Why is Bitcoin so cheap?

[smoothie]

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.

That would be so in ideal world with 100% efficient market. In practice, most good traders know that markets tend to stand irrational for long time, often longer than those traders can remain solvent. The market (in Bitcoin's case, to large degree represented by idiotic amateur traders) is irrationally and vastly undervalues Bitcoin. Yes, as you noticed, by many orders of magnitude. This is your answer.

The good news here is that the market cannot ignore fundamentals indefinitely. Pretty soon it will start pricing in present and future growth of Bitcoin economy and we will have another 10x meltup also known around here as "the bubble". So the gap between fundamental and speculative valuation will be made smaller.

+1

[Peter Lambert]

- 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.

Maybe a better comparison would be the exchange fee to convert them. How easy/expensive is it to get USD vs BTC into your native currency to spend on all your expenses?

[Spaceman_Spiff]

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.

Big thumbs up for this post !

[bitcoin44me]

Would you ever put 125k usd in 1 btc? I don't think so....

And put all your money for 10 satoshi? Lol.
People are only investing what they can lose.

If you can lose 100 - 200 usd, you will spend them into bitcoin if you can buy 1 or 2 btc.
But if you can buy less than 1, you will feel disappointed, and probably won't spend your money there.

[Peter Lambert]

Would you ever put 125k usd in 1 btc? I don't think so....

And put all your money for 10 satoshi? Lol.
People are only investing what they can lose.

If you can lose 100 - 200 usd, you will spend them into bitcoin if you can buy 1 or 2 btc.
But if you can buy less than 1, you will feel disappointed, and probably won't spend your money there.

That makes no sense.

If I have 100 USD available to invest, and I suspect bitcoins will go up another factor of 10, it does not matter what the current price is. If I look at the calendar and it is October 2010, then I buy 1000 BTC. If it is March 2011, then I buy 100 BTC. If it is August 2011 or November 2012, then I buy 10 BTC. If it is May 2013, then I buy 1 BTC.

Sometime in the future, people who want to put some money into bitcoin will use their 100 USD to buy 0.1 BTC and they will be just as happy about getting a good deal on their purchase as the people in early 2011 were when they talked the seller down to 1.

[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.

Maybe a better comparison would be the exchange fee to convert them. How easy/expensive is it to get USD vs BTC into your native currency to spend on all your expenses?

USD is converted into automatically with a 2% FX fee applied on payments. So for example a 10 USD bill would cost me 10 * USD/RON * 1.02. Some prices are shown in EUR, and paid in RON. Some bills, are weirdly displayed in RON, paid in EUR, but converted from RON, and the conversion fee applies just once, maybe the merchant pays the other side.

BTC would require something like 15 EUR SIPA fee per fiat deposit, or a 4% fee on localbitcoins.com for p2p exchanges. I don't know anyone in the city that exchanges BTC, except me and a work colleague.

There are no local currency exchanges that I can use, and using USD means I pay the FX fee. Currently I will have to pay 2-3% on top of the BTC price, there is no alternative. Ideally this should be around 1% which I wouldn't mind and which would be super-competitive with everything else.

Being a p2p decentralized open protocol and open access currency, I mine my own bitcoins and obtain sufficiently cheap bitcoins (or litecoins) at around 75% of mtgox's price, which I can use for expenses. So paying for things with bitcoin (VPS, hosting, domains, SSL certs, online storage, other services) would offer me a 25% discount. Paying for physical items is impractical as virtually nobody here accepts bitcoins, and paying for shipping cancels the advantage.

I hope my experience can answer your questions.

[Peter Lambert]

USD is converted into automatically with a 2% FX fee applied on payments. So for example a 10 USD bill would cost me 10 * USD/RON * 1.02. Some prices are shown in EUR, and paid in RON. Some bills, are weirdly displayed in RON, paid in EUR, but converted from RON, and the conversion fee applies just once, maybe the merchant pays the other side.

BTC would require something like 15 EUR SIPA fee per fiat deposit, or a 4% fee on localbitcoins.com for p2p exchanges. I don't know anyone in the city that exchanges BTC, except me and a work colleague.

There are no local currency exchanges that I can use, and using USD means I pay the FX fee. Currently I will have to pay 2-3% on top of the BTC price, there is no alternative. Ideally this should be around 1% which I wouldn't mind and which would be super-competitive with everything else.

Being a p2p decentralized open protocol and open access currency, I mine my own bitcoins and obtain sufficiently cheap bitcoins (or litecoins) at around 75% of mtgox's price, which I can use for expenses. So paying for things with bitcoin (VPS, hosting, domains, SSL certs, online storage, other services) would offer me a 25% discount. Paying for physical items is impractical as virtually nobody here accepts bitcoins, and paying for shipping cancels the advantage.

I hope my experience can answer your questions.

So the simple answer is that there just is no local currency exchange, and so to use bitcoins to pay for stuff locally you have to convert it first to USD and then use the same currency conversion you would use if you started with USD.

In time, there will be local bitcoin exchanges available for every currency. The fact that these don't exist yet means there is still room for bitcoins to grow.

[BombaUcigasa]

In time, there will be local bitcoin exchanges available for every currency. The fact that these don't exist yet means there is still room for bitcoins to grow.

Yes, in fact bitcoin and bitcoin services have plenty of room to grow. The way Bitcoin started getting adopted (academia, enthusiasts, developers, some companies) means there is no real push, education or presence outside of these niche circles. It started from the bottom up and it can only be adopted by the same principle.

There are no utility or service companies offering Bitcoin payment options, and very few public service venues provide it. The fact that it has a very liberal and open regulated model means there is no option for companies to greatly profit from pushing it or to deploy marketing and MLM structures. You can't really sell an open idea that exposes you to uncontrolled competition.  It benefits the individual so much more that companies will find it harder to adopt. A company needs a very fluid cash-flow, holding on bitcoins slows the profitability and causes problems, individuals don't have this issue as they have a slower cash-flow.

There is a limit however to how useful bitcoin is, and those are the relative proportion of bitcoin to altcoins (once bitcoin was created, there was a limited 21M units, not anymore, each altcoin adds aditional similar* value units), and the smallest divisible unit (you can't split a satoshi up when you decide to pay 2 satoshi or 3 satoshi for a sheep, but the difference 30% makes is significant).

Also at the moment, there is a powerful gradient on the demand/offer sides in each geographical region, and as such varying prices across the globe. It is more like gold than salt, and every week a new mineral can be invented to store value.

[Peter Lambert]

In time, there will be local bitcoin exchanges available for every currency. The fact that these don't exist yet means there is still room for bitcoins to grow.

It benefits the individual so much more that companies will find it harder to adopt.

Companies are made up of individuals. The same benefits that bitcoins provide to individuals (secure money, quick international transfers) can benefit companies as well.

There is a limit however to how useful bitcoin is, and those are the relative proportion of bitcoin to altcoins (once bitcoin was created, there was a limited 21M units, not anymore, each altcoin adds aditional similar* value units), and the smallest divisible unit (you can't split a satoshi up when you decide to pay 2 satoshi or 3 satoshi for a sheep, but the difference 30% makes is significant).

Currently 1 US cent is worth about 0.0001 BTC, few people would argue that a cent is significant, but that is the granularity allowed by USD. So we still have to go up four orders of magnitude in price before the USD and the bitcoin have the same price granularity. That would mean that if I bought one bitcoin today for about 100 USD, and waited for BTC and USD to have the same price granularity, I could sell that bitcoin for one million USD. And I would argue that you would need to go at least one more order of magnitude before price granularity is a problem, and that is for just the most inexpensive items. If you are going to buy a car using bitcoins, you could go even a couple magnitudes more than that before the granularity becomes a problem. Plus, it would be a very simple fork to add some more digits to the bitcoin protocol and give us another 8 digits to work with.

[Odalv]

In time, there will be local bitcoin exchanges available for every currency. The fact that these don't exist yet means there is still room for bitcoins to grow.

Yes, in fact bitcoin and bitcoin services have plenty of room to grow. The way Bitcoin started getting adopted (academia, enthusiasts, developers, some companies) means there is no real push, education or presence outside of these niche circles. It started from the bottom up and it can only be adopted by the same principle.

There are no utility or service companies offering Bitcoin payment options, and very few public service venues provide it. The fact that it has a very liberal and open regulated model means there is no option for companies to greatly profit from pushing it or to deploy marketing and MLM structures. You can't really sell an open idea that exposes you to uncontrolled competition.  It benefits the individual so much more that companies will find it harder to adopt. A company needs a very fluid cash-flow, holding on bitcoins slows the profitability and causes problems, individuals don't have this issue as they have a slower cash-flow.

There is a limit however to how useful bitcoin is, and those are the relative proportion of bitcoin to altcoins (once bitcoin was created, there was a limited 21M units, not anymore, each altcoin adds aditional similar* value units), and the smallest divisible unit (you can't split a satoshi up when you decide to pay 2 satoshi or 3 satoshi for a sheep, but the difference 30% makes is significant).

Also at the moment, there is a powerful gradient on the demand/offer sides in each geographical region, and as such varying prices across the globe. It is more like gold than salt, and every week a new mineral can be invented to store value.

When 1 BTC == $1,000,000 USD then 1 satoshi == 1 cent. And market cap $21 trillion :-)

[WishIStartedSooner]

We're stuck with a dollar today to 500 dollars in 10 years time.

This isn't a preference for many people, so I fixed that for ya.

[Singlebyte]

That would be so in ideal world with 100% efficient market. In practice, most good traders know that markets tend to stand irrational for long time, often longer than those traders can remain solvent. The market (in Bitcoin's case, to large degree represented by idiotic amateur traders) is irrationally and vastly undervalues Bitcoin. Yes, as you noticed, by many orders of magnitude. This is your answer.

The good news here is that the market cannot ignore fundamentals indefinitely. Pretty soon it will start pricing in present and future growth of Bitcoin economy and we will have another 10x meltup also known around here as "the bubble". So the gap between fundamental and speculative valuation will be made smaller.

Nope...wrong...

Market is ALWAYS correct at any given moment. It takes into effect "idiotic amateur traders" & "100% efficient market" and EVERY other factor at the given moment in time.  As variables change, so does the valuation of the item.  

is irrationally and vastly undervalues Bitcoin.

There is NO such thing as "overvalued" or "undervalued".  It is a perceived value from the individual making the assumption on the limited amount of knowledge/facts they have and includes their own bias.  Nobody can know ALL the factors that make up an item's true worth.  Only the market can determine the real value.


Let me give you an example.  I go to Mecums auto auction to sell a classic 1967 Form Mustang.  All the past auctions and appraisals say my car should go for at least $25k.  I to believe it is worth at least this much and maybe more from all my research.  But to my surprise, when the hammer falls it only sold for $19,500.  It is easy to say my car was worth more because I "perceived" it as such.  Reality is, at that given moment and time (and location), the cars value is EXACTLY what someone at the auction was willing to pay for it.  No more No less.


The market takes EVERY variable (even inefficiency like Mtgox) into consideration.  This is why there are big differences in prices between the exchanges.  As exchanges become more or less liquid the the value of BTC swings up or down.  


But I totally understand what all of you are posting and trying to point out.  It does "feel" like these factors are distorting the values of BTC (and they may be).  And I to believe BTC is undervalued!  

[Birdy]

The market is no omnipotent all-knowing sentient being.
It doesn't take every variable into consideration, it is the variables.
Just like the weather "takes all temperatures into consideration".

But in contrast to the weather, the variables are based much more on human decisions.
Humans can be wrong, therefore the market can be wrong.
(wrong in the sense of being a bad decision for the market participants or in accurateness of predictions)

[Singlebyte]

The market is no omnipotent all-knowing sentient being.
It doesn't take every variable into consideration, it is the variables.
Just like the weather "takes all temperatures into consideration".

But in contrast to the weather, the variables contain much more human decisions.
Humans can be wrong, therefore the market can be wrong.
(wrong in the sense of being a bad decision for the market participants or in accurateness of predictions)

Believe me, the market takes that (bad/good human decisions) into consideration as well!

[adamstgBit]

bitcoin will always be cheap even at 1K each its cheap like dirt because, its a really rare item that is used as money, their is a certain degree of confidence in the money users are holding and a certain degree of fear, this feeds supply and demand and the price is set. truth is there a lot of fear right now and their has always been alot of Fear, mtgox and many others have had huge problems...

even me Uber Bull, when i first hear about the blockchain only put in 25$...


 Fear is high, even among bulls, this is why price will always be low, and the potential ROI very high.

in 10year the ROI might be 6-4% a year and risk will be 0...

but who knows...

[molecular]

Falkvinge says it's over valued.

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

Falkvinge makes a mistake in my mind: he only looks at bitcoins current value for transactional purposes.

50% chance of bitcoin being worth $500,000 in 10 years is obviously way too high a guess.

It seems the market gives this a chance of 0.1%. I give it a higher chance personally... that's why I'm long bitcoin.

[Singlebyte]

This article about the stock market does a better job explaining what I have been trying to convey about BTC market:

http://stocks.about.com/od/advancedtrading/a/101208Price.htm

[Birdy]

Believe me, the market takes that (bad/good human decisions) into consideration as well!

Yes, let's assume you have a bunch of idiots buying something that will mathematically proven give them back less (some of the perpetual mining contracts are pretty close to this *cough*).
They all buy it for $1 and it will give them back $0.5. (maybe it has gold in its name or something xD)
I would call that overvalued or the market being wrong.

[xxjs]

The market is always correct by definition.

You can not talk about a perfect market or imperfect market, unless you (as a divine master) decide what is valuable. In the free market, all participants define with their individual view, taking everything (relevant for them) into account. You can not say they are irrational, without taking the master role.

Still there are differences in goodness of a market:

Transaction cost: Different valuations would otherwise incur a transaction, but does not due to transaction cost and other friction like delays. This will lead to a market wiht a spread: The price is different whether you want to buy or sell.

Regulation: Someone distorts the market using force, driving price up or down. There is still a market.

Information: When the actors does not have the price information (the bourses are down). Prices on individual trades diverge more.

Thick or thin market: Thin market is when there are few sellers and buyers. This appears when the goods in question is a distinct object not replacable with others, or nearly so.

I am sure there are other qualification of a submarket that I have not thought about.

When the market in question is money, as bitcoin, there is always the problem of measuring it, as the value is the inverse of all other prices. But we have other money nearly as good: fiat.

The bitcoin to fiat market has a high goodness in most respects, the exception being transaction cost. The transaction costs being bourse fees, transfer fees, fiat-fiat conversion cost, the need for registration and time delays.

[murraypaul]

For people who might want to invest in Bitcoin by buying them directly, there are two significant issues:
a) Difficulty and delays when trying to convert local currency to Bitcoin.
Where can USB/EU/GBP etc be easily and quickly converted to Bitcoin?
Without waiting days or weeks, without sending in lots of different documents?
b) Risk that money gets 'trapped' in BTC and cannot be converted back.
Even if people don't intend to withdraw money in the short term, being able to do so is a plus, to cover unexpected circumstances.
With all the problems with MtGox, does that even need explaining further?
People will be rightfully concerned that as more regulatory pressure is applied, it will become more and more difficult to extract fiat value from Bitcoin.
Plus the exchanges that people have to rely on to do the exchanging are somewhere between unreliable and shady.
So fiat money that might otherwise be moving into Bitcoin is being deterred by the lack of quick, safe and reliable means of exchanging back and forth.