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Author Topic: Is energy/computer hardware the "gold standard" for Bitcoin? Critique my analogy  (Read 2477 times)
rudeguy
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March 24, 2013, 03:25:12 AM
 #21

Well, this is an interesting concept.

I don't think the resources expended while mining BTC offer it any more value than it has. Instead, the value comes from the consumer confidence that BTC is worth something. Either through purchasing power, or potential gains from investments/trading. That is why the bitcoin is fragile in its current state, the system is still in its infancy and something could go wrong.

If the BTC was backed by energy and hardware resources, there would be a floor to BTC's value. From what I've learned, there is no such thing presently. BTC has the potential to be worthless, so spent resources offer nothing IMO.

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franky1
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March 24, 2013, 04:44:49 AM
 #22

lol to all those saying the value is based purelyon speculation only. ok i think the OP is mainly correct TRUE VALUE is based on production costs. but please be aware TRUE VALUE and the final SPOT / Sell price are 2 different things.

heres how gold works
TRUE VALUE = production costs from the gold miners
ADDED VALUE = price of  shipped and remoulded bars ready for "retail" resale.
Speculated PROFIT is then added ontop based on greed and future predictions of value due to future scarecity.

this is why you can buy unprocessed gold cheaper then gold bars as it skips the ADDED VALUE addition. but still includes a bit of speculated profiting by the seller in question

so lets say golds TRUE VALUE was $1000 and ADDED VALUE was $300. speculated value added on another $200 to bring it to the spot price of $1500. You would see price swings above $1300 and going upwards with $1300 being hard to go below as only a dummy would sell at a loss.

the way to notice a gold or bitcoin bubble is to know the profitability of bars/coins over a long period and if the profitability sky rockets then its a ramp.. if the profitability nose dives then its a dump.

bitcoin and gold SPOT prices are not based purely on EITHER speculation or cost. it is a mix. take into consideration the cost price as a initial guide to then notice if the speculated profit on top is too greedy or not.

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theta
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March 24, 2013, 11:14:41 AM
 #23

That's not true. The value of anything depends on the utility it has, not in the cost of production. The two may be correlated but the causation direction is the opposite of what is being suggested here. That is, because of a high utility value, people are competing to produce the good in question, which drives production costs up. If utility value drops, it doesn't matter what it costs to produce it, the end price will drop as well (which means that people will not compete to produce it, which may decrease production costs, which may bring us back to step 1).

In the example of gold you gave, production costs are $1300 when gold is at $1600 (hypothetical figures but in the ballpark). When gold was at $800, production costs were at $600. What happened inbetween? All available gold with easy access/cheap mining costs was mined, and after the value went up to $1600, it became economical to mine gold with production costs of $1300. If gold goes to $3000, it will be economical to mine gold in more difficult to mine locations with costs of say $2500. If then gold were to fall back to $1000, it would not be economical to mine gold at either $1300 or $2500, so you would see production costs quoted at <$1000 (most likely mining would decrease substantially in that scenario, as presumably all gold with sub-$1000 production cost would have been mined when gold was higher). So, in that scenario, all gold would be worth $1000, no matter what the production costs were. Even those mined at $2500 (when it was profitable to do so), it would still be worth $1000, as that would be the current price, as decided in the market, and determined by the actual end utility (for either consumption or investment purposes, it doesn't matter).

Let me give you another example: imagine you want to build a house. Estimated building cost is $200k. In scenario A, estimated cost turns out to be the actual one. In scenario B you encounter a huge rock where you dig for the foundations, and to remove it it costs an extra $100k. Total cost for building is $300k. The end result in either scenario is the exact same house. Would you say that its value is different in the two scenarios? Absolutely not. Its value is decided by the market, according to its utility value (roughly equal to Net Present Value of all future rents minus maintenance costs and taxes). This is completely unaffected by whether it cost $200k or $300k to build it.

And one more example in the BTC world. If I produce 1 BTC using a super efficient ASIC miner run on solar panels and wind turbines at a marginal cost of production of exactly zero, versus using an inefficient GPU running on grid electricity at a marginal cost of production of $150, do these bitcoins worth their respective costs? No, they are worth whatever the current value of BTC is, let's say $70. And if tomorrow 1BTC=$200, they will both be worth $200, irrespective of their production costs. Likewise, if bitcoin fails to gain further traction, and a new and better alternative replaces it, so BTC's utility value drops and its price goes to $0.05, both of these bitcoins will be worth exactly $0.05, not whatever amount of energy was used to produce them, as that energy is what in economics is called a sunk cost.

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mobile4ever
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March 29, 2013, 02:49:58 PM
 #24

That's not true. The value of anything depends on the utility it has, not in the cost of production.


When Africans used  shells for money in the past, they all had an agreement what they were
worth.


https://en.wikipedia.org/wiki/Shell_money

There was no cost of production, unless you count the energy needed to find them. But then I guess that is like bitcoin. What utility did the shells have?
odolvlobo
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March 29, 2013, 04:14:36 PM
 #25

That's not true. The value of anything depends on the utility it has, not in the cost of production.


When Africans used  shells for money in the past, they all had an agreement what they were
worth.


https://en.wikipedia.org/wiki/Shell_money

There was no cost of production, unless you count the energy needed to find them. But then I guess that is like bitcoin. What utility did the shells have?

The utility of the shells was their use as a medium of exchange.

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mobile4ever
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March 29, 2013, 05:24:43 PM
 #26

That's not true. The value of anything depends on the utility it has, not in the cost of production.


When Africans used  shells for money in the past, they all had an agreement what they were
worth.


https://en.wikipedia.org/wiki/Shell_money

There was no cost of production, unless you count the energy needed to find them. But then I guess that is like bitcoin. What utility did the shells have?

The utility of the shells was their use as a medium of exchange.


I will guess everyone knew about how much time it took to find a shell. ( Yes, I am making a reference to finding a block in bitcoin. ) 
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