Re-visit the question: What is bitcoin's value backed by?

[mjgolsen]

excellent analysis. representative value! love it.

[BitGo]

its the hashing HARDWARE backing bitcoin.

yup, if the hardware goes down, then bitcoin goes down: viva la miners!

hardware + agreements, since we agree that we will trade with BTC

[NewLiberty]

Backing is for redeemable currencies.  If a currency is a promise from an institution that issued it, that the institution would give the holder of the currency a specific amount of a specific good from the institution's stockpile, then it is redeemable, and backed by that quantity of goods.

So, when someone claims that modern fiat is "backed by the legislation of the issuer", or "backed by state coercion", these are false statements.
Redeeming the equivalent quantity of legislation or coercion in exchange for your fiat is also a physical/logical impossibility. Does any modern state run a redeemable fiat system these days?

No, and BASEL III puts us even further from redeem-ability, for better or worse, richer or poorer, we are married to it.

1 US Dollar is redeemable for 1 US Dollar worth of Tax burden fulfillment, in fact it's the ONLY thing that can be used to fulfill tax burdens.  So while this is not 'backing' in the traditional sense of it is a key reason why fiat currency has value.  Instances of states that try to issue fiat currency but fail to tax (The Confederacy in the American Civil war is a prime example) invariably have a collapse in their currencies valuation.

The computer MMORPG models do this through a variety of drains and still get interesting inflationary effects.

It looks like the next move IRL is to create ever greater too-big-to-fail issuers.  IMF Special Depository Rights may become the new global interchange currency.
For the US, the alternative is to let it fail like the USSR and break into many different states.  The number of those that hyper-inflated in Eastern Europe or had other currency failures and unrest exacerbated by currency games may prove instructive to avoid that in the other direction and enlarge the problem to SDRs.
That could provide another 30 years, by which time Bitcoin may also be in full swing.

[Arros]

Bitcoin works like a lottery ticket. IF it becomes the standard international currency, each bitcoin unit will be worth many many times its current value. So, even though the chance of success is very small, people gamble on it.

You could say bitcoin's value is backed by dreams of getting rich with a lot of luck.

[smscotten]

Bitcoin works like a lottery ticket. IF it becomes the standard international currency, each bitcoin unit will be worth many many times its current value. So, even though the chance of success is very small, people gamble on it.

You could say bitcoin's value is backed by dreams of getting rich with a lot of luck.

That's not value, that's anticipation of future value.

[EscrowBTC]

Bitcoin is backed by stupidity, just like any other deflationary cryptocurrency is.

PS: 1 BTC can't lose its value just because...

Two things are infinite: the universe and human stupidity

True

[johnyj]

Bitcoin works like a lottery ticket. IF it becomes the standard international currency, each bitcoin unit will be worth many many times its current value. So, even though the chance of success is very small, people gamble on it.

You could say bitcoin's value is backed by dreams of getting rich with a lot of luck.

This is an interesting view. Recently I'm researching that John Law's money creation scheme and he hold a similar view that money's value is decided by people's consensus and belief. People's belief used to be religion related, but now science and mathematics have become most of the people's belief

It is not necessary for bitcoin to become a standard international currency to make dream come true, just become a quality medium of saving is enough to raise its value constantly, since more and more savings from all over the planet will enter bitcoin system. Today, government can not fulfill their promise of pension payment, so many people will save for their retirement privately using bitcoin

If enough people accept bitcoin as a medium of payment, then its value will be established like fiat money. All it need to hold people's belief is the trust or credit rating, and in principle bitcoin has the highest credit rating among all currencies due to it is based on mathematics and networks

[manfred]

so many people will save for their retirement privately using bitcoin

lol, bitcoins as a retirement plan.
Gold had value for 1000's of years, fiat for century's and bitcoins lifespan will be decades. The speed at which technology moves anyone has to be the ultimate dreamer to believe bitcoin is the leading crypto in 90 years time. Its not a matter if a superior crypto will emerge but when. Could be days, weeks, months years.  Steam engines and bitcoins are similar in the sense as world changing, revolutionary but then replaced by better concepts. What is the confirmation speed again?

[Carlton Banks]

What is the confirmation speed again?

You'd be better to ask what the reason for the confirmation speed is. It was not a mistake or an oversight, it was a very deliberate design decision. Making it shorter also increases the amount of stale blocks produced by the whole network, and so adds more to the burden of discerning the longest chain.

[NewLiberty]

Bitcoin works like a lottery ticket. IF it becomes the standard international currency, each bitcoin unit will be worth many many times its current value. So, even though the chance of success is very small, people gamble on it.

You could say bitcoin's value is backed by dreams of getting rich with a lot of luck.

You could say it.
But that would not make it true. 

Value <> Backing
These two concepts are too often confused. 

Captain Pedantic to the rescue:
"The value is supported by dreams of getting rich with a lot of luck." yes, true.

But you can not redeem any amount of bitcoin for a specific amount of "dreams of getting rich" from anyone that I am aware of...
http://en.wikipedia.org/wiki/Private_currency#Currency_backing

[Arros]

Bitcoin works like a lottery ticket. IF it becomes the standard international currency, each bitcoin unit will be worth many many times its current value. So, even though the chance of success is very small, people gamble on it.

You could say bitcoin's value is backed by dreams of getting rich with a lot of luck.

That's not value, that's anticipation of future value.

If I use "value" like you apparently do, then I should say the right/license to mine a site issued by a government has no value because whatever you may or may not be able to dig up from that site, and whatever price you may be able to sell those things for are in the future and anticipation of future value is not value?

You're of course free to create your personalized jargon but whenever you read economics writing, value calculation always includes any return anticipated in the future.

[smscotten]

Bitcoin works like a lottery ticket. IF it becomes the standard international currency, each bitcoin unit will be worth many many times its current value. So, even though the chance of success is very small, people gamble on it.

You could say bitcoin's value is backed by dreams of getting rich with a lot of luck.

That's not value, that's anticipation of future value.

If I use "value" like you apparently do, then I should say the right/license to mine a site issued by a government has no value because whatever you may or may not be able to dig up from that site, and whatever price you may be able to sell those things for are in the future and anticipation of future value is not value?

You're of course free to create your personalized jargon but whenever you read economics writing, value calculation always includes any return anticipated in the future.

Well, if we were talking economics jargon, we wouldn't ever use the word "value" without prefacing it to specify whether we mean nominal, real, future, present etc value. But any present valuation based on future value must also incorporate risk into the formula. Otherwise, to take your example, every lottery ticket would be valued in the millions of dollars.

Granted, you did use and even emphasize the word "if" which makes a premise of the increase in value. Yes. If you determine with certainty that the value will increase, you should include that value. But to take that and turn it around and say that that uncertain future increase (which could just as easily be a decrease) is the what gives the currency present value, well, you're not describing any kind of value, you're describing what I believe the economists like to call irrational exuberance.

[Arros]

So, smscotten, would you say the "right to mine" in my example has value? Do you think newspaper would say such a right "has no value"? Do you think economics literature would say such a right to mine "has no value"?

What do you think is the value of source materials from which people can make desireable things people consume? They are valuable only because people anticipate they can be converted into some things they can sell at some future time. There is also uncertainty involved in how the conversion process will go and whether people will actually buy from you etc.

Value is derived from the final act of consumption which is often in the uncertain future. If we want to get numerical, we do need to be more clear about how things like uncertainty are handled (or not  ). However, that's very far from dismissing anticipation of the future as the basis of value with which people use to make decisions now, like buy or sell.

[smscotten]

So, smscotten, would you say the "right to mine" in my example has value? Do you think newspaper would say such a right "has no value"? Do you think economics literature would say such a right to mine "has no value"?

What do you think is the value of source materials from which people can make desireable things people consume? They are valuable only because people anticipate they can be converted into some things they can sell at some future time. There is also uncertainty involved in how the conversion process will go and whether people will actually buy from you etc.

Value is derived from the final act of consumption which is often in the uncertain future. If we want to get numerical, we do need to be more clear about how things like uncertainty are handled (or not  ). However, that's very far from dismissing anticipation of the future as the basis of value with which people use to make decisions now, like buy or sell.

You haven't given me enough information about the mine. I would say that the mining rights anywhere have some value. Whether that value exceeds the cost of bringing that value to market is an open question. I don't know enough about geology to frame an example properly but if there are 20 other lots which are near to the one you're offering (near enough to have similar mineral properties but far enough that we wouldn't be chasing after the same of whatever mineral it is we're mining for) and three of those hundred mined a billion dollars worth of whatever it is in a year while the other 17 each mined 10 million dollars' worth, I'd estimate that plot's value at 158.5 million dollars. If I knew that it would cost 200 million dollars to mine that land, yeah, I'd say it was basically a worthless stake, though clearly it has value, simply value that does not meet the cost to get it.

I'm not dismissing future value, I'm saying that you can't count as "value" the highest possible profit, ignoring risk. Without having some hypothesis about the measure of the risks of profit or loss, there isn't any set of numbers from the future that you can attach to current value to modify that. If you have some piece of information about factors that increase the likelihood of higher value over time, then you can count it. But in this nebulous example the added value comes from whatever those factors are. The added value does not come from the increase in value. The increase in value doesn't just cause itself.

[smoothie]

Just like anything else that is accepted as payment it is backed by people's confidence. Yes SHA256 is so far been secure it is people's confidence that backs it which is then backed by peoples money, time, efforts, talent, etc.

[NewLiberty]

Just like anything else that is accepted as payment it is backed by people's confidence. Yes SHA256 is so far been secure it is people's confidence that backs it which is then backed by peoples money, time, efforts, talent, etc.

Bitcoin's value is supported by people's confidence etc, but that is different than being backed.
The world is so unaccustomed to a backed currency, that the meaning of backing is at risk of being lost to time.

[Arros]

smscotten, I was not ignoring risk. Why would I say it "Works like a lottery ticket" and "the chance of success is very small, people gamble on it" if I were? (That bitcoin will most likely fail and have it's market price crash to 0 in the next decade or so is in fact my guess, but that's not important here.) The market price right now is a reflection of both the very small chance of success and very high payoff just in case a miracle happens.

In fact, market price is often the most convenient way to estimate value because it's readily available. Value of any asset naturally involves future events which are uncertain, and as such, we usually can only use educated guesses to come up with an numerical answer. Market price is a kind summary of market participant's guesses, often as reliable (or not) as other complicated methods people come up with.

Regarding my "right to mine" example, the point is any value you can attribute to it, be it very high or very low, positive or otherwise, is neccessarily derived from what may happen in the uncertain future. You shouldn't need further information to see that. Whatever you may or may not find in that site, whatever prices those things may or may not sell for, and whether the government collapse or not or just reneage on their promise to screw you, are uncertain future events. When a government auctions such a right, people use their educated guess to estimate their numerical answer for value and use that to work out how much to bid.

Different people will have different estimations and that's just the nature of it. Value in this context is a variable people estimate to help with their decision making. It's not some kind of idealistic concept, or for moral commentary. It's a pragmatic concept that is involved in decision making.



Relating back to the actual topic of this thread, bitcoin's value hinges on the future. Part of it is the long term success as a currency system, and part of it is whether someone may buy your bitcoin off your hands at some profitable price in the next few months etc. For people who are not buying food or some such with it, it's value is entirely derived from future events. Therefore, people can only come up with their estimate by guessing now. Since the big payoff contingency is extremely unlikely (my guess and market participants mostly seem to agree), I whimsically said it's "backed by dreams of getting rich with a lot of luck."

[smscotten]

Arros, I just don't buy the proposition that Bitcoin will be more valuable in the future because it will be more valuable in the future therefore the price will be higher in the future therefore the value is higher now, without first asserting some cause for the future rise in value or some cause for the present value.

That reason for the rise in value doesn't even have to be substantial or valid because we can have another conversation about that. Bitcoin will be more valuable in the future because people love words with the letters "B" and "T" in them? OK fine, I'll accept that or at least argue it as a separate point. Bitcoin will be more popular because people want to believe that they will get rich and can delude themselves into believing that it will go up whether it will or not, which is likely to become a self-fulfilling prophecy bubble market? Well, that's something too.

What isn't something (alcohol poisoning? that's a thing?) is to claim that it is valuable today because it will be worth more tomorrow than it is today without establishing either that it *is* worth something today or that it might go up. If you're asking where the value is coming from, the answer can't be that the value is coming from its value. That just doesn't mean anything, that's all.

[johnyj]

Relating back to the actual topic of this thread, bitcoin's value hinges on the future. Part of it is the long term success as a currency system, and part of it is whether someone may buy your bitcoin off your hands at some profitable price in the next few months etc. For people who are not buying food or some such with it, it's value is entirely derived from future events. Therefore, people can only come up with their estimate by guessing now. Since the big payoff contingency is extremely unlikely (my guess and market participants mostly seem to agree), I whimsically said it's "backed by dreams of getting rich with a lot of luck."

This is from the perspective of a speculator, who just want to make some quick profit in fiat money. Admittedly, speculation always affect the short term price discovery

People will gain much more confident in bitcoin if they understand why today's fiat money system is fundamentally flawed. Unfortunately they were born into this established system and they seldom question the rationality of its current design

Most of the children think the sun goes around the earth, since they feel that earth is static and sun is moving. Same, most of people think fiat money has a constant value but anything else's price is fluctuating. This misbelief has costed them a fortune, they will sooner or later realize this, it is just a matter of time

[NewLiberty]

Dollars are designed to always be decreasing in value, to encourage investment say the Keynesians.  So measure the market in something that isn't changing it's worth, such as gold.


Since the "bottom" of the market at the last crash, the market has gone down.  But in nominal dollars it seems higher, doubled!  But the Dollar is not worth as much.
Still due to dollar inflation, market investors owe a lot of money in capital gains taxes, because the stock prices are hitting new highs, so selling them is a "profit".

I'm not much for currency investment, but I do respect Gresham's law when it applies.  Yes I would rather spend my dollars and would rather accept bitcoin payments.  Am not so worried about the carry risk with bitcoin, the average has been in my favor.  I also enjoy spending my bitcoin, but I do so preferentially with those with whom I have some personal compassion or ongoing business relationship, because I want them to still be around if there is some currency crisis.

I also like to spend bitcoin with folks that are new to bitcoin or just curious.  It provides a great way to introduce someone who is just contemplating it.  For every new person we bring into the new monetary economy, we do each other a favor that will never be forgotten.

Who among us does not remember their first bitcoin transaction?