The value of a bitcoin

[Fizzgig]

In an effort to better understand bitcoins, I thought I would give my take on what a bitcoin is and why it has value. You can then tell me if and why I am wrong.

First, bitcoins are a commodity designed to have the features we want in a money. Without transactions and human interaction, it is worthless. Without the monetary functions bitcoin has, it is worthless. The function of bitcoins is what drives demand, and it is supply and demand which determine price. It is the function of this new currency where it derives it's real value. To argue that bitcoins have no value because they aren't backed by anything is like trying to argue that gold has no value because it is not backed by anything. One hundred years ago gold is what was used to back the currency, it was the commodity underlying the paper. Bitcoins is the digital commodity which will back a future currency.

Second, the theoretical max of 21 million bitcoins is arbitrary because bitcoins are infinitely divisible and it is a commodity. You could just as easily have a theoretical limit of 1 bitcoin with an initial disbursement of 0.00000238 BTC and nothing would change at all.

Those are two rough ideas which I haven't found much validation with. Thoughts?

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[Rob768]

The US Dollar is backed by Absolutely nothing.  The only difference is that the total bitcoins in circulation will have a limit while the USD will continue to grow in supply by billions or trillions per year. 

[Grant]

In an effort to better understand bitcoins, I thought I would give my take on what a bitcoin is and why it has value. You can then tell me if and why I am wrong.

First, bitcoins are a commodity designed to have the features we want in a money. Without transactions and human interaction, it is worthless. Without the monetary functions bitcoin has, it is worthless. The function of bitcoins is what drives demand, and it is supply and demand which determine price. It is the function of this new currency where it derives it's real value. To argue that bitcoins have no value because they aren't backed by anything is like trying to argue that gold has no value because it is not backed by anything. One hundred years ago gold is what was used to back the currency, it was the commodity underlying the paper. Bitcoins is the digital commodity which will back a future currency.

Second, the theoretical max of 21 million bitcoins is arbitrary because bitcoins are infinitely divisible and it is a commodity. You could just as easily have a theoretical limit of 1 bitcoin with an initial disbursement of 0.00000238 BTC and nothing would change at all.

Those are two rough ideas which I haven't found much validation with. Thoughts?

Why it has value for me...

1. It isn't backed by anything, which i find as a huge plus. Because if it was backed by something it wouldn't be as efficient of a currency, for these 2 reasons:

 a) it would require a safe deposit of gold that is secure, this would substantially increase the transaction costs and make it less efficient as money.
 b) everytime new coins are minted someone would have to purchase that commodity that backs it and transport it to that safe deposit.
 In all such backing not only would increase costs and make it less efficient as cash, but it would also require me to trust a central authority. Needless to say i have no plans to invest in gold when i hold a currency, if i wanted gold i'd buy gold directly.

2. No central authority, no refunds, no chargebacks, no counterfeit, and therefore extremely low transaction costs. As perfect as cash could be.

3. Limited and exponentially shrinking supply of new coins, the number is irrelevant whats relevant is the formula it makes it easy for me to expect what the money is or will be worth when i know the supply will be fixed.

[Buzzard]

Fizzgig, I do believe that you've got a good start on it.

With enough participants, BTC would be just as valid as most paper currencies, with fewer issues that the paper has to constantly fight.  (Counterfeit BTCs would be a little hard to pull off)

Also, since BTC started as an artificial currency, with designed limits and checks, there's negligible long-term risks of the BTC supply suddenly expanding.  (Although an explosion in miner power could have some interesting short-term effects)


But at the end of the day, ECON 101 tells us what a BTC is worth:  What is the buyer willing to pay for it?

[bitminers]

Well said Grant!

[Xezlec]

First, bitcoins are a commodity designed to have the features we want in a money. Without transactions and human interaction, it is worthless. Without the monetary functions bitcoin has, it is worthless. The function of bitcoins is what drives demand, and it is supply and demand which determine price. It is the function of this new currency where it derives it's real value.

But there are many (!) physical substances that are fixed in amount, and can be easily handled, but do not have much value.  Besides, just "having features we want in a currency" doesn't stop someone else from making another digital system that has those same features, and even aside from that, doesn't guarantee that they will always have value.  Since they don't have inherent worth, they are only able to be exchanged for things because some people are enthusiastic about the idea that they should.  Pure enthusiasm alone is a pretty fickle basis for my wealth!

To argue that bitcoins have no value because they aren't backed by anything is like trying to argue that gold has no value because it is not backed by anything.

Uh.  It kinda doesn't.  Libertarians think it does, but ordinary people are pretty skeptical about it.  Warren Buffet, in particular, thinks gold as a store of value is stupid exactly because it has little inherent worth.  In truth, it has some value because of its appearance and nice physical properties, plus thousands of years of tradition (which people will likely care about for a long time), so it's a little better than just some arbitrary token.  Still though, yeah, I think much of the current value people assign to it is irrational and will collapse at some point.

The US Dollar is backed by Absolutely nothing.  The only difference is that the total bitcoins in circulation will have a limit while the USD will continue to grow in supply by billions or trillions per year.

I don't have much training in economics, but in the one class I did take, they told us that the US dollar is "fiat currency" -- its value comes from law.  Because the law requires taxes to be paid in US dollars, dollars will have value as long as there are people subject to our government's laws.  There is inherent value there.  But who requires payment in bitcoins, and what makes it likely that they will continue to do so?

Yeah, I don't think this has any value at all, and I expect that one the initial enthusiasm bubble dies out, prices will oscillate rapidly as you all try to speculate your way to some kind of real value, and eventually die out as you guys all come to your senses.  I could be wrong, but that sure is what my gut tells me.  Convince me otherwise.

[hi]

Hi,

BTC need to be accepted by a major retailer in USA.  Once this happens their value will go even higher!

Hi

[gideon g]

I could be wrong, but that sure is what my gut tells me.  Convince me otherwise.

I'm optimistic about bitcoin, but I advise you to go with your gut.  Wait and see.  We don't need more investors anyway, we need merchants and software developers.

[Xezlec]

I could be wrong, but that sure is what my gut tells me.  Convince me otherwise.

I'm optimistic about bitcoin, but I advise you to go with your gut.  Wait and see.  We don't need more investors anyway, we need merchants and software developers.

Hmm, but isn't a merchant an investor to some extent?  They need a reason to believe that it will hold its value at least until they cash it in.  Also, I'm a software developer, and despite my skepticism, I am kind of interested in writing something to play with this.  What do you need?

[gideon g]

Hmm, but isn't a merchant an investor to some extent?  They need a reason to believe that it will hold its value at least until they cash it in.

To some extent, yes.  They don't need to bank on the long-term prospects of bitcoin though.  If they're seriously bearish, they could just exchange their coins for fiat immediately whenever they complete a transaction.  As long as bitcoin is around long enough for them to turn a profit on whatever work they put into setting their businesses up to accept the transactions, they'll be fine.  Even if that doesn't happen, they lose very little as compared to someone who spends thousands on buying bitcoins in hopes that the price will increase over the long term.

Also, I'm a software developer, and despite my skepticism, I am kind of interested in writing something to play with this.  What do you need?

I don't personally need a software dev.  I meant that the bitcoin community needs them. 

If you're looking for work, check out the marketplace section of the forum.  You can advertise your services (once you get out of newbie purgatory), and there are occasionally people seeking devs there that you can reply to via private message.

[dana.powers]

merchants will likely convert BTC to local currency instantly at the time of the transaction.  i expect there are and will be services that provide instant conversion services for these types of merchants, which would reduce, if not eliminate, the investment risk merchants have to assume in order to accept BTC.

[muc]

Hi,

BTC need to be accepted by a major retailer in USA.  Once this happens their value will go even higher!

Hi

while bitcoins is in the venue of geeks, they won't be noticed

when they become mainstream, then you can expect governmental action of some sort

[lmlbs]

Say average power cost is about $0.1 USD / KWh

Say we're using 5850 on a MB, for a total power req. of  500 W.

Calculator at http://bitcoinx.com/profit/index.php says that we'll need an average of 120 days to get a block of 50 BTC.

120*24*0.5*0.1/50 == 2.88 USD / BTC

This is the absolute minimum - cost of "goods", since there is also equipment cost/amortization, building rental costs, support tech. salaries, profit of whoever bothers to mine.

Now, compare that to completely insane valuations that stock market has, like 100 times P/E ratios.

Ergo => current price of 15 USD is only 5 times the very minimal Intrinsic value. And if  KWh costs 0.2 USD, then only 2.5 times, NOT taking other costs into account, and not reflecting the UTILITY of the electronic currency.

Draw your own conclusions.