of bitcoins), which is the inverse of the (harmonic) average of the average *holding time* of a bitcoin before buying something with it.

Hello everybody,

I'm pretty new to bitcoin, looked first at it this summer.  I also did some curve fitting to the historical data in log scale.  Of course, one has to be extremely cautious when extrapolating from early price movements, but intuitively the idea that the bitcoin price should "do something" is pretty clear.  I'm cautiously also buying modest amounts of bitcoin... for my retirement in a few decades, based upon similar extrapolations.

When looking at the long term (and not doing day trading), one must always look at the fundamentals.  Now, bitcoin is supposed to be a monetary asset, in the same way as fiat, or as physical gold: it doesn't serve any other purpose but as "money", that is, intermediate vector of value.  A monetary asset is in a certain way a "frozen Ponzi scheme" or a "frozen bubble" to some extend in my opinion: the only reason why you give it value today (why you want to spend real effort and other monetary assets on it) is that you believe that someone else will estimate it has value tomorrow, and that you will get something for it in return.
Shares, houses, and other investments also have a part of "monetary asset", but they usually also have another cash flow associated to them, like dividends, rent or usage (you can *live* in a house), so there is a "floor" to their price, which is their cash flow or usage.  Gold has a very limited "usage" in jewels and so on, but is essentially a nearly purely monetary asset.

Now, for a purely monetary asset, its "value" is solely determined by the "quantity theory of money", which states that in steady state:
P x Q = M x V

where P is the price of goods, Q is the quantity of goods bought with the monetary asset, M is the amount of monetary asset, and V is the average velocity of the monetary asset.

The "price of a bitcoin" B is then 1/P, and we have:

B = 1/P = Q / (M x V)

So you can expect the price of a bitcoin to be the amount of stuff (expressed in dollars) divided by the amount of bitcoin in circulation M, and divided by the velocity V.

Now, 1/V is given by the "(harmonic) average holding time" of a bitcoin between two buys, which we can call T.

We hence have:

B = Q x T / M

Or: the market capitalisation is B x M = Q x T

In other words, the market capitalisation is grossly given by the value of all stuff bought with bitcoin, times the (harmonic) average hold time of a bitcoin.

Many expectations of "too the moon" are based upon a similar "holding time" T for fiat and for bitcoin: in that case, the market capitalisation is then comparable to the fraction of the fiat market capitalisation that is done in bitcoin.

If bitcoin becomes a success, in the sense that, world wide, people buy and sell stuff in bitcoin, then this market capitalisation can be potentially huge.  Only in dollars, there are 2 - 10 trillion dollars in circulation.  World wide, the estimate (M2 money) is of the order of 55 trillion.
If bitcoin would take 1% of the world trade, its market cap would be about 550 billion dollars.  If bitcoin doesn't even buy 1% of stuff in the world, then the question can be asked whether it made sense in the first place to consider it as a monetary asset.

That is, under the assumptions of similar average hold times.

So that's about a 100-fold increase in market cap compared to now.

Essentially, this is the "amount of value" one needs bitcoins to have in order to be able to buy all that stuff, and to hold all those coins for a time T.

The crucial point is T: if people would just buy bitcoins (with fiat) to spend them immediately, then T becomes much shorter than the average hold times.  This can pretty much lower the market cap needed to buy all that stuff.  Essentially, if bitcoins are only held "a few seconds" the time to buy them with fiat, and to spend them buying some goods, you see that the market cap of bitcoin would be extremely limited.  If 1% of goods are traded in bitcoin, but bitcoins are held 100 times less long than fiat, then market cap is not going to change !

But bitcoin has promises as a store of value too, so chances are that people will actually hold on bitcoin also as "store of value".  Even more so than to fiat which has a bad reputation as store of value.  That might actually make T *longer* than the T of fiat.

However, for the moment, I have no idea, but Q is pretty low (except maybe on black markets, which do play a role in the early phases of bitcoin).

So why is bitcoin then worth something ?  I think we are still in a hugely speculative phase, where the current price of bitcoin is more the future *expectation* of what its price will be, rather than the actual value in monetary use.  Most people (like me) speculate somehow that bitcoin is going to become a success, and that people will not only use it to buy stuff (Q), but also as a store of value (T).  

This has the potential to put the bitcoin price B pretty high.

But it won't happen overnight.  You are not going to wake up, with people buying suddenly 1% of the world economy in bitcoin.   This is going to be a slow process, and to me, *this* is the fundamental value of bitcoin.   The current prices are short-term effects of traders, and the longer term consists in the long term belief of high bitcoin value, that is, a long term speculation on the value of B, as a function of Q and of T.

It can also be that bitcoin flops.  But for the moment, I'm taking a prudent bet on "to the moon", but over a decade or more.  It would be a nice complement to my retirement.  

However, in my opinion, there's no fundamental which can support a "to the moon and staying there" in the near term: Q is too low for the moment.  For bitcoin to become money, you have to buy a significant part of the world economy with it (1% is a very "significant part").

What is dangerous with curve fitting, is that there will be a transition at some point, from the "speculative" domain where we are in now, to the "monetary domain" when it is really on its monetary fundamentals.  There's no reason why fitting laws on the speculative part should have anything to do with the monetary circumstances.

Hello,

I'm pretty new to cryptocurrencies, and I would like to ask a question which is maybe already answered, but I did some searching and didn't find an obvious answer.

Here's the question: is it cryptographically in principle possible to do P2P exchange of 2 different crypto currencies (say, bitcoin and litecoin) without trusting each other, and without any other kind of escrow mechanism (blocked account, third party...) ?

The naive idea would be something of the kind:

suppose Alice has 200 LTC and would like to exchange it for 2 BTC, and Bob has 2 BTC, and you would like to exchange it for 200 LTC.

Alice can communicate to Bob the LTC address where the 200 LTC are, and Bob can communicate to Alice the BTC address where the 2 BTC are. 

Now, is it possible that Bob sends to Alice an encrypted version of the private key of that BTC address, so that Alice can VERIFY that the encrypted version contains the correct private key for the address, without having access to the key itself ?
If in the same way, Alice sends Bob an encrypted version of the private key for the address containing the 200 LTC, Bob can verify that he has an encrypted version of the right LTC private key ?

And second, is it possible that Alice and Bob exchange incrementally the private encryption keys of the encrypted BTC and LTC private keys, in such a way that they can verify incrementally that these encryption keys are not fake, so that at a certain point, or one of both parties stops sending the pieces of key and then the other party does so too, or both end up sending all of the pieces of key, so that both parties can decrypt the private keys, and submit the corresponding transactions ?

I see the only danger as to submit simultaneously a transaction emptying the address before the other party can submit its transaction.  But that could be solved by slicing up the amount of the exchange in smaller amounts and repeating the action several times.

The point in incrementally exchanging the decryption keys is that in the last step, one party has already sent his entire decryption key, and the other one has still one letter to send, then this is easily solved by a "brute force" attack on only one letter which is not difficult :-)

So, to resume my question: is the above scheme cryptographically feasible in some way, and could it be the basis for a P2P cryptocurrency exchange ?