Speculative Bubbles: Unexplored Opportunities in Bitcoin Development

[BTConomist]

It’s no secret that bitcoin miners pay, on average, less than 5 dollars to generate a single bitcoin (that is, of course, if they don’t rely on the legacy mining rigs to generate those bitcoins). We can also expect that speculators will continue to treat bitcoins as GOLD 2.0 investment, thus bidding up the BTC/USD exchange rates well above a miner’s average cost. As you can already see, there’s a great opportunity to explore here, thanks to our passionate speculators.

Here’s a best-case scenario:

A bitcoin miner decides that he’d like to send flowers to a girl of his dreams (or maybe even to his wife), and luckily for him, there is a local flower shop that would gladly accept BTC as a form of payment. But, instead of relying on the speculative exchange rates, the flower shop decides to price the flowers according to what he feels would be a fair trade, say 10-20 percent above a miner’s average mining cost per bitcoin. This way, regardless of what the going BTC exchange rate may be on any given day, the flower shop will keep BTC-based prices of flowers quite stable.

Why would the flower shop be interested in keeping BTC prices stable? It’s simple, really!

The flower shop believes that BTC is a better form of currency than the one being provided through the fractional reserve banking system. So, instead of favoring the latter, the flower shop decides to contribute to BTC’s popularity as a currency by slowly transitioning its own operations to a purely BTC-based business, with wages and other operational expenses paid in BTC.

But since the flower shop suppliers do not accept BTC just yet, the flower shop would need to keep at least some operating capital in FIAT. This means that some of the earned BTCs would initially be converted into FIAT, but at speculator-driven exchange rates. (Hmm... it seems that the GOLD 2.0 speculators are in fact the VCs of bitcoin economy... Who would have thought? Perhaps there is still hope for a purely BTC-based economy, after all.)

Do you see where I’m going with this?... Comments?... Questions?... Concerns?

[spiral_mind]

The flower shop could choose to charge more if customers pay in Bitcoins, sure. People could also shop there using dollars instead of Bitcoins until the owner doesn't even care about them anymore (for actual business use at least).

I think it is more likely that a steadily appreciating Bitcoin value would cause those shopowners who believe in the long term appreciation in the value of BTC to actually offer a discount instead.

Miners with BTC to spend would be more likely to use their coins making it a win/win situation.

[BTConomist]

I think it is more likely that a steadily appreciating Bitcoin value would cause those shopowners who believe in the long term appreciation in the value of BTC to actually offer a discount instead.

You seem to be missing the point... BTC prices are already discounted when you factor in what the speculators think BTC is worth in terms of other currencies. Basically, the cost would seem to be much higher if you were to buy flowers in FIAT (i.e. Exchange Rate x Price in BTC) than if you were to buy them in BTC (i.e. Avg. Mining Cost x Price in BTC). Everyone wins in the long term, other than the speculators of course.

[kodo]

Bitcoin is still in Beta phasis, imagine when its all completed and working even more smoothly 

[BTConomist]

Bitcoin is still in Beta phasis, imagine when its all completed and working even more smoothly  

Andy Warhol once said, "They always say time changes things, but you actually have to change them yourself." This quote pretty much describes what I think the bitcoin community should focus on, rather than blindly worshiping the idea of bitcoin being nothing more but a debit card. We all know that it doesn't take much to issue a debit card, so why rely on the issuers of debit cards (Mt.Gox et al.) to lead bitcoin development?

[Le Happy Merchant]

I think I may be missing something here, but I read your entire post three times and I'm ready to respond despite my lack of full comprehension.

It seems that in this example you are pegging the price of flowers to the price of electricity in cross reference to the mining difficulty. This seems extremely roundabout.

If miners continue to do what makes sense, the difficulty will grow alongside the price of Bitcoin. Which will lead to a commensurate increase in the cost of generating one Bitcoin. Essentially the price of flowers will now follow the difficulty curve, which follows the price on a delay. 

Thus it takes minute-to-minute volatility out of the equation, but incentivizes just watching the price all the same so that you know what will happen.

[BTConomist]

It seems that in this example you are pegging the price of flowers to the price of electricity in cross reference to the mining difficulty. This seems extremely roundabout.

If miners continue to do what makes sense, the difficulty will grow alongside the price of Bitcoin. Which will lead to a commensurate increase in the cost of generating one Bitcoin. Essentially the price of flowers will now follow the difficulty curve, which follows the price on a delay.  

Thus it takes minute-to-minute volatility out of the equation, but incentivizes just watching the price all the same so that you know what will happen.

Your reasoning sounds about right. However, I would also include miner's equipment depreciation and other operating costs. At the end, miners would pretty much make a stable return on the general ledger rows that they make available for public use, whereas the public (merchants, consumers, etc.) would increase the applicability of those rows to real world trade by increasing their use throughout the daily exchange of goods and services between themselves. Eventually, miners will eat away (via transaction fees) all of the existing rows to make them available for public use once again at some future date (but perhaps at a higher cost, provided that bitcoin economy grew)... And a circular dependency continues, so to speak.