How to value a currency

[myrkul]

So, what is the "intrinsic value" of a bitcoin? You give the number of $50/BTC up there in your OP. Would you care to explain, then, why it's currently trading at $92.45? And why it started at less than a dollar?

Mr. Market can be crazy at times

Additionally it was also at less than a Dollar because Q changes over time.

I'm not saying $50 is the correct valuation. I have no clue how to value a currency. But stating that something is incorrect because a (by definition) speculative market trades it at a different price is just silly.

I wasn't stating it was wrong because the market fluctuates, or even that he failed to derive the same value as the market. I was requesting that he explain, using his equations, why this is so.

I can explain why this is so, simply by stating that the people who use bitcoin value it enough to exchange $92.45 for it. When Bitcoin was in it's infancy, people valued it less, and fewer people valued it. Thus, the price was lower.

I've been stating all along that he was wrong because he based his calculations on a flawed premise: That bitcoin's value comes from what you can purchase from it. He's got it backwards. You can purchase things with bitcoin because people value it.

What drives the speculative valuation of $/BTC is an expectation that Q will become large, that M is contained and that V is also relatively stable.

In other words, people think that it is worth buying, so they buy it.

[Sword Smith]

In other words, people think that it is worth buying, so they buy it.

Do I sense that we are reaching some kind of understanding? An expectation of a large future Q is what drives this investment strategy:
http://youtu.be/NG1qooBzE2w

[Sword Smith]

Did you even read my OP, Myrkul?

[Sword Smith]

I've been stating all along that he was wrong because he based his calculations on a flawed premise: That bitcoin's value comes from what you can purchase from it. He's got it backwards. You can purchase things with bitcoin because people value it.

Neither statement is sufficient. It applies both ways: I value it because I can purchase things for it and you can purchase things for bitcoins because I value it. I value fiat currency because I can purchase things with it. The same goes for bitcoins and I expect to increase my purchasing power of any bitcoin holding I may have. A currency like Bitcoin is like a network and the network value rises when more people join that is, when you can trade more things with bitcoins.

[myrkul]

In other words, people think that it is worth buying, so they buy it.

Do I sense that we are reaching some kind of understanding? An expectation of a large future Q is what drives this investment strategy:
http://youtu.be/NG1qooBzE2w

Nearing one, perhaps.

Q doesn't play a part in many user's valuations, though. For instance, the person who only wants to get his 5 million dollars through border checkpoint without being hassled won't give a shit that you can buy tea with it. He just wants a few thousand coins to keep in a brainwallet to avoid having to explain why he's carrying 5 million dollars.

People value a currency for many other things than just what you can buy with it. As I said before, you've got it backwards. You can buy stuff with bitcoin because people value it. Not the other way around. People have to value a currency, and desire it, before you can buy things with it, or else, they wouldn't offer to sell things for it. It's common sense.

[Sword Smith]

For instance, the person who only wants to get his 5 million dollars through border checkpoint without being hassled won't give a shit that you can buy tea with it. He just wants a few thousand coins to keep in a brainwallet to avoid having to explain why he's carrying 5 million dollars.

That is an excellent point which does not completely make my calculations irrelevant, though. The reason that he can change back from BTC to fiat is that other people also value BTCs because they can buy stuff for it.

People value a currency for many other things than just what you can buy with it. As I said before, you've got it backwards. You can buy stuff with bitcoin because people value it. Not the other way around. People have to value a currency, and desire it, before you can buy things with it, or else, they wouldn't offer to sell things for it. It's common sense.

It is just as much common sense to state that people value it because they can buy stuff with it. It is, as mentioned above, not wither or. It is both - a feedback process.

[myrkul]

People value a currency for many other things than just what you can buy with it. As I said before, you've got it backwards. You can buy stuff with bitcoin because people value it. Not the other way around. People have to value a currency, and desire it, before you can buy things with it, or else, they wouldn't offer to sell things for it. It's common sense.

It is just as much common sense to state that people value it because they can buy stuff with it. It is, as mentioned above, not either or. It is both - a feedback process.

No, it isn't. If I tried to buy your computer from you using Rai stones, you'd run me off, because you don't want Rai stones. This, despite the fact that on the island of Yap, one could conceivably buy a large estate and the livestock (and wife!) to go with it. You don't value Rai stones, so you won't sell me anything for one, no matter how much you could buy with one.

[Sword Smith]

People value a currency for many other things than just what you can buy with it. As I said before, you've got it backwards. You can buy stuff with bitcoin because people value it. Not the other way around. People have to value a currency, and desire it, before you can buy things with it, or else, they wouldn't offer to sell things for it. It's common sense.

It is just as much common sense to state that people value it because they can buy stuff with it. It is, as mentioned above, not either or. It is both - a feedback process.

No, it isn't. If I tried to buy your computer from you using Rai stones, you'd run me off, because you don't want Rai stones. This, despite the fact that on the island of Yap, one could conceivably buy a large estate and the livestock (and wife!) to go with it. You don't value Rai stones, so you won't sell me anything for one, no matter how much you could buy with one.

I would love a Rai Stone!! Besides, my computer is from primo 2009.

i would value a Rai stone according to the purchasing power that it could give me and how much I value that purchasing power on Yap. I might value it at a discount since it was on some remote island. And maybe I would also value it just because it would be cool to say that I owned one.

[myrkul]

People value a currency for many other things than just what you can buy with it. As I said before, you've got it backwards. You can buy stuff with bitcoin because people value it. Not the other way around. People have to value a currency, and desire it, before you can buy things with it, or else, they wouldn't offer to sell things for it. It's common sense.

It is just as much common sense to state that people value it because they can buy stuff with it. It is, as mentioned above, not either or. It is both - a feedback process.

No, it isn't. If I tried to buy your computer from you using Rai stones, you'd run me off, because you don't want Rai stones. This, despite the fact that on the island of Yap, one could conceivably buy a large estate and the livestock (and wife!) to go with it. You don't value Rai stones, so you won't sell me anything for one, no matter how much you could buy with one.

I would love a Rai Stone!! Besides, my computer is from primo 2009.

i would value a Rai stone according to the purchasing power that it could give me and how much  value that purchasing power. And maybe I would also value it just because it would be cool to say that I owned one.

So you see, now, that purchasing power is not the determining factor in the value of a currency? That it is actually the other way around?

In fact, from the Rai stone article:

The ... value of a specific stone is based not only on its size and craftsmanship but also on the history of the stone. If many people—or no one at all—died when the specific stone was transported, or a famous sailor brought it in, the value of the rai stone increases.

The story determines the value. Just like you would love one, "just because it would be cool to say that I owned one."

[Sword Smith]

So you see, now, that purchasing power is not the only determining factor in the value of a currency?

Fixed

[myrkul]

So you see, now, that purchasing power is not the only determining factor in the value of a currency?

Fixed Broken

Fixed.

Value determines purchasing power. Not the other way around. This is self-evident if you examine what the terms mean:

Value: How much people want A.
Purchasing power: How much B you can get for A.

Since you have to get B from someone, how much they want A will be the deciding factor in how much B they're willing to give up for it.

[Sword Smith]

So you see, now, that purchasing power is not the only determining factor in the value of a currency?

Fixed Broken

Fixed.

Value determines purchasing power. Not the other way around. This is self-evident if you examine what the terms mean:

Value: How much people want A.
Purchasing power: How much B you can get for A.

Since you have to get B from someone, how much they want A will be the deciding factor in how much B they're willing to give up for it.

You see only what you want to see. I told you that I would value the Rai stone according to, among other things, its purchasing power. This you chose to ignore. I honestly think that the arguments speak for themselves and that it is up to anybody to go through our discussion and make up their own mind. I only value US dollars for one reason. I can buy stuff with it. Either by travelling to the US and pay my living expenses there or by buying Danish kroner with the US dollars. There is no other reason for me than the fact that I can purchase stuff with USD to value them - purchasing power impacts value but, as I have admitted, other factors may influence my subjective value as well.

[myrkul]

So you see, now, that purchasing power is not the only determining factor in the value of a currency?

Fixed Broken

Fixed.

Value determines purchasing power. Not the other way around. This is self-evident if you examine what the terms mean:

Value: How much people want A.
Purchasing power: How much B you can get for A.

Since you have to get B from someone, how much they want A will be the deciding factor in how much B they're willing to give up for it.

You see only what you want to see. I told you that I would value the Rai stone according to, among other things, its purchasing power. This you chose to ignore. I honestly think that the arguments speak for themselves and that it is up to anybody to go through our discussion and make up their own mind. I only value US dollars for one reason. I can buy stuff with it.

OK, that's why you want USD. To buy stuff. But you're missing the point. The only reason you can buy stuff with it is because people want it. And yes, part of why people want a currency is so that they can buy stuff with it. But that does not determine it's value. How much people want it is what determines it's value, and trying to base the value on purchasing power is like trying to get to space this way:

[Sword Smith]

So you see, now, that purchasing power is not the only determining factor in the value of a currency?

Fixed Broken

Fixed.

Value determines purchasing power. Not the other way around. This is self-evident if you examine what the terms mean:

Value: How much people want A.
Purchasing power: How much B you can get for A.

Since you have to get B from someone, how much they want A will be the deciding factor in how much B they're willing to give up for it.

You see only what you want to see. I told you that I would value the Rai stone according to, among other things, its purchasing power. This you chose to ignore. I honestly think that the arguments speak for themselves and that it is up to anybody to go through our discussion and make up their own mind. I only value US dollars for one reason. I can buy stuff with it.

OK, that's why you want USD. To buy stuff. But you're missing the point. The only reason you can buy stuff with it is because people want it. And yes, part of why people want a currency is so that they can buy stuff with it. But that does not determine it's value. How much people want it is what determines it's value, and trying to base the value on purchasing power is like trying to get to space this way:

Great! Now you have accepted that the reason that I accept USD is that I can buy stuff with it. And here comes the central point: USD becomes more valuable since the goods and services that I can produce can be traded in USD!! The value that it gains this way is proportional to the worth of the goods that I can produce and am willing to trade in USD. USD gains value since the same amount of dollars can now be traded for more goods, i.e. Q has increased by me accepting USD. What applies to my sevices or good also applies for other people so Q is one of the determining factors of valueing a currency. A currency is a network and its value increases when more people adopt it.

Are you trolling me? If so, it is working 

And your silly picture is just that, silly, and not an argument.

[myrkul]

A currency is a network and its value increases when more people adopt it.

Not at all necessarily. If a lot of people wanted USD, but not very much, then the value of USD would be low. If very few people wanted USD very much, then the value would be high. Value is a function of how much people want something, not how many.

Are you trolling me? If so, it is working 

No, I am educating you. That you are getting emotionally involved in the education is unfortunate, since it reduces the likelihood that you will listen to what I am trying to teach you. Your idea was bad. This does not mean you are bad.

And your silly picture is just that, silly, and not an argument.

It wasn't intended as an argument, but to illustrate yours. You want a currency so you can buy something (person A lifts person B). You can buy something because someone else wants the currency (person B lifts person A). Therefore, the value of the currency is based on the purchasing power (and off they go into the sky).

The only reason you can buy something with a currency is because someone else wants that currency. Purchasing power might be a good way to measure the value of a currency, but it certainly does not determine the value.

[Sword Smith]

Great. And I believe I am the one educating you. You failed to address my main argument:

Great! Now you have accepted that the reason that I accept USD is that I can buy stuff with it. And here comes the central point: USD becomes more valuable since the goods and services that I can produce can be traded in USD!! The value that it gains this way is proportional to the worth of the goods that I can produce and am willing to trade in USD. USD gains value since the same amount of dollars can now be traded for more goods, i.e. Q has increased by me accepting USD. What applies to my sevices or good also applies for other people so Q is one of the determining factors of valueing a currency.

[Sword Smith]

What you are presenting is a false dichotomy.

[myrkul]

My apologies. I'll address it now.

USD becomes more valuable since the goods and services that I can produce can be traded in USD.

Not if nobody wants your goods or services. I say again, value is a measure of how much someone wants something.

USD gains value since the same amount of dollars can now be traded for more goods, i.e. Q has increased by me accepting USD.

If USD gains any value from you accepting it, it's not from the objects which you are willing to trade for it, but rather from your desire for it.

What you are presenting is a false dichotomy.

false dichotomy (plural false dichotomies)

    (logical fallacy) A situation in which two alternative points of views are presented as the only options, whereas others are available.

Hmm. Even if I were presenting an either/or, this still wouldn't apply. Since I'm not presenting an either/or, you're wrong here, too. Not running a very good track record, I'm afraid.

[counter]

After briskly reading a few posts I'm liking the premise of this thread, it's very intriguing and makes one think deeper of the value of a currency and how we view what that value truly is based on. 

I appreciate the equation you gave to explain your points, very helpful and interesting breakdown.  Much of what I've read here makes sense.  Some stuff leaves me a little confused but overall a good debate I tend to side with the OP as I feel I get more explanations for the viewpoints given.  All in all it's good to here opposing arguments on the topic. 

[desper]

I think Sword Smith's analysis that fair USDBTC is $50 is probably about right.
The reason USDBTC is now trading at $100+ is because of the expected growth in Q.

It's a bit like a growth stock--the PE ratio is higher because of expected future growth.

My conclusion: the current price on the exchanges of $100+ is about right for now, given that we think that BTC is likely to be adopted ever more widely.

Thanks for the analysis.