if bitcoin only served the "underground" economy...

[MoonShadow]

. The not-invented-here vibe is just extremely strong. The current mindset is highly exclusionary.

Depends upon what we are talking about.  If you mean small tweeks such as the block interval or hugely disrputive changes such as last-most-difficult-hash which can be achieved with a parrallel blockchain, then yes the developers aren't keen on playing games with a system that just works.  Besides, there is test-net for that kind of thing.  If you mean something disruptive, but truely innovative that cannot be practically implimented without a breaking change, then maybe.

You just don't go around breaking a running system to try out your theories.

[BlackBison]

That still doesn't mean that if some new cryptocurrency comes out with a killer feature, and more and more people and vendors start to use it, that Bitcoin can't just implement that feature as well, and once again overtake the newcomer due to already having established hardware/software/merchant support. It could happen, but I really don't think it's likely.

You are 100% right. Bitcoin and its developers could somehow become inclusive. It isn't impossible. I just find it extremely unlikely. The not-invented-here vibe is just extremely strong. The current mindset is highly exclusionary.

Totally agree. However, this is going to change fairly soon when a serious competitor arises.. they will have to become more nimble, more adaptable and shed their ponderous ways. Or they will lose.

[2112]

Depends upon what we are talking about.  If you mean small tweeks such as the block interval or hugely disrputive changes such as last-most-difficult-hash which can be achieved with a parrallel blockchain, then yes the developers aren't keen on playing games with a system that just works.  Besides, there is test-net for that kind of thing.  If you mean something disruptive, but truely innovative that cannot be practically implimented without a breaking change, then maybe.

You just don't go around breaking a running system to try out your theories.

Well, I'm thinking more of a mindset that any particular technical detail. It is more of a human factors issue than a technology issue.

Example: I used to wonder why Gavin was so against Genjix's (and others) idea of refactoring the Satoshi's code that lead to libbitcoin. After about a year of kibitzing on this forum I finally understood after seeing how the Bitcoinica Consultancy/Bitcoin Consultancy/Intersango fiasco had turned out.

Those are really hard choices to make, especially since this isn't a for-pay project but an association of volunters. Of course it is better to err on the side of safety when working on a financial software. But where to draw a line?

[FreeMoney]

That still doesn't mean that if some new cryptocurrency comes out with a killer feature, and more and more people and vendors start to use it, that Bitcoin can't just implement that feature as well, and once again overtake the newcomer due to already having established hardware/software/merchant support. It could happen, but I really don't think it's likely.

You are 100% right. Bitcoin and its developers could somehow become inclusive. It isn't impossible. I just find it extremely unlikely. The not-invented-here vibe is just extremely strong. The current mindset is highly exclusionary.

Totally agree. However, this is going to change fairly soon when a serious competitor arises.. they will have to become more nimble, more adaptable and shed their ponderous ways. Or they will lose.

Bitcoin is bigger than 'the bitcoin devs' anyone with the skills to write a client and other cryto currency apps can just make a newer better bitcoin client/apps and be years ahead of where they would be on their own in terms of bootstrapping an economy.

[justusranvier]

For example, an (arguable) estimation of US total economic production is it's GDP of ~14T if I'm not mistaken. That's much more that the entire USD money supply. Granted, you must better define "money supply" as many things may be used as money... but if you take for example the M2 aggregation for USD, that's around ~10 bi according to wikipedia. More than 1000 times lower than the GDP...

Anyway, my point is, money supply != economic production. You can't compare "black market production" with bitcoin's monetary base of 21M and reach any meaningful number.

One could produce an approximation by making some assumptions about velocity. The simplest assumption is that velocity is roughly equal in the underground and official economies.

Here's an example using order-of-magnitude estimation to expand on my previous comment.

The size of the US economy and the underground economy are the same at 10^13 each.

There are 10^12 USD in circulation but will only be 10^7 BTC in circulation.

Assuming similar monetary velocity a BTC economy the size of the entire underground (or US) economy would create an exchange rate of 10^7 ($100,000/1BTC).

How does this compare to current conditions? First we need to estimate the size of the current Bitcoin economy. If Silk Road is moving $2000000 per month that puts the size at >10^7 so for calculation purposes let's call it 10^8. This would imply an exchange rate of $1 USD/BTC, except only about 1/3 of the bitcoins are mined yet. This isn't quite enough to justify the current price of 10^1 USD/BTC, but it's relatively close. Apparently velocity in the bitcoin economy now is lower than the general economy but velocity should increase as the total amount of bitcoin commerce increases, so this estimation method should get more accurate over time.

Based on that I expect to see $100/BTC when Bitcoin "GDP" reaches $10 billion equivalent per year and $1000/BTC at $100 billion equivalent per year.

[MoonShadow]

For example, an (arguable) estimation of US total economic production is it's GDP of ~14T if I'm not mistaken. That's much more that the entire USD money supply. Granted, you must better define "money supply" as many things may be used as money... but if you take for example the M2 aggregation for USD, that's around ~10 bi according to wikipedia. More than 1000 times lower than the GDP...

Anyway, my point is, money supply != economic production. You can't compare "black market production" with bitcoin's monetary base of 21M and reach any meaningful number.

One could produce an approximation by making some assumptions about velocity. The simplest assumption is that velocity is roughly equal in the underground and official economies.

Here's an example using order-of-magnitude estimation to expand on my previous comment.

The size of the US economy and the underground economy are the same at 10^13 each.

There are 10^12 USD in circulation but will only be 10^7 BTC in circulation.

Assuming similar monetary velocity a BTC economy the size of the entire underground (or US) economy would create an exchange rate of 10^7 ($100,000/1BTC).

How does this compare to current conditions? First we need to estimate the size of the current Bitcoin economy. If Silk Road is moving $2000000 per month that puts the size at >10^7 so for calculation purposes let's call it 10^8. This would imply an exchange rate of $1 USD/BTC, except only about 1/3 of the bitcoins are mined yet. This isn't quite enough to justify the current price of 10^1 USD/BTC, but it's relatively close. Apparently velocity in the bitcoin economy now is lower than the general economy but velocity should increase as the total amount of bitcoin commerce increases, so this estimation method should get more accurate over time.

Based on that I expect to see $100/BTC when Bitcoin "GDP" reaches $10 billion equivalent per year and $1000/BTC at $100 billion equivalent per year.

While I can't falut your analysis, I think that you are overlooking something very important.  All things equal, and increas in velocity implies a decreasing time preference, meaning people in general are more inclined to spend now than wait for a better deal.  Right now, the time preference is very high in bitcoin, as many of us have been sitting one some considerable funds for moneths to years.  While this is bound to lower as the economy grows, the increases in velocity would tend to cancel out the price increases that a growing economy would otherwise imply.  And this leads to my final point; for all practical purposes the velocity of US $ is limited to the rate at which the middle class worker is paid for his labors.  SInce the average worker is paid weekly, this effect slows down $ velocity overall and drives consumers towards credit to improve the interval; but even credit can't cycle as fast as Bitcoin is capable of, since bitcoins can be respent roughly every hour.  So, theoriecally, a bitcoin can be priced an order of magnatude lower than $ (with an equvialnt monetary base, which we don't have) and move the same value in the same time frame due to the very real possibilty that employers could pay employees for work on a daily, or even hourly basis, using funds spent at POS the very same day.

[justusranvier]

While I can't falut your analysis, I think that you are overlooking something very important.  All things equal, and increas in velocity implies a decreasing time preference, meaning people in general are more inclined to spend now than wait for a better deal.  Right now, the time preference is very high in bitcoin, as many of us have been sitting one some considerable funds for moneths to years.  While this is bound to lower as the economy grows, the increases in velocity would tend to cancel out the price increases that a growing economy would otherwise imply.  And this leads to my final point; for all practical purposes the velocity of US $ is limited to the rate at which the middle class worker is paid for his labors.  SInce the average worker is paid weekly, this effect slows down $ velocity overall and drives consumers towards credit to improve the interval; but even credit can't cycle as fast as Bitcoin is capable of, since bitcoins can be respent roughly every hour.  So, theoriecally, a bitcoin can be priced an order of magnatude lower than $ (with an equvialnt monetary base, which we don't have) and move the same value in the same time frame due to the very real possibilty that employers could pay employees for work on a daily, or even hourly basis, using funds spent at POS the very same day.

I agree that Bitcoin is technologically possible of sustaining a higher monetary velocity than current currencies but I'm not sure that it would actually increase. Governments do a lot to cause people to spend money faster than they would choose otherwise via tax codes that give people an artificial incentive to put their savings in the stock market, inflation reducing the value of savings, easy credit that gives consumers the illusion of increased purchasing power, policies that reduce the incentive for personal savings (old age pensions), etc. The inability to do all these things with Bitcoin would tend to reduce velocity to a more natural level.

Which effect will predominate? We won't know until it happens. One thing is certain, however: a higher bitcoin velocity would indicate health in the BTC economy as a whole but would have a disappointing effect on exchange rate for the speculators.

[Fluttershy]

I'd rather see mainstream acceptance. I'd even settle for more places using Dwolla so I could convert bitcoins to products without having to fill up my bank statement with withdraws and deposits.

[BitPay Business Solutions]

The bitcon economy is still very small.  Most of the activity on a daily basis related to bitcoin is trading, arbitrage, and money transfers.  The number of people using bitcoin to actually buy things (legal things) is still quite small, but we sign up new businesses every day so the numbers are growing.

PayPal alone does $5 Billion per year in online payments.  If Bitcoin can get 1% of that business, that is $50 million per year. 

Alsao, early investors in bitcoin will experience the "wealth effect" as their value grows.  So, people will be more likely to spend their bitcoins after they have held them awhile.

[justusranvier]

The number of people using bitcoin to actually buy things (legal things) is still quite small, but we sign up new businesses every day so the numbers are growing.

Do you think that legal trade will overtake Silk Road relatively quickly, or is it going to be a while?

Alsao, early investors in bitcoin will experience the "wealth effect" as their value grows.  So, people will be more likely to spend their bitcoins after they have held them awhile.

I don't see that as being realistic. Based on the known volume of bitcoin commerce I think the exchange rate is too high, possibly by an order of magnitude. Signing up new merchants and convincing more people to use bitcoin for purchases could lower the exchange rate due to increased velocity before it increases it.

Another big speculative bubble like last year wouldn't keep prices high for very long, especially if early adopters started spending their coins, so any wealth effect would be short-lived.

[BitPay Business Solutions]

I think it will happen within a year.

[majamalu]

Based on the known volume of bitcoin commerce I think the exchange rate is too high, possibly by an order of magnitude.

Do you think that the current price of gold is related to its use as a facilitator of trade, or to its use as a means of preserving - or even increasing - value in an uncertain future?

The same applies to Bitcoin. Only that Bitcoin is indisputably better as a facilitator of trade, and might be better as a means of preserving - or even increasing - value in an uncertain future.

[justusranvier]

Do you think that the current price of gold is related to its use as a facilitator of trade, or to its use as a means of preserving - or even increasing - value in an uncertain future?

I think it's far more accurate to treat gold like a luxury good than a currency.

[tvbcof]

Do you think that the current price of gold is related to its use as a facilitator of trade, or to its use as a means of preserving - or even increasing - value in an uncertain future?

I think it's far more accurate to treat gold like a luxury good than a currency.

You are welcome to think as you like and treat gold accordingly.  A lot of people including myself, and entities like central banks, consider gold to be a standard reserve and a currency insofar as it can be used perform settlements and balance accounts so you may or may not be in good company.  The one thing I don't do is wear a lot of gold on my body or have it kicking around the house as a luxury item.  Doing so makes one look like a jackass in my opinion.

@abelsfire:  My best guess as to the current price of gold is that it reflects confidence in other forms of wealth preservation.  Like many, I think it probable that the newly developed paper-gold market is distorting the price of physical downward...and have been capitalizing on this happy state of affairs starting a decade ago.  Of course when I saw on opportunity to mop up some BTC for a bargain that cut into my PM acquisition regime to some degree.

[caveden]

All things equal, and increas in velocity implies a decreasing time preference, meaning people in general are more inclined to spend now than wait for a better deal.

No, again this is comparing apples and oranges.
Savings != money.
A lower time preference imply less savings. But savings have many forms, not only storing money.
A higher velocity might simply imply people are more "certain" about where to place their money. If you could know everything for sure, you'd likely never hold liquid money. As soon as you'd receive some, you'd exchange it for something better right away (either an investment or something you know you'll need/want). We keep liquid money because we cannot be 100% sure of when we'll need it, nor how much. Neither we can be 100% about which investments are good or bad. Keeping money is a form of protection.
Velocity might also be linked to the actual speed in which we are capable of transacting, as you and others have noted. The fact that we can easily transfer any amounts of bitcoin anywhere in the world in ~1h will probably contribute to a higher velocity.

[caveden]

One thing is certain, however: a higher bitcoin velocity would indicate health in the BTC economy as a whole but would have a disappointing effect on exchange rate for the speculators.

A healthier BTC economy might also imply in better BTC-quoted investment opportunities (stocks, bonds etc) in which these speculators could invest.

[n8rwJeTt8TrrLKPa55eU]

Based on the known volume of bitcoin commerce I think the exchange rate is too high, possibly by an order of magnitude.

Do you think that the current price of gold is related to its use as a facilitator of trade, or to its use as a means of preserving - or even increasing - value in an uncertain future?

The same applies to Bitcoin. Only that Bitcoin is indisputably better as a facilitator of trade, and might be better as a means of preserving - or even increasing - value in an uncertain future.

+1

The killer app for Bitcoin is not commerce.  For most things we want to buy and sell, we can already do so almost instantaneously and worldwide, via legacy methods such as credit cards.  The current fiat monetary system, as corrupt and unstable as it is, is mostly "good enough" for 99% of day-to-day transactions.  Anything you want to buy, you can, with enough effort, by using state money.  Bitcoin adoption might shave off a few percent in commission, or a few days in speed, versus credit cards and money transfers, but that's a quantitative, not qualitative, change.

Instead, the "private store of value" premium in Bitcoin is (and will continue to be) the driving force behind its price.  Bitcoin is your digital gold and personal offshore bank, at no cost to you, and without leaving your house.  That's Bitcoin's disruptive killer app: intangible, transportable, mathematically guaranteed, financial security and privacy.  A service not available anywhere else, at any price.

Which means there is no meaningful upper limit on Bitcoin's valuation: if personal privacy continues to erode, if draconian asset taxes and capital controls become widespread, fear could drive every single penny in global savings to Bitcoin, and they would stay there with a velocity of zero.  Indefinitely.

Total global wealth is approximately $150 Trillion.

Divide by 21 million.

That's the upper limit and current trend on the Bitcoin price. Completely independent of how much commerce is transacted in Bitcoins.

For more thoughts on this topic, replace the world "gold" by "bitcoin" in the following article:
How Can We Possibly Calculate the Future Value of Bitcoin?

And read this great blog post by BrightAnarchist (whom I believe is a member of this forum):
The *Real* Advantages of Bitcoin

[justusranvier]

Instead, the "private store of value" premium in Bitcoin is (and will continue to be) the driving force behind its price.  Bitcoin is your digital gold and personal offshore bank, at no cost to you, and without leaving your house.  That's Bitcoin's killer app: mathematically guaranteed financial security and privacy.

The only problem is that a "store of value" doesn't exist. It's a convienient model that works only under certain conditions.

The economy is the production and subsequent consumption of products and services. When people talk about "storing value" unless they are stockpiling canned food what they mean is storing a claim on future production. Obviously the claim is only worth something if the future production actually happens AND the producer chooses to honor the claim.

Commerce is the economy. Under favorable circumstances we can build higher-level abstractions on top of that commerce like "saving" deferred consumption, but those abstractions are only valid under the right economic conditions.

[nedbert9]

That still doesn't mean that if some new cryptocurrency comes out with a killer feature, and more and more people and vendors start to use it, that Bitcoin can't just implement that feature as well, and once again overtake the newcomer due to already having established hardware/software/merchant support. It could happen, but I really don't think it's likely.

You are 100% right. Bitcoin and its developers could somehow become inclusive. It isn't impossible. I just find it extremely unlikely. The not-invented-here vibe is just extremely strong. The current mindset is highly exclusionary.

Totally agree.  Hubris isn't smart when facing innovation.

[Rassah]

That still doesn't mean that if some new cryptocurrency comes out with a killer feature, and more and more people and vendors start to use it, that Bitcoin can't just implement that feature as well, and once again overtake the newcomer due to already having established hardware/software/merchant support. It could happen, but I really don't think it's likely.

You are 100% right. Bitcoin and its developers could somehow become inclusive. It isn't impossible. I just find it extremely unlikely. The not-invented-here vibe is just extremely strong. The current mindset is highly exclusionary.

Totally agree.  Hubris isn't smart when facing innovation.

There's a big difference between bitcoin and the typical Hubris v.s. Innovation. Typically that hubris comes from large established companies that are comfortable with what they do, that get taken by surprise when someone with more innovation brings a competing product that customers want. Bitcoin is open source, with the developers and the customers often being one and the same, and no single entity really being in charge. So in this case, it would be like accusing the who e Linux ecosystem of having hubris and not being able to face innovation.