Why is Bitcoin so cheap?

[Wary]

Economists say that in an effective market price of an item is it's future utility times probability of it happen times our time preference. That is if chances of Bitcoin trading for 500K$ in 10 years time are, say, 50% and we value a dollar today twice as much as a dollar in 10 years time, then Bitcoin today should be trading at 125,000$ apiece. Still it's trading thousand times cheaper. Why?

I can see two explanations:

-We estimate chances of Bitcoin's success around 0.1%
-We prefer a dollar today to 500 dollars in 10 years time.

Both these explanations are obviously untrue. Then why is BTC so cheap?

Edit: fixed typos

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[Birdy]

To apply such numbers, you have to know about them.
There are a lot of things you have to learn about Bitcoin before you can try to estimate the chance of success.
Also don't trust what economists say xD

[Wary]

To apply such numbers, you have to know about them.
There are a lot of things you have to learn about Bitcoin before you can try to estimate the chance of success.

There are a lot of people who have learned about BTC. So now we see what the market in a whole thinks about BTC. Ask any libertarian, he will confirm that markets are very effective at estimating chances and values.  But the BTC market makes incredible error, it misses at least 3 orders of magnitude! Why?

[stevedekorte]

There are other factors like the alternatives and their risks over that period (e.g. the S&P has nearly doubled in nominal value over the last two years and there are many high yield bonds of questionable risk) but I'd guess 0.1% is a fair estimate of what the market considers the likelihood of BTC having roughly the current market cap of gold in 10 years.

Of course, the market is made almost entirely of traders who have no way to accurately evaluate the risk (if they could, we wouldn't have bubbles). Even understanding Bitcoin itself requires a good understanding of computer science and economics - what % of traders have a firm grasp of both? And who can predict the global economic climate over the next decade or what financial regulation and monetary policies will be chosen? Anyone that could might easily make more over that period than even this potential 5000x ROI on BTC.

[chriswilmer]

Economists say that in an effective market price of an item is it's future utility times probability of it happen times our time preference. That is if chances of Bitcoin trading for 500K$ in 10 years time are, say, 50% and we value a dollar today twice as much as a dollar in 10 years time, then Bitcoin today should be trading at 125,000$ apiece. Still it's trading thousand times cheaper. Why?

I can see two explanations:

-We estimate chances of Bitcoin's success around 0.1%
-We prefer a dollar today to 500 dollars in 10 years time.

Both these explanations are obviously untrue. Then why is BTC so cheap?

Edit: fixed typos

That's what you would expect in equilibrium. Right now, you have "bears" who are waiting for a short-term dip in the price before buying, which I only state as one example of a short-term effect that is not captured by the economist's statement.

[Birdy]

To apply such numbers, you have to know about them.
There are a lot of things you have to learn about Bitcoin before you can try to estimate the chance of success.

There are a lot of people who have learned about BTC. So now we see what the market in a whole thinks about BTC. Ask any libertarian, he will confirm that markets are very effective at estimating chances and values.  But the BTC market makes incredible error, it misses at least 3 orders of magnitude! Why?

Well, personally I don't think the market is so effective every time, where it really excels is adjusting very fast after something is known as a good or bad investment though.

[DaFool]

Where do you take the number $500k from? Just imaginination, some sort of calculation?

I mean if bitcoin should be implemented into the financial service chain in terms of online transactions from e- commerce or as a "behind the scenes financial vehicle" in services like Western Union then the amount of money transfered by them has to fit into the existing 21m coins. So for that to be possible the price would have to rise. But to $500k?

Aside from that people are just way too risk averse and think that only the fiat in their bank account is real money instead of seeing it a another trading position. (Which it is, its a bet that fiat currency will rise in value- a very stupid one considering the amount will never shrink.)

[LightRider]

Falkvinge says it's over valued.

https://bitcointalk.org/index.php?topic=293809.0

[Pokerfan]

Bitcoin money supply is currently at 2.5 billion USD (including future coins). That's not bad! There's just not demand for more at this point in bitcoin adoption.

[stevedekorte]

"Where do you take the number $500k from? Just imagination, some sort of calculation?"

 The world gold supply is valued at around $12T. Should bitcoin effectively replace gold as the global decentralized ledger of choice, each BTC would be worth ~$550K in 2013 dollars ($15T/21M).

[Birdy]

"Where do you take the number $500k from? Just imagination, some sort of calculation?"

 The world gold supply is valued at around $12T. Should bitcoin effectively replace gold as the global decentralized ledger of choice, each BTC would be worth ~$550K in 2013 dollars ($15T/21M).

Even if that sounds crazy, but the number would be even higher.
I am very sure that at least 1 mio Bitcoins are lost forever.

The real question is, will Bitcoin ever be used like gold/gain gold's market cap?

[Adrian-x]

The real question is, will Bitcoin ever be used like gold/gain gold's market cap?

For some insight we head to:
https://bitcointalk.org/index.php?topic=68655.0

[smoothie]

"cheap" is just a perception.

Bitcoin is valuable is the way I see it.

[HeliKopterBen]

Nothing goes up in a straight line.  It will take time.  Besides, bitcoin is not ready for that valuation yet because no viable solution exists for the average person to use the currency securely.  It takes a certain skill level to safely secure your money at this point.  If bitcoin went mainstream now, you would hear horror stories about how newbies got wiped out.

[Wary]

Where do you take the number $500k from? Just imaginination, some sort of calculation?

Gold, M1, etc... It deserves a separate thread (and there are ones around), but it is irrelevant for this thread. Be it 1M or 0.1M, it's still orders of magnitude off. The question is why.

[Wary]

Nothing goes up in a straight line.  It will take time.  Besides, bitcoin is not ready for that valuation yet because no viable solution exists for the average person to use the currency securely.  It takes a certain skill level to safely secure your money at this point.  If bitcoin went mainstream now, you would hear horror stories about how newbies got wiped out.

I agree, there are a number of problems to be resolved. But what are chances of them to be resolved in 10 years time? Market seems to think that the chances are only 0.1%.

[Wary]

There are other factors like the alternatives and their risks over that period (e.g. the S&P has nearly doubled in nominal value over the last two years and there are many high yield bonds of questionable risk) but I'd guess 0.1% is a fair estimate of what the market considers the likelihood of BTC having roughly the current market cap of gold in 10 years.

Of course, the market is made almost entirely of traders who have no way to accurately evaluate the risk (if they could, we wouldn't have bubbles). Even understanding Bitcoin itself requires a good understanding of computer science and economics - what % of traders have a firm grasp of both? And who can predict the global economic climate over the next decade or what financial regulation and monetary policies will be chosen? Anyone that could might easily make more over that period than even this potential 5000x ROI on BTC.

So, the explanations are:
1. Market is wrong (3 orders of magnitude off!). Because most of market players don't understand BTC/economics.
2. Market is right. Chances of BTC "to make it" are not 20%, as Peter Thiel thinks, not 90% as my recent poll shows, but 0.1%

[User705]

As a traded currency the price is exactly what one trader is willing to sell to another.  Don't forget that imbalances always exist when discussing huge all encompassing systems and trying to price them as a whole.  Example at the hight of Japan's bubble the forbidden city blocks were considered to be worth more the whole state of California.  Was it true?  Of course not.  Where individual units of real estate both in California and Japan still trading at prices that suggested such an imbalance?  Of course yes.  Or consider the following example that when Nixon closed the gold window the entire stock market valuation was greater then the existing supply of gold on earth when converted to gold at the then mandated rate.  Does that mean that no trades occurred at those prices?  Of course they did.  A currency and especially BTC since it has no physical properties is just a reference.  And while taking a step back and looking at the big picture is helpful there's a saying that the market can be wrong longer then you can be solvent or alive for that matter.

[NewLiberty]

In your calculation do you also assume that all other crypto currency is worthless and remains so?

[Singlebyte]

Bitcoin is valued at EXACTLY what is is worth TODAY.  No more and no less.  The market takes ALL factors into consideration and dictates what its price is at any given moment in time.  Tomorrow BtC will also be exactly right...regardless if it is up or down.  If the equilibrium starts to tilt in any direction the market will correct it within minutes.