Anyone want to help me tear this to shreds?

[johnyj]

With his theory, he can not explain this: With the arriving of ASIC, the mining efficiency increased by 10 fold but the price of bitcoin also raised by 10 fold

The daily coin supply is fixed, efficiency has nothing to do with coin generation. What really matters is the number of miners.  If the number of miners doubled and their individual cost stays the same, the coin price will double, and the total electricity consumption will also double

It can also be like this: The number of miners do not change, but each of them use double electricity to mine the coin, in this case the coin price will also double

Well, nope, this is the labour theory of value. Cost follow price, modified with speculative foresight and errors. Same with gold.

This is not labour theory of value. It is a mixture of supply/demand analysis and some special character of bitcoin

The daily coin supply will be cut by half every 4 years, while the adoption rate will be higher and higher, the demand will always outpace supply in the near future

However, even demand is higher, those demand will not directly translate into a higher exchange rate, because smart investors will always consider the cheapest way to get coin, thus investing in mining rigs. So fiat money will first flow into mining rig producers and power companies, only after mining cost rose above coin price, they will start to buying coins

This is the reason that mining cost will always drive the exchange price of bitcoin in the near future

Currently mining is still very profitable with latest ASIC devices. It is easy to forecast that the price will not rise too much until mining becomes barely profitable

This spring, after the deliver of working ASIC devices, many people realized that mining with GPU will not be profitable and their only way to get coin (If they did not preorder ASIC last year) is to buy, that pushed price up quickly

And current situation proved that they were right, if they put those money into ASIC rigs order at that time, they will be at the end of the queue to get ASIC devices, thus barely make some coin. (In March, $4000 could buy you 80 coins, but if you order some ASIC devices from BFL with $4000, you will never be able to mine 80 coins)

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[notme]

Electricity price? Why would I care?

Clouds, night.

[xxjs]

With his theory, he can not explain this: With the arriving of ASIC, the mining efficiency increased by 10 fold but the price of bitcoin also raised by 10 fold

The daily coin supply is fixed, efficiency has nothing to do with coin generation. What really matters is the number of miners.  If the number of miners doubled and their individual cost stays the same, the coin price will double, and the total electricity consumption will also double

It can also be like this: The number of miners do not change, but each of them use double electricity to mine the coin, in this case the coin price will also double

Well, nope, this is the labour theory of value. Cost follow price, modified with speculative foresight and errors. Same with gold.

This is not labour theory of value. It is a mixture of supply/demand analysis and some special character of bitcoin

The daily coin supply will be cut by half every 4 years, while the adoption rate will be higher and higher, the demand will always outpace supply in the near future

However, even demand is higher, those demand will not directly translate into a higher exchange rate, because smart investors will always consider the cheapest way to get coin, thus investing in mining rigs. So fiat money will first flow into mining rig producers and power companies, only after mining cost rose above coin price, they will start to buying coins

This is the reason that mining cost will always drive the exchange price of bitcoin in the near future

Currently mining is still very profitable with latest ASIC devices. It is easy to forecast that the price will not rise too much until mining becomes barely profitable

This spring, after the deliver of working ASIC devices, many people realized that mining with GPU will not be profitable and their only way to get coin (If they did not preorder ASIC last year) is to buy, that pushed price up quickly

And current situation proved that they were right, if they put those money into ASIC rigs order at that time, they will be at the end of the queue to get ASIC devices, thus barely make some coin. (In March, $4000 could buy you 80 coins, but if you order some ASIC devices from BFL with $4000, you will never be able to mine 80 coins)

It is really the labour theory of value, but I have to add that the capital must be regarded as condensed work to make it obvious. There is also a time lag, and speculation and speculation errors.

The mainstream theory of value is that the value has its roots in the minds of the market actors. If the value of something rises, labour and capital lines up behind that, until the diminishing return makes it unprofitable to invest more.

Same with a downward price move. First the miners will stop the machines and fire the manpower to keep it, with even lower price the equipment will be abandoned to save the machine room space.
Every decision of course take everything into account, obviously including the price forecast.

[johnyj]

The mainstream theory of value is that the value has its roots in the minds of the market actors. If the value of something rises, labour and capital lines up behind that, until the diminishing return makes it unprofitable to invest more.

This theory only applies to goods and services, you will have trouble applying this theory to money


Under labour theory of value, if the cost dropped to $50 to mine a coin, miners will sell each coin at a price little bit over $50, thus drive the price down

But this does not apply for bitcoin, since the coin supply is always fixed and it is getting less and less. At mean time, the demand is getting higher and higher. The price will rise forever long term wise and mining cost will decide the lower bound of the price range

In reality, after the mining cost dramatically reduced (the arriving of ASIC devices in March) , the bitcoin price skyrocketed. This means the bitcon's price is mainly decided by the degree of competition among miners. ASIC devices absolutely raised the competition to an unprecedented level

[Rassah]

The mainstream theory of value is that the value has its roots in the minds of the market actors. If the value of something rises, labour and capital lines up behind that, until the diminishing return makes it unprofitable to invest more.

This theory only applies to goods and services, you will have trouble applying this theory to money

How is money different from any other good or commodity?

But this does not apply for bitcoin, since the coin supply is always fixed and it is getting less and less. At mean time, the demand is getting higher and higher. The price will rise forever long term wise and mining cost will decide the lower bound of the price range

How can mining cost decide the lower bound of the price? This is what the other guy was insisting, which didn't make any sense to me. If the market value of bitcoin is $90, and due to increase in electricity prices (it's winter, so more people paying for heating) it costs $100 to make a bitcoin, how can a miner sell his bitcoin for $100 in a $90 market?

This means the bitcon's price is mainly decided by the degree of competition among miners.

Can you explain this process? Aren't miners a relatively teeny-tiny proportion of the exchange market where people compete for bitcoins?

[aigeezer]

Interesting thread. Beware of "Rational Behavior" arguments, of one type or another.

Keep the ideas coming, please.

[xxjs]

The mainstream theory of value is that the value has its roots in the minds of the market actors. If the value of something rises, labour and capital lines up behind that, until the diminishing return makes it unprofitable to invest more.

This theory only applies to goods and services, you will have trouble applying this theory to money


Under labour theory of value, if the cost dropped to $50 to mine a coin, miners will sell each coin at a price little bit over $50, thus drive the price down

But this does not apply for bitcoin, since the coin supply is always fixed and it is getting less and less. At mean time, the demand is getting higher and higher. The price will rise forever long term wise and mining cost will decide the lower bound of the price range

In reality, after the mining cost dramatically reduced (the arriving of ASIC devices in March) , the bitcoin price skyrocketed. This means the bitcon's price is mainly decided by the degree of competition among miners. ASIC devices absolutely raised the competition to an unprecedented level

Bitcoin value is decided, like for all other things, from the minds of every actor.

[johnyj]

How is money different from any other good or commodity?

People tends to believe that money is a benchmark of value, unit of counting, just like they always consider one meter is a fixed amount of distance. They consider one dollar contain a fixed amount of value regardless of production cost (Actually the cost of making one dollar is close to zero). Although this is just misconception, but majority of people think this way. Anyway, this is a bit off-topic

How can mining cost decide the lower bound of the price? This is what the other guy was insisting, which didn't make any sense to me. If the market value of bitcoin is $90, and due to increase in electricity prices (it's winter, so more people paying for heating) it costs $100 to make a bitcoin, how can a miner sell his bitcoin for $100 in a $90 market?

Can you explain this process? Aren't miners a relatively teeny-tiny proportion of the exchange market where people compete for bitcoins?

Suppose that investors have 1 billion dollar waiting to be invested in bitcoin, would they just buy bitcoin from exchanges?

They won't. Due to extremely limited supply of coins on the market, even 1 million dollar order will raise the price by 10%, 1 billion dollar might raise the price to $100K and they still can not get enough coins

So most of those money will first go to mining devices, since that is the lowest possible cost to acquire coins, and it will not affect the exchange rate. Only when mining becomes no longer profitable, those money will go to exchange to purchase coins

It also means, no matter how much fiat money are waiting to be invested in bitcoins, as long as mining cost is lower than the exchange rate, those money will flow into ASIC devices and electricity bills. There might be much more money than you can imagine waiting to be invested in bitcoins

And believe me, 1 billion dollar is so tiny amount of money, FED has been printing 2.8 billion dollar per day for almost a year

[Rassah]

They won't. Due to extremely limited supply of coins on the market, even 1 million dollar order will raise the price by 10%, 1 billion dollar might raise the price to $100K and they still can not get enough coins

So most of those money will first go to mining devices, since that is the lowest possible cost to acquire coins, and it will not affect the exchange rate.

But that's the thing, it's not the lowest possible cost. Or it doesn't have to be. If bitcoin stays at $120, and enough miners join that mining profitability is about zero, if electricity prices go up due to demand, it will be cheaper to buy coins on the exchange than to buy mining devices. Even with mining being profitable it's a bit more expensive, since you have to pay off the cost of the hardware while you are paying for electricity. Plus $1 mil dumped into the market will get you about $1mil of coins right now, plus some loss due to price increase, whereas $1mil dumped on mining hardware will maybe get you enough coins, but that's assuming everyone else isn't buying lots of hardware and taking your piece of the profits, too.

Regardless, you said mining costs decide he lower bound of the bitcoin price. Does that mean you claim that bitcoin proce can not drop below mining costs?

It also means, no matter how much fiat money are waiting to be invested in bitcoins, as long as mining cost is lower than the exchange rate, those money will flow into ASIC devices and electricity bills. There might be much more money than you can imagine waiting to be invested in bitcoins

Hmm, I have been mining, and I gotta say, throwing money into mining hardware right now is probably a stupid idea. It was "profitable" for those who preordered early, since they got their devices first and were able to mine before difficulty skyrocketed, but it actually wasn't profitable, because if they had bought bitcoins instead of preordered hardware, they would have had a lot more coins than they will likely ever be able to mine at this point. And anyone new hoping to mine is likely going to get their devices after difficulty increases have made them not worth it, too.

[johnyj]

Regardless, you said mining costs decide the lower bound of the bitcoin price. Does that mean you claim that bitcoin price can not drop below mining costs?

Yes it can, if the bitcoin price is constantly dropping, then less and less people will invest in mining devices, investors only need to put some low price buy order every day and they will be automatically filled. But due to limited supply of coins, the sell pressure is very low, when there is no panic selling, it is very difficult to buy large amount from exchange (Those who wanted to sell already sold, those currently holding coins are all ROIed, they will not sell even the price dropped)

Hmm, I have been mining, and I gotta say, throwing money into mining hardware right now is probably a stupid idea. It was "profitable" for those who preordered early, since they got their devices first and were able to mine before difficulty skyrocketed, but it actually wasn't profitable, because if they had bought bitcoins instead of preordered hardware, they would have had a lot more coins than they will likely ever be able to mine at this point. And anyone new hoping to mine is likely going to get their devices after difficulty increases have made them not worth it, too.

True, it is difficult to estimate the number of pre-order and new ASIC chips that entering the market now(For example bitfury just added 180T hash power in a couple of weeks)

I think there are some psychology behind mining enthusiasm:

1. People with investment background still have some old habbit, they want to produce bitcoin instead of buy. Once the machine is built, it can mine forever. But no one have a good clue about how fast the return is diminishing, it is all guess

2. Even mining cost is a bit higher than the current market price, it is still better than buying large amount directly from the market since that will raise the exchange rate dramatically and get a bad excute price


I believe that there are many business plans being laid out. Just had a look at http://www.cryptx.com/ yesterday, a solar powered data center has been bought

All these will ensure that the competition and cost of mining will rise quickly approaching the market price, then we'll see what will happen. My guess is that the bitcoin price will rise, since more money will be redirected to exchanges by then

[gurcani]

One obvious way to show that a theory is wrong is to look at its limits: What happens if the supply of bitcoins suddenly dropped to zero? (forget the technical aspect, and the panic this would generate among asic companies etc. this is pure gedanken from a social perspective...) Does bitcoin loose all its value? does it become infinitely valuable?

If there was a local (in time) relation between kw/h and price, one of the two should happen, right? But I am pretty sure that neither would happen. Bitcoin price would probably go up somewhat. But that would be more psychological (knowing that the supply is now even more limited, people would predict that it would go up, so they would want to sell it for a higher price).

I actually have some sympathy for the labor theory. However the relation between labor and value is not a one-to-one relation and it is not local in space-time. Globalization means you have to compete with China, but there is also "memory" and fluctuations, so you have to compete with the guy from 2 years ago who has decided to keep his savings in bitcoins rather than dollars.

Bitcoin has no intrinsic value. As a currency, It is actually a system to keep track of value (earlier ripple -i.e. ripplepay- was more explicit about this, but it never became popular since it lacked incentive). Mining is actually a red harring. It is just to interest people and resolve the problem of power concentration due to printing of the exchange units (traditionally done by the central banks).

Consider this. I do translation to earn bitcoins, then I buy stuff with them. The guy who sells me the stuff with bitcoins uses them to do other things. It is the "translation" or the "thing" that I bought with it which has any use value. Bitcoin simply keeps track of the fact that I did translation for someone. But within a free market framework such that the value of that translation may increase or decrease compared to if I had accepted dollars instead of bitcoins or if I did the translation now.

Now if you think, dollar is the "unit" of value, than yes the bitcoin value has been increasing. This means that the translation I did in 2011 is worth something like 10 translations now. This is true in space also, the work I do in my everday life is worth 10 units of the same work if it was done in China instead of where I live.

Bitcoin is designed such that it is a very advantageous repository of value as compared to dollars. If I keep my savings in bitcoins instead of dollars, they preserve their value much better over time (no inflation, limited supply etc.).