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Author Topic: OMG! What has Satoshi created? He has opened Pandora's box  (Read 4284 times)
marcus_of_augustus
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March 24, 2013, 11:33:15 PM
 #41

Bitcoin is backed by the cost of electricity (and equipment) required to compute its proof of work.


Not correct, though people say this very often.

"Backing" when talking about a currency has a very specific, important meaning. It means that some party has promised to redeem that currency for some other good of value. Backing requires a backer, in other words. It requires someone's promise to back Item A with Item B. This is how paper money can have real value, because if it's backed by a government or bank or corp that will give you gold/silver for it, then it has that same value by proxy. That's backing.

Bitcoin is not backed by anything, nor anyone. It is a resource, a commodity, a good in and of itself.

The cost of electricity/equipment does not back Bitcoin whatsoever, just as the cost of dredging deep-sea mud from the ocean floor doesn't back the price of this mud on the open market.

I agree mostly. Electricity price does however set a floor on the cost of production, while we are in the "block reward" phase at least. Bitcoin cost of production cannot be overlooked but is currently insignificant given the size of the monetary premium in the current BTC price, and will probably remain insignificant unless there is a massive crash.

Cost of production is the reason BTC did not go to zero after the last crash but stopped around ~US$2. Think of it like the backstop ... way, way, way down there and it is of course tied to difficulty and thus popularity of mining, i.e. network adoption.

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March 25, 2013, 01:43:37 AM
 #42

Bitcoin is backed by the cost of electricity (and equipment) required to compute its proof of work.


Not correct, though people say this very often.

"Backing" when talking about a currency has a very specific, important meaning. It means that some party has promised to redeem that currency for some other good of value. Backing requires a backer, in other words. It requires someone's promise to back Item A with Item B. This is how paper money can have real value, because if it's backed by a government or bank or corp that will give you gold/silver for it, then it has that same value by proxy. That's backing.

Bitcoin is not backed by anything, nor anyone. It is a resource, a commodity, a good in and of itself.

The cost of electricity/equipment does not back Bitcoin whatsoever, just as the cost of dredging deep-sea mud from the ocean floor doesn't back the price of this mud on the open market.

I agree mostly. Electricity price does however set a floor on the cost of production, while we are in the "block reward" phase at least. Bitcoin cost of production cannot be overlooked but is currently insignificant given the size of the monetary premium in the current BTC price, and will probably remain insignificant unless there is a massive crash.

Cost of production is the reason BTC did not go to zero after the last crash but stopped around ~US$2. Think of it like the backstop ... way, way, way down there and it is of course tied to difficulty and thus popularity of mining, i.e. network adoption.


It's very simple, if the market does not see any value in Bitcoin it will be worth zero. The cost of production only means the miners need to ask that price in order to recover their inputs. There's no "floor" that prevents people from offering less than is needed to cover their costs.

What it seems like is that some people are using the term "backed" to mean what gives bitcoin it's value. I don't think there is any underlying THING that gives it value. It's value is that it is extremely useful as money and it's proving to be a lot more useful than any past physical currency because of it's decentralized nature.
marcus_of_augustus
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March 25, 2013, 03:31:26 AM
 #43

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It's very simple,

No, but what is simple is to pontificate loudly on forums.

I've got data on price and mining costs going back to when bitcoin was less than US$0.05 that shows you to be wrong. In fact, it has yielded some quite simple and profitable trading strategies, and no you won't be seeing it ... but keep believing it is "simple", is good for me.

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March 25, 2013, 07:28:55 PM
 #44

Another is "supported by."  As in 'Bitcoin is supported by the scarcity of energy available from natural resources.'
Back to the first definition (which is what most people use): what exactly and by whom is guaranteed to be exchanged for irrevocably spent electricity in case of Bitcoin?

The first definition only (strictly/literally) applies to currencies legislatively or constitutionally tied to a commodity, IE dollars on a gold standard.

The second definition subsumes the first, is more general, and more useful because it is more commonly used.

The second definition is not "made up."  You are merely confusing your own lack of education with objective reality.
Since we're going by common usage, no one says that the US Dollar is backed by its anticounterfeiting technology, even though according to the same reasoning, that limits its supply and supports its price. This is not even close to a common use. Why would we say that for bitcoins? The only way we could is if we're going against common usage.

Even ignoring that, speaking of guaranteeing scarcity, mining doesn't guarantee scarcity, since the 21 million limit is there regardless of the ability to rescind transactions, which is what mining actually tries to prevent.

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March 26, 2013, 05:35:43 PM
 #45

Sometimes I worry that I will wake up and Bitcoin will all have been a dream.
Should this ever happen then you can always implement it yourself from scratch because then you will be the first one who had the idea and become the Satoishi of this other reality. I would do the same in my reality.

Old Bitcoins recycling and disposal: 1N7ZcHoe77JncRYAg27RVqJZbrjqUQ77WE
Blockchain.info -> Multibit converter (and much more) https://github.com/prof7bit/wallet-key-tool
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