Lopsided Growth of the Infrastructural Value and Exchange Value of Bitcoin

[swusc2]

Are miners holding too much of the Bitcoin economy? Some inferences made:

1) Miners control the majority of Bitcoins

2) The large majority of people involved in the Bitcoin community are strictly Miners looking to exchange Bitcoins into $

3) As difficulty goes up Miners lose incentive to mine as costs catch up with profits

As I see it now, the infrastructural growth of Bitcoin is a lot slower than the growth based on the number of people attracted to Bitcoin through mining. In this case, the value of the Bitcoin is substantially inflated since it isn't backed by stability or businesses but instead by the mining community size. As mining difficulty increases, and speculation inflated prices only temporarily keeping mining attractive, when the increase in difficulty exceeds profitability and miners cash-out, the value of Bitcoin is going to substantially drop to meet the infrastructural value, which is considerably less.

A further issue that I see occurring is *if* this miner cash-out does occur, the high number, low value of Bitcoins congregate towards smaller groups of people, i.e., optimistic speculators, thereby further reducing the usability and value of Bitcoins. This makes rebounding considerably harder since the influx of new users will end up with a disproportionately less amount of currency compared to the people left from previous crashes.

Right now there are way too many people and not enough businesses to justify 6.6 million Bitcoins being at an exchange rate $16-17 per. Right now the great majority of value in Bitcoin resides in the ability to exchange it for $s.

I think we need angel investors and entrepreneurs, i.e., the people with lots of Bitcoins/Money/Connections to start up more Bitcoin related businesses so that infrastructural growth somewhat keeps up with popular exchange inflation. If the disparity between the two reaches some critical point where the people start moving away from Bitcoin, i.e. mining costs exceed profits, we will see more large crashes, such as the $30->$10 which occurred in just a few days, to come. If the parity increases to such a point where the difference in growth is in orders of magnitude, the proceeding crash may just set the entire market back.

What we need right now is developers to make some very very user friendly sites, i.e. something in the likeness of Ebay in combination with escrow that provides both buyer and seller protection (since Bitcoin makes punishing scammers considerably harder). Once people have concrete and reasonably safe place to sell and exchange individual goods, we will see more large legitimate businesses spring up, where escrows will not be necessary for them and quality control will prevent scamming.

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[Sjalq]

Check out the results of this poll

http://forum.bitcoin.org/index.php?topic=21658.0

[swusc2]

Check out the results of this poll

http://forum.bitcoin.org/index.php?topic=21658.0

In that poll only 17 out of 211 people said they were going to spend their BTC as is. Majority said either hoard BTC or some combination of Convert enough to cover cost then hoard.

Hoarding effectively is just cashing out except they expect the exchange rate to increase so they want to cash out later.

Also I made a reference that since we are experiencing a large growth in hashing power and not nearly as much infrastructure growth, the value of the bitcoin isn't keeping up with the difficulty and we are approaching the mining profibility limit. And the difficulty is growing way too fast while the actually use of bitcoins is still lagging behind. Instead of smoothly transitioning from a mining base economy to a transaction based, there will be a significantly large perturbation.

[Matarael]

What we need right now is developers to make some very very user friendly sites, i.e. something in the likeness of Ebay in combination with escrow that provides both buyer and seller protection (since Bitcoin makes punishing scammers considerably harder). Once people have concrete and reasonably safe place to sell and exchange individual goods, we will see more large legitimate businesses spring up, where escrows will not be necessary for them and quality control will prevent scamming.

I completely agree. Some sort of auction site with clearcoin type escrow would be perfect. I'd be happy to invest in something like that.

[swusc2]

What we need right now is developers to make some very very user friendly sites, i.e. something in the likeness of Ebay in combination with escrow that provides both buyer and seller protection (since Bitcoin makes punishing scammers considerably harder). Once people have concrete and reasonably safe place to sell and exchange individual goods, we will see more large legitimate businesses spring up, where escrows will not be necessary for them and quality control will prevent scamming.

I completely agree. Some sort of auction site with clearcoin type escrow would be perfect. I'd be happy to invest in something like that.

If someone with some background as a developer or has connections with prolific developers and is also a well trusted member of the community is willing to pursue such a project seriously, it would have considerably positive implications for Bitcoin. And if anything I would also invest to fund such a project.

[Sjalq]

There is an upside to the hoarding though. I hoard because I believe there will be a market for BTC in the future and that the USD (or in my case ZAR) price will also be much higher than it is today. Without a market the exchange rate will be very little. However just acting as a means to transport money across jurisdictions BTC's current exchange rate it nowhere near where it is now.

Remember hoarding drives up the price either through bidding it by market action or through not bidding it down when you sell it into the market. This makes it more attractive to a larger group of people. Lets face it that $16.60 for a BTC is what got a lot people interested. The higher that number goes the more interested people will be. At present there is only about $110 million worth of BTC, that is not nearly enough to get someone like Amazon on board. Given if Amazon got on board the price would definitely adjust upwards to allow them to participate.

During hyperinflation something interesting happens. Sound currency is first hoarded, this sometimes takes years. Then once a sufficient quantity of the sound currency is in private hands, then the unsound currency is replaced in day to day trade. A similar thing might happen with bitcoin, once enough of it at a high enough price is in the hands of enough people, trade will take off rapidly and naturally.

Taken from an investor's perspective, you will only want to go through the bother of building a BTC business if you are sure you can make more money than a normal business. Else why bother? If the answer is; because BTC has some inherent philosophical value and deserves an economy, then it is too soon to do so.

A while back I encountered the Talent Exchange (interest free, debt based, online currency). They have quite a large following in the city of Cape town. To the point where I've heard of people living exclusively in the Talent economy. Still that market was only about $1million worth of trades in 2009, and that after years of building it.