Is energy/computer hardware the "gold standard" for Bitcoin? Critique my analogy

[cancis]

I have been proselytizing Bitcoin since 2010 and wanted to ask the community to critique and help me fine-tune what is essentially my sales technique for selling folks on Bitcoin.

When I discuss Bitcoin, people tend to get a little perturbed and start saying "well how is it worth anything!?". At this point I begin using the analogy that Bitcoin's value comes from utility, adoption, and scarcity. Utility is obvious - you can buy almost anything with BTC that you can with USD (and in some cases more). Adoption is also not difficult to convey. Scarcity has always been the sticking point.

I started using an analogy (in combination with describing the halving blocks and "designed scarcity" of the system) that Bitcoin does in fact have a gold standard: energy. This "gold standard" is superior to actual allegedly-gold-backed currencies in that it cannot be divorced from utilizing energy for production. Because mining is required to find blocks/solve equations, you are also implementing scarce man-made tools (GPUs/ASICs) to mine bitcoin from the scarce inputs (electricity).

I have taken it further at times and described that Bitcoin is truly a modern currency due to using the collective knowledge of all of mankind (the microprocessor, etc) to create a store of value. People tend to like this angle - it sounds epic and intriguing

Hack away! I want to have as close to an unindictable spiel as possible when talking to people who really know their stuff regarding currency/forex/economics.

[herzmeister]

No. That energy is required for mining bitcoins is merely a technical implementation detail.

What gives them value is that they're limited and useful. That's all. They'd be as valuable if no energy was required. It was just the most sensible way to incentivize and issue them to those users that secure the network.

https://bitcointalk.org/index.php?topic=155325.msg1646796

[Manticore]

Ultimately, the network effect/popularity gives Bitcoin value. Yes, BTC is useful and limited, but the technology itself can be easily replicated (LTC, PPC, etc., etc.).

Bitcoin is valuable as progenitor of the first successful crypto-currency model. BTC has brand appeal, which I find quite interesting. It is the Coca-Cola is virtual currency. Or, really the Facebook or virtual currency. How many FB clones are successful?

And how many currencies end up in Branding Magazines??? https://bitcointalk.org/index.php?topic=156112.0

I'm by no means detracting....BTC is brilliant. It is part tech stock (incredible tech story), part currency, part commodity, and even, in a sense, similar to a piece of fine art (e.g., it can be perfectly replicated but only the original holds great value).

I believe it's difficult to assign BTC value based on its usefulness because any of its clones have the same or very similar features. That would be like saying Facebook is valuable because of its features (ability to add friends, message, etc). No, Facebook is valuable because it was first mover and those features are only useful because everyone uses FB.

[Manticore]

 "It is the Coca-Cola is virtual currency. Or, really the Facebook or virtual currency. How many FB clones are successful?"

 It is the Coca-Cola of virtual currency. Or, really the Facebook of virtual currency. How many FB clones are successful?


Typing too fast.....

[gendal]

Hack away! I want to have as close to an unindictable spiel as possible when talking to people who really know their stuff regarding currency/forex/economics.

Why not just start at the other end?

Why do the USD and GBP have value?  Ask your audience to explain that to you... after all, they clearly believe that those currencies *do* have value.  They'll probably tie themselves in knots but it's not hard to help them see that a currency doesn't have to be "backed" by something to have value in the real world...  so once you've established that things aren't at all clear in the "real" world, you only then have to establish that Bitcoin is at least as good as what we already have.

i.e. you don't need to argue from first principles to win people over.... start from a shared common point of understanding.

To bridge from USD to BTC, I would probably seek to address the legal tender issue first --- use Scotland to demonstrate that it's an irrelevance.   Then discuss the adoption/utility argument.... that's just a point in time statement... and you can dismiss most other objections to BTC under this umbrella.

That really just leaves the "why Bitcoin is better" side of the argument, and scarcity is a key angle.... First establish that guaranteed scarcity is a huge difference as compared to currencies with an inflationary central bank.   Then demonstrate that the claim for scarcity is credible.

And, critically, the credibility of the claim comes from the incentive structure in place amongst the existing users... if anybody tried to change the 21M coin limit, the incentive is for existing users (miners) to reject this as it would devalue their existing holdings.  It is this incentive structure that creates the scarcity.... not technical details of the mining algorith, the cost of power or anything like that.

[cancis]

Hack away! I want to have as close to an unindictable spiel as possible when talking to people who really know their stuff regarding currency/forex/economics.

i.e. you don't need to argue from first principles to win people over.... start from a shared common point of understanding.

Awesome, exactly the sort of insight I was looking for. The technical angle is what appeals to me, but likely won't resonate with the type of person that is asking for information.

[theta]

Why do the USD and GBP have value?  Ask your audience to explain that to you... after all, they clearly believe that those currencies *do* have value.  They'll probably tie themselves in knots but it's not hard to help them see that a currency doesn't have to be "backed" by something to have value in the real world...  so once you've established that things aren't at all clear in the "real" world, you only then have to establish that Bitcoin is at least as good as what we already have.

These currencies are backed by the taxation power of the respective issuing government.  You don't have that with bitcoin.

[Mosper]

Their value comes completely from the speculation that one day they will be worth so much more. There isn't enough demand for the supply being limited to really even be affecting things and them being useful is debatable for all but a couple of examples. Bitcoin is a penny stock more than anything.

[mobile4ever]

I have taken it further at times and described that Bitcoin is truly a modern currency due to using the collective knowledge of all of mankind (the microprocessor, etc) to create a store of value. People tend to like this angle - it sounds epic and intriguing

If you are talking about the work of machines, in this case video cards and the upcoming ASICS, as an investment, it agrees with me. If the work of humans has value, why not the work of machines? This fact is what gave value to bitcoin in the first place, right?


The machines do the work with the mining software, using the electricity, which has (and had) value. The bitcoin is therefore a store of value either with the cost of the electricity used to make them or the work of the processors. Maybe both.

[Mosper]

I have taken it further at times and described that Bitcoin is truly a modern currency due to using the collective knowledge of all of mankind (the microprocessor, etc) to create a store of value. People tend to like this angle - it sounds epic and intriguing

If you are talking about the work of machines, in this case video cards and the upcoming ASICS, as an investment, it agrees with me. If the work of humans has value, why not the work of machines? This fact is what gave value to bitcoin in the first place, right?


The machines do the work with the mining software, using the electricity, which has (and had) value. The bitcoin is therefore a store of value either with the cost of the electricity used to make them or the work of the processors. Maybe both.

This doesn't make any sense at all. It isn't storing the value because it can't be reversed into its previous and actually useful form. It is consuming actually worthwhile things and its value comes purely from your thinking it has value. Nothing else.

[theta]

I have taken it further at times and described that Bitcoin is truly a modern currency due to using the collective knowledge of all of mankind (the microprocessor, etc) to create a store of value. People tend to like this angle - it sounds epic and intriguing

If you are talking about the work of machines, in this case video cards and the upcoming ASICS, as an investment, it agrees with me. If the work of humans has value, why not the work of machines? This fact is what gave value to bitcoin in the first place, right?


The machines do the work with the mining software, using the electricity, which has (and had) value. The bitcoin is therefore a store of value either with the cost of the electricity used to make them or the work of the processors. Maybe both.

This doesn't make any sense at all. It isn't storing the value because it can't be reversed into its previous and actually useful form. It is consuming actually worthwhile things and its value comes purely from your thinking it has value. Nothing else.

Exactly. The fact that useful and valuable energy was consumed for the "creation" of a bitcoin has nothing to do with the value of said bitcoin. That electricity is a sunk cost. Imagine for example that I spend an equal amount of energy playing a video game. I haven't created any value.

[gendal]

If you are talking about the work of machines, in this case video cards and the upcoming ASICS, as an investment, it agrees with me. If the work of humans has value, why not the work of machines? This fact is what gave value to bitcoin in the first place, right?

Emphatically, no.

Not sure if you were being playful (since this seems to have been discussed a lot in the past)... but just in case....

You're committing the Labour Theory of Value fallacy.  The amount of effort that it took to produce something has no determination whatsoever on the value of the output.    To see why this is:  imagine a building site... you need a hole dug to lay some foundations.

One man says he could dig it in a week, using a shovel.  Another says he can bring in a team who will do it in a month using teaspoons.   Which has more value to you?  At best, they're equal.  More realistically, the quicker hole is more valuable.  Either way, the amount of effort used to dig that hole has no bearing.   

The same applies here.... would a bitcoin mined using expensive energy be worth more than one mined using electricity from a cheaper source?!

Where things get interesting is when you run the logic the *other way*.

If you believe something will have a certain value, then there is every reason to spend just less than that amount of effort in creating it.   So, yes.... the cost of the energy and the hardware used by Bitcoin miners may well be quite close to the value of the coins they mine... but that's because it makes sense to spend just that much effort and no more in that endeavour.

i.e. causality runs in the opposite direction to those who equate "effort" and "value" seem to think.

[gendal]

These currencies are backed by the taxation power of the respective issuing government.  You don't have that with bitcoin.

I've often wondered about that.... how real is this effect?  I agree that if the taxing authority doesn't have the ability to create more currency then taxation power is clearly important.   But if they can just print more anyway, then all taxation power gives them is the ability to target subsets of the population for confiscation rather than relying on inflation to take equally from everybody. 


Looked at another way, why should a government's taxation ability (which is a statement about its ability selectively to extract wealth from its population) allow us to say anything about the value of a particular currency?  The only link that I can see is that the government may demand that the value is transferred through the medium of their chosen currency, which would create demand for it at certain times.

Either way, I'm not sure the "taxation" argument is as strong as people seem to think.

[jaywaka2713]

No. energy/computer hardware for BTC is like the paper needed to make the USD

[theta]

These currencies are backed by the taxation power of the respective issuing government.  You don't have that with bitcoin.

I've often wondered about that.... how real is this effect?  I agree that if the taxing authority doesn't have the ability to create more currency then taxation power is clearly important.   But if they can just print more anyway, then all taxation power gives them is the ability to target subsets of the population for confiscation rather than relying on inflation to take equally from everybody. 


Looked at another way, why should a government's taxation ability (which is a statement about its ability selectively to extract wealth from its population) allow us to say anything about the value of a particular currency?  The only link that I can see is that the government may demand that the value is transferred through the medium of their chosen currency, which would create demand for it at certain times.

Either way, I'm not sure the "taxation" argument is as strong as people seem to think.

The part in bold is exactly the point. Because the US government has a taxation monopoly in economic activity within the US border (plus of worldwide income of its citizens living abroad) AND these taxes have to be paid in US$, the US$ has a certain minimum value. As long as these conditions hold, i.e. there is significant economic activity in the US and the US government maintains its power to tax it, the US$ will never go to zero (no matter what the delusional hyperinflationists may tell you), as when tax season comes, these taxes will have to be paid in US$. Bitcoin doesn't have that luxury. Nobody needs specifically BTC for a particular purpose so its value could very well drop to zero at some point (if, say, a better alternative is found and gains more traction etc.).

As for what you say in the first paragraph, printing money away can only work if the conditions I already mentioned exist (i.e. significant real economic activity and ability to tax it), otherwise nothing backs this printing and you end up like Zimbabwe, the printed currency is not worth the paper it's printed on.

[mobile4ever]

I have taken it further at times and described that Bitcoin is truly a modern currency due to using the collective knowledge of all of mankind (the microprocessor, etc) to create a store of value. People tend to like this angle - it sounds epic and intriguing

If you are talking about the work of machines, in this case video cards and the upcoming ASICS, as an investment, it agrees with me. If the work of humans has value, why not the work of machines? This fact is what gave value to bitcoin in the first place, right?


The machines do the work with the mining software, using the electricity, which has (and had) value. The bitcoin is therefore a store of value either with the cost of the electricity used to make them or the work of the processors. Maybe both.

This doesn't make any sense at all. It isn't storing the value because it can't be reversed into its previous and actually useful form. It is consuming actually worthwhile things and its value comes purely from your thinking it has value. Nothing else.

It comes down to what a person believes. Money is just a means of exchange. In other countries in history, they used sea shells as money. Whatever a group decides is money, is money.


For me, the fact that huge companies use machines to make cars, like Toyota, Nissan, and Volkswagen ( they have really nice machinery there ) is proof that the work of machines has value. Again, for me, when an AMD processor, ASIC processor or whatever processor, works to figure out an equation ( as in bitcoin ) that work is just as valid as making a car in the Volkswagen factory. It has value. Those who use that "value" have an agreement between themselves.


You said:

It isn't storing the value because it can't be reversed into its previous and actually useful form.

Actually, the bitcoins can be used to "revert" back to electricity. I can buy a generator with bitcoin and make electricity with the generator.


Even if all the above is wrong, bitcoin will have value with those who use it because they all have agreed that it has value. We could trade horses, we could trade dollars, we could trade cigarette butts, ..... If we have agreed to do so for a fixed value -  we are free to do so.

[theta]

I have taken it further at times and described that Bitcoin is truly a modern currency due to using the collective knowledge of all of mankind (the microprocessor, etc) to create a store of value. People tend to like this angle - it sounds epic and intriguing

If you are talking about the work of machines, in this case video cards and the upcoming ASICS, as an investment, it agrees with me. If the work of humans has value, why not the work of machines? This fact is what gave value to bitcoin in the first place, right?


The machines do the work with the mining software, using the electricity, which has (and had) value. The bitcoin is therefore a store of value either with the cost of the electricity used to make them or the work of the processors. Maybe both.

This doesn't make any sense at all. It isn't storing the value because it can't be reversed into its previous and actually useful form. It is consuming actually worthwhile things and its value comes purely from your thinking it has value. Nothing else.

It comes down to what a person believes. Money is just a means of exchange. In other countries in history, they used sea shells as money. Whatever a group decides is money, is money.


For me, the fact that huge companies use machines to make cars, like Toyota, Nissan, and Volkswagen ( they have really nice machinery there ) is proof that the work of machines has value. Again, for me, when an AMD processor, ASIC processor or whatever processor, works to figure out an equation ( as in bitcoin ) that work is just as valid as making a car in the Volkswagen factory. It has value. Those who use that "value" have an agreement between themselves.


You said:

It isn't storing the value because it can't be reversed into its previous and actually useful form.

Actually, the bitcoins can be used to "revert" back to electricity. I can buy a generator with bitcoin and make electricity with the generator.


Even if all the above is wrong, bitcoin will have value with those who use it because they all have agreed that it has value. We could trade horses, we could trade dollars, we could trade cigarette butts, ..... If we have agreed to do so for a fixed value -  we are free to do so.

Your first point is wrong, as has been mentioned already above. If I use valuable machine work and electricity to create something that nobody needs or wants, this does not mean that that something has a value equal (or in fact anywhere near) the value of the electricity/labour that went into it. If nobody wants it, it's worth exactly zero, or perhaps the salvageable value of its materials.

You point about reversing the process is also wrong. This is not reversing the process. You don't get back the energy used in the creation of the bitcoin. You are just exchanging it for something else, which can only happen if another assumption is true, which is that other people are assigning it some value and are willing to exchange their generators (or fiat currency that can be used to buy generators) for it.

Your last point is correct. If enough people believe that there is value to it, then it has value. The longer this is the case (and ideally the more stable that perceived value is), the more it becomes a self-fulfilled prophecy. 

[mpfrank]

I would like to argue that OP is correct, that indeed the value of Bitcoin DOES in fact relate to the value of energy (more specifically, useful free energy) that was used to create it.

In thermodynamics, the kind of energy that is important, for purposes of doing work, is not total energy but "free energy" - the energy that is available to do work.  For example, a world consisting of a uniform hot bath of gas at thermal equilibrium could contain a lot of energy (heat energy), but none of this would be free energy - it cannot be used to do work.  However, in a scenario where the exact same hot bath was coupled to a cold reservoir through a heat engine, part of the energy of the hot gas *would* be free energy and could be used to do work (the exact amount depends on the temperature and capacity of the cold reservoir).

This example illustrates that free energy (which really, is the only kind of energy that matters) does not inhere in a thing itself, it inheres in a *configuration* of things; most generally it could depend on the configuration of everything around it that might affect how much of the system's total energy can be usefully extracted as work.

In the modern world, a large part of what determines how much our environment can be extracted as useful work is the entire industrial economy, including the financial system.  For example, if there were no mining machines, or no banks to fund the capital investment in mining machines, then (say) shale oil deep under the ocean would be inaccessible and would not constitute free energy for practical purposes.  But, because our technologies and capital investment systems do exist, they can be used to extract that oil and use it to do useful work.

Thus, I would argue that money (like other elements of the infrastructure of modern civilization) indeed embodies (free) energy - since it enables the harnessing of energy - so its configuration in relation to other elements of our world is one that contains free energy, and likewise, free energy must be invested to produce any form of money that has value.  Because, if a form of money can be produced without investing much energy in its production, then it will be overproduced, have a low market value, and be unable to cause much useful work to be done.  The sad fact about the US dollar is that the only reason it still requires some amount of free energy (real effort) to produce is due to Fed policies (which aren't allowing it to be overproduced at Zimbabwe levels yet); granted that is not a very reliable reason for it to maintain market value, but it is the reason why it does, nonetheless.

The great advantage of Bitcoin is that its architecture provides a much more reliable guarantee why energy is required to produce it, due to its proof-of-work protocol.  Granted, the exact amount of energy needed to produce each new batch of Bitcoin fluctuates over time, depending on a number of factors such as difficulty, technology available, etc., but nonetheless, it is critical that free energy (in some form) *is* required, since if no energy whatsoever were required, then there would be nothing to prevent new Bitcoins from simply popping into existence out of thin air.  Anything in this universe (Bitcoins included) requires some amount of energy to produce and it would be impossible for Bitcoin (or any kind of information processing system at all) to exist if there were no energy.

If you claim that the energy that goes into producing Bitcoin is inconsequential or unrelated to its value, then I have a challenge for you:  Try to create a cryptocurrency that has all the same properties as Bitcoin (distributed, secure, etc.), but that does NOT require some similar proof-of-work function for its production.  I hypothesize that this is impossible.  ANY currency that does NOT require energy to produce, by definition, can be effortlessly produced in unlimited quantities and therefore has no value.  The fact that energy is required to create Bitcoin is not simply a side-effect of its market value, but in fact is essential to it.  

To see this, consider a thought experiment:  Suppose that the Bitcoin protocol did not automatically increase difficulty with hash rate.  Then, new blocks would be created constantly, the block chain would instead be a very bushy tree, and there would be no consistent ledger, and no double-spend resistance.  It simply would not work; it would not have value as money.

Thus, Bitcoin does indeed embody the energy that was used to create it.  The exchange rate between Bitcoins and kW-hrs varies over time and from place to place, 'tis true, but that is only an example of the general rule that the free energy content of a system depends on the means that happen to be available to harness its energy as useful work - just like the free energy of a heat bath depends on what kinds of large, cold reservoirs are available nearby for a heat engine to dump its entropy into.

Far from being a mere "technical detail," the fact that producing Bitcoins requires a large amount of energy is in fact essential to its value as money.

Some related thoughts here:  http://minetopics.blogspot.com/2013/01/grand-unification-of-physics-and.html

[odolvlobo]

I have been proselytizing Bitcoin since 2010 and wanted to ask the community to critique and help me fine-tune what is essentially my sales technique for selling folks on Bitcoin.

When I discuss Bitcoin, people tend to get a little perturbed and start saying "well how is it worth anything!?". At this point I begin using the analogy that Bitcoin's value comes from utility, adoption, and scarcity. Utility is obvious - you can buy almost anything with BTC that you can with USD (and in some cases more). Adoption is also not difficult to convey. Scarcity has always been the sticking point.

I would take another approach and not try to sell bitcoin as an investment. Here are some selling points for Bitcoin that avoid the whole "bitcoin is a ponzi scheme not backed by anything" myth:

1. Bitcoin sales are cheaper. Prices are higher when paying with a credit card because the merchant has to pay the credit company a substantial fee. Bitcoin fees are extremely low.
2. Bitcoin is safer. Using a credit card exposes you to the danger of credit card fraud or identity theft.
3. Bitcoin is inflation-proof. If you are waiting to buy something, its price will only go down in terms of BTC.

[mobile4ever]

Try to create a cryptocurrency that has all the same properties as Bitcoin (distributed, secure, etc.), but that does NOT require some similar proof-of-work function for its production.  I hypothesize that this is impossible.  ANY currency that does NOT require energy to produce, by definition, can be effortlessly produced in unlimited quantities and therefore has no value.  The fact that energy is required to create Bitcoin is not simply a side-effect of its market value, but in fact is essential to it.  

Thanks, you said it better than I could.

Plus, at the moment, you can actually get more electrical energy out of a bitcoin, since their value went up. In other words, the bitcoin is now an energy investment if someday a miner wants to revert it back to electricity.