Why is Bitcoin so cheap?

[Zangelbert Bingledack]

It's simple. Less than 0.1% of people know enough about Bitcoin to believe with high confidence that there is a 20% chance it will reach that price in ten years, let alone people with the capacity to risk substantial capital and the patience and time to set up a secure wallet and jump through exchange hoops. Heck, even on this forum few people are truly confident of this, if they believe it at all.

It takes an awful lot of knowledge, understanding, dedication, research, patience, thinking, vision, and even daringness regarding possible legal risks to fill the above prerequisites. On top of all that, most of the people who understand economics (Austrian economics, of course) well enough to get why Bitcoin will change the world are convinced by that same economics they learned that "Bitcoin cannot be money." Moreover, Bitcoin sounds really cheesy/scammy when people first hear about it, and it relies on many counterintuitive, "obviously impossible" facts, like how a private key can be used to sign a transaction without revealing the key when broadcasting it.

[polarhei]

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

The reason is, when becoming more popular, the preparation cost is extremely low. Today, one 300Mh/s SHA-256's production cost is extremely low as few penny when making in thousands.

The is the game of trust. Some people still believe the being means nothing like game token.

[mkbit88]

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.

The market isnt perfect and there isnt nearly enough use and liquidity for perfect "correction within minutes." Consider prices differences between exchanges: Yes they follow gox, but why is there any but the most marginal difference between all the exchanges? (yes I know why, but for the sake of argument)

Furthermore, yes an asset can be under or over valued. The market does not set a prices for us, we set the price on markets. If for instance, you knew total estimated gold or oil reserves were completely wrong in some way, that asset is under or over valued because of a lack of information to traders.

[Peter Lambert]

Maybe the market believes that there will be sufficient credit money built on top of the current bitcoin system for the current bitcoin money supply to sufficiently serve the needs of the future bitcoin users? That way, even as adoption and use of bitcoins grows, the current price could remain stable. In the end it depends on if bitcoins are used more to store value or as way to transfer value. If Bitcoins replace gold, then the monetary value of bitcoins will need to be high and the value of a single bitcoin will be 500k or something like that. On the other hand, if bitcoins are just replacing PayPal and Western Union then each bitcoin will not have to be worth much more than they are now, since you can reuse the bitcoin over and over, and if people use systems built on top of bitcoin that allow instant transfers (like how many webwallets allow instant transfer from one user to another of the same wallet system) the velocity of money can be very high.

[maqifrnswa]

economist also say that in an efficient market, the value of something is equal to its marginal cost.
The marginal cost of a bitcoin is simply the electricity needed to run the miner divided by yield. Right now, that is about $2.42/bitcoin.

[Birdy]

economist also say that in an efficient market, the value of something is equal to its marginal cost.
The marginal cost of a bitcoin is simply the electricity needed to run the miner divided by yield. Right now, that is about $2.42/bitcoin.

What about all the other costs?
hardware costs, risks of being scammed, waiting time until delivery, work involved to get the stuff running?
They don't vanish into thin air, even more as Bitcoin mining hardware is only useful for a small time span (due to currently rising difficulty).

[Peter Lambert]

economist also say that in an efficient market, the value of something is equal to its marginal cost.
The marginal cost of a bitcoin is simply the electricity needed to run the miner divided by yield. Right now, that is about $2.42/bitcoin.

So you are saying you can get more bitcoins out of your miner if you just dump a bit more electricity into it? I was under the impression that miners all ran at pretty much the highest possible value?

Or are you saying that if I spend $2.42 on equipment and electricity then I should be able to find a block sometime within the next 25 days?

[ImI]

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?

BTC is a cryptocurrency but its not the only one. Its very likely that in the coming decade other cryptocurrencies come around that will outperform BTC.

So your assumption of 500K$ MAY be wrong.

[wiggi]

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%

Less than 0.1% to go to 500k because it's not 100 vs 500000, there should be some kind of "bulk of the probability distribution".
(e.g. when Bitcoin goes to 1k or 10k and struggles against real competition from big tech companies)

But who can look at the Btc price chart and say "efficient market" with a straight face?

[BombaUcigasa]

Possible explanation:
- My income does not allow me to buy so much bitcoin that I shift the price to 100k...
- Ever heard about those things called demand and offer? Those can be quite pesky...
- What is the utility of a dollar and a bitcoin now? I know it's 10% and 0% respectively for me, how about you?

[adamstgBit]

- What is the utility of a dollar and a bitcoin now? I know it's 10% and 0% respectively for me, how about you?

please explain 10% and 0%?

[notme]

"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?

The velocity of Bitcoin in such a situation would be much higher then the velocity of gold.  Bitcoin is much easier to send around the world.  Even with significant lost Bitcoin, it could fill gold's role with a much lower price than half a million each.

[BombaUcigasa]

- What is the utility of a dollar and a bitcoin now? I know it's 10% and 0% respectively for me, how about you?

please explain 10% and 0%?

I can't buy anything with USD here. Should I try to use it, only way it might be possible is at an exchange office or paying my various internet service bills which are about 10% of my expenses. Everything else is in another currency.

As for bitcoin, I can only spend less than 1% every month, because nobody and nothing here accepts it.

[Birdy]

The velocity of Bitcoin in such a situation would be much higher then the velocity of gold.  Bitcoin is much easier to send around the world.  Even with significant lost Bitcoin, it could fill gold's role with a much lower price than half a million each.

But isn't the point in gold's role just having it to save your wealth aka store it?
So the duration of the transportation shouldn't have that much influence on that.

[notme]

economist also say that in an efficient market, the value of something is equal to its marginal cost.
The marginal cost of a bitcoin is simply the electricity needed to run the miner divided by yield. Right now, that is about $2.42/bitcoin.

What about all the other costs?
hardware costs, risks of being scammed, waiting time until delivery, work involved to get the stuff running?
They don't vanish into thin air, even more as Bitcoin mining hardware is only useful for a small time span (due to currently rising difficulty).

All electricity used becomes heat.  It is only a cost if you don't have a demand for heat.  In the winter, mining has no marginal cost since it saves me from burning as much propane.  Hardware, however, is becoming pricey.

[notme]

The velocity of Bitcoin in such a situation would be much higher then the velocity of gold.  Bitcoin is much easier to send around the world.  Even with significant lost Bitcoin, it could fill gold's role with a much lower price than half a million each.

But isn't the point in gold's role just having it to save your wealth aka store it?
So the duration of the transportation shouldn't have that much influence on that.

It is also used for international settlements.  With bitcoin this can be done more frequently and at lower cost.

[Wary]

The velocity of Bitcoin in such a situation would be much higher then the velocity of gold.  Bitcoin is much easier to send around the world.  Even with significant lost Bitcoin, it could fill gold's role with a much lower price than half a million each.

But isn't the point in gold's role just having it to save your wealth aka store it?
So the duration of the transportation shouldn't have that much influence on that.

It is also used for international settlements.  With bitcoin this can be done more frequently and at lower cost.

From other hand, if you get your paycheck monthly, the money just sit on your account for (average)half-month. Bitcoin won't change this timing.

[byronbb]

The velocity of Bitcoin in such a situation would be much higher then the velocity of gold.  Bitcoin is much easier to send around the world.  Even with significant lost Bitcoin, it could fill gold's role with a much lower price than half a million each.

But isn't the point in gold's role just having it to save your wealth aka store it?
So the duration of the transportation shouldn't have that much influence on that.

But it's utility is diminished because it's heavy and must be guarded all the time. Think about a million dollars of gold vs a million dollars of bitcoin, the later is magnitudes easier to keep secure and spend. Bitcoin has the convenience of cash with the security of gold, insomuch as there is no third party risk of a Central Bank.

[Zaih]

The equilibrium in determining Bitcoins price is heavily influenced by so many other factors, including the extreme lack of knowledge about it.

[Odalv]

economist also say that in an efficient market, the value of something is equal to its marginal cost.
The marginal cost of a bitcoin is simply the electricity needed to run the miner divided by yield. Right now, that is about $2.42/bitcoin.

I can send you $5,000 if you can mine 1,000 BTC for me. At price $2.42/bitcoin you will have more than 100% return.