Bitcoin and inherent value

[Anonymous]

Bitcoin as it stands today is an unstable currency, and one lacking any inherent value outside of the dollar that it can be traded for. As I've brought up in other threads, one of the biggest problems I myself see with Bitcoins is that people are (mostly) refusing to accept Bitcoins at their face value instead of relative worth. For example, I know there are places selling gold or silver for Bitcoins, but I've only ever seen it pegged to the dollar rate of silver.

What would it take to see a Bitcoin to Silver rate? Would it take one investor buying a whole load of silver and hoping that he doesn't lose his return by pegging prices? Would that even be a good thing? It might limit the worth of Bitcoins in some way, but stability would be a good thing, especially because at this point there seem to be some new major problems arising (particularly with regards to malicious programs).

In other words, could stability be forced onto the bitcoin by a single investor willing to peg it's rate to an intrinsically valuable resource? And if so, would that be a good thing? Would it have to be some big MTGox style thing or could it be a retailer?

Personally, I think the future of Bitcoins is dependent on convincing people to stop cashing out. As long as there is major concern over the dollar worth of Bitcoins then it is nothing more than a less stable bond, but if people can be convinced of it's true worth, then we can really see an economy begin to flourish independently of major economic structures.

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[billyjoeallen]

In other words, could stability be forced onto the Bitcoin by a single investor willing to peg it's rate to an intrinsically valuable resource? And if so, would that be a good thing? Would it have to be some big MTGox style thing or could it be a retailer?

Easily and for not much money, either. A credible trader could offer 1 milligram of gold per bitcoin. to back the entire 21 million bitcoins eventually in existence, it would take only 21,000 grams and BAM! gold standard. This would be a floor value, not a constant or ceiling. Others would likely be willing to trade much larger amounts of gold, but unable to back the entire monetary stock. 

a milligram of gold could be traded easily as gold leaf encased in clear plastic the size and shape of a credit card.

I am not recommending anyone do this, BTW. It's silly and completely unnecessary.  I'm just saying it's easily accomplished if anyone wanted to do it.

[Anonymous]

That's true, but to matter it's value would have to be recognizable. A milligram would be throwing away Bitcoins.

[error]

a milligram of gold could be traded easily as gold leaf encased in clear plastic the size and shape of a credit card.

Shire Silver already makes these. No idea if he accepts Bitcoin though.

[Anonymous]

What if someone made a move without intentions of backing the entire currency though?

[Anonymous]

Realistically, it would be decided by an investor. Linking it to gold could be interesting, but you'd need the gold to back it in the first place.

[Anonymous]

Because most of those goods are pegged to USD, and at that point we might as well be trading unstable bonds.

[Bitcoin_Silver_Supply]

Because most of those goods are pegged to USD, and at that point we might as well be trading unstable bonds.

This.

Also, I listened to this while reading your original post http://www.youtube.com/watch?v=6CMTXyExkeI

[elk-tamer]

I'd say bitcoins have inherent value equal to the cost they save. Any transaction made cheaper or safer by using them demonstrates that. Pegging it to gold or anything else non-digital is going to complicate transactions and so lower their value.

[Piper67]

Anyone who thinks a currency can be pegged to anything, but especially to another currency, needs to visit South America in the 90's... That didn't turn out so well now, did it?

[ctoon6]

This will only happen when a huge merchant like walmart or amazon accepts bitcoin, even then they might still peg to the dollar until bitcoin is more widely accepted than usd. at that point USD would be pegged to BC.

[Anonymous]

Because most of those goods are pegged to USD, and at that point we might as well be trading unstable bonds.

Are they really pegged to dollars? If I am selling something, and dollars inflate, then I raise the price.

That is literally what being pegged to USD means.

[jtimon]

Bitcoin as it stands today is an unstable currency, and one lacking any inherent value outside of the dollar that it can be traded for.

There's no such thing as inherent value. We value things.
Gold is so expensive because it is money, not because of its industrial uses.
Money doesn't need "intrinsic value": it can be made of paper or bits.

[Anonymous]

Your point is correct, those who think gold has some truly inherent value are going to be shocked if the world somehow ended. They may be able to trade a few bars of gold for some bread. Nonetheless, perception of value gives money intrinsic value, as does utility. In this way gold is an average standard, since a lot of its value stems from jewelry, bullion, and other useless nonsense while the majority of the industrial uses are simply ignored. Even if it weren't valuable due to historical reasons though, gold still has a massive amount of industrial value. If you wanted to peg a currency to something genuinely valuable, we could peg it to wheat or rice. Perishable goods are less stable though, and metals have a long history and are thus favored.

Still, if you want people to perceive Bitcoins as valuable, then you're going to have to accept that the way things are now aren't sustainable. People on here love talking about how Bitcoins will be amazing once Wal-Mart takes them but completely skip their own heads as to why a company would adopt a currency capable of fluctuating $5 in value during the time a customer travels around the store.

Stability is a key thing missing from Bitcoins, and some kind of non-USD pegging could go a long way towards remedying that. What about an exchange that traded in a single commodity instead of currency like MTGox does?

[flug]

I wonder how closely bitcoin is pegged to the dollar. If for some reason the dollar plunged 50%, would BTC follow it down? What about the bitcoins traded for other national currencies? Bitcoins traded for goods? Won't these influence the BTC value too?

[Anonymous]

Not likely, the majority of trades take place in USD.

[Steve]

Personally, I think the future of Bitcoins is dependent on convincing people to stop cashing out.

For people that are unsure about the success of BTC (and don't want to or aren't able to invest much in buying coins), but would like to see it succeed, here's what you can do to help bitcoin:

First, don't ever sell bitcoins on the exchanges.  Instead, look hard for ways you can spend it on things you need.  There are several market places that are already operational and there are various goods and services that people are willing to provide in the marketplace forums.  People will even let you pick things on amazon or barnes and noble, pay for them in BTC and then ship the goods to you (I've done this myself before).

And, when you need to buy something, always ask yourself first whether you can buy it with bitcoin.  If you can, go buy some bitcoins from an exchange and then buy the product or service using bitcoins.  It may be a bit of a pain right now, but it's getting much easier and the selection of goods much better.  And enduring a little bit of hassle in the short term will go a long way to helping bitcoin succeed (and help make it much easier to use in the future).

[Anonymous]

But nothing is saying that those people aren't cashing out. You as an individual did a great job in passing off your coins without selling them, but the problem isn't with buyers. It's with retailers. Personally, I made an investment in creating a Bitcoin-based business because I believe there is something there in the future worth striving towards. Right now we're nowhere close, but every little bit helps. My storefront should be ready by september, and my plan is to sell something with real value (as opposed to just stickers and patches that say "BITCOINS") at a pegged rate to Bitcoins. I think the feedback I receive from that will be very telling.

[Steve]

But nothing is saying that those people aren't cashing out. You as an individual did a great job in passing off your coins without selling them, but the problem isn't with buyers. It's with retailers. Personally, I made an investment in creating a Bitcoin-based business because I believe there is something there in the future worth striving towards. Right now we're nowhere close, but every little bit helps. My storefront should be ready by september, and my plan is to sell something with real value (as opposed to just stickers and patches that say "BITCOINS") at a pegged rate to Bitcoins. I think the feedback I receive from that will be very telling.

Correct, nothing is saying that those merchants aren't cashing out and in fact many will need to because the merchants will need to pay expenses for which they'll require dollars.  However, at least some commerce in bitcoin (aside from exchange) has taken place.  If the merchants then try and pay some of their suppliers with bitcoin, the use of bitcoin grows by that much more.  This is the way to make bitcoin a success IMO.  At bit-pay.com we're trying use bitcoin as much as possible to pay vendors we use.

Glad to hear you'll be opening a storefront!

[indio007]

The inherent value in Bitcoin is the continuous security provided to users. The blockchain and all transactions are being continuously verified and authenticated. What other money is there that is having a multitude 3rd parties verify it's legitimate.

Anyone that thinks bitcoin is not backed by a valuable consideration is plain wrong.
Any service is a valuable consideration.

[Anonymous]

Every major currency has third party verification done constantly. There seems to be this common misunderstanding that a combination of scarcity and security create value, when in reality there are essentially an infinite number of things that are both impossible to counterfeit and have a limited number. The value in bitcoins as it stands now is that it is an anonymous bond for US dollars, it's value is almost completely dependent on that (for the time being).

[MikesMechanix]

First, don't ever sell bitcoins on the exchanges.  Instead, look hard for ways you can spend it on things you need.  

Isn't the difference between buying currency rather than goods, using Bitcoins, mostly philosophical? Otherwise, I can't see a difference.

FWIW, in Europe a lot of EUR prices fluctuate according to the USD exchange rate, since the importers need to pay in USD. Computer parts are an obvious example, the prices can change a lot over time.

[Jaime Frontero]

everything is pegged to something else.  all that really matters is how you, personally, manipulate exchange rates in your own head.

me, i look at everything in terms of how many loaves of bread it'll get me.  a nifty trick my dad taught me - it's gotten me around the world a couple of times without a hitch.

[Anonymous]

And the number of loaves of bread a bitcoin will get you is exactly as many as the USD you can trade that bitcoin for will get you. I love the idea of bitcoin, but I still don't see how they're more than bonds at this point, and any counterargument seems to involve the economics equivalent of "a wizard did it" followed by fantasy scenarios they view as inevitable (such as major retailers adopting bitcoin).

[indio007]

Every major currency has third party verification done constantly.

For example?
If you buy something at a store and the cashier counterfeit tests the bill and gives you a receipt that would be one verification of the instrument and transaction.
Both don't happen. Neither happen till you transfer the note. Bitcoin network does this while you passively hold them, before they are spent and after they are spent.
It's not even  a close comparison.


I can't even believe you're trying to muddle people's minds that the usage of the Bitcoin network has no value. Believe me, the courts will find it has value.

[realnowhereman]

And the number of loaves of bread a bitcoin will get you is exactly as many as the USD you can trade that bitcoin for will get you. I love the idea of bitcoin, but I still don't see how they're more than bonds at this point, and any counterargument seems to involve the economics equivalent of "a wizard did it" followed by fantasy scenarios they view as inevitable (such as major retailers adopting bitcoin).

Here's a hypothetical: a baker accepts USD or BTC.  However, given that transactions are more secure, and there are no bank fees, he is willing to offer 3% off the equivalent USD price for paying in BTC.  What happens then?  Bitcoins will buy you more loaves than the USD do.  Is it still a bond?

Let's say there was a global payment system based on the internet that charged 3%.  Would it not be worthwhile for a merchant to offer 2.5% off for paying in BTC?

Equivalent prices are not going to last long once merchants realise they can compete on price using bitcoins.

[mmdough]

And the number of loaves of bread a bitcoin will get you is exactly as many as the USD you can trade that bitcoin for will get you. I love the idea of bitcoin, but I still don't see how they're more than bonds at this point, and any counterargument seems to involve the economics equivalent of "a wizard did it" followed by fantasy scenarios they view as inevitable (such as major retailers adopting bitcoin).

Here's a hypothetical: a baker accepts USD or BTC.  However, given that transactions are more secure, and there are no bank fees, he is willing to offer 3% off the equivalent USD price for paying in BTC.  What happens then?  Bitcoins will buy you more loaves than the USD do.  Is it still a bond?

Let's say there was a global payment system based on the internet that charged 3%.  Would it not be worthwhile for a merchant to offer 2.5% off for paying in BTC?

Equivalent prices are not going to last long once merchants realise they can compete on price using bitcoins.

As a baker, I would say that this scenario is unrealistic. Bakers who wish to sell their products via mail, with transactions taking place over the internet, are poor bakers. Bread doesn't ship well.

So, instead, you're talking about a face-to-face transaction. Cash would be inherently simpler than BTC, free from bank fees, anonymous, instantaneous, and I pay my suppliers in it.

BTC would be preferable to credit cards, especially for small transactions, but currently transactions are verified so much more slowly that there might actually be a greater security risk involved. Plus, I can't pay my suppliers with it.

So, if anything, I would probably have to charge a small premium for BTC, although I might waive this if I'm confident that they'll be a more valuable asset long-term. This confidence is going to be based on the speculation marketplace which, hey surprise, is denominated in dollars.

So, as a merchant, my best bet is to peg my BTC transactions to the dollar exchange rate, making them function more or less like secure bonds.

I don't think OP's point was to criticize BTC or the technology underlying them-- nor is this my point-- merely to suggest that the value of that technology is limited by the social systems which accept them.

[realnowhereman]

As a baker, I would say that this scenario is unrealistic. Bakers who wish to sell their products via mail, with transactions taking place over the internet, are poor bakers. Bread doesn't ship well.

Okay; well I was only giving an example using the same commodity that the poster picked: loaves. I don't think I said anything about mail order bread. I was hoping that the point would make its way through without needing exact details.  Obviously not though; let's pick another trade to make my point.

How about this: I have a car to sell, as a private citizen.  I'm already into bitcoins, and am not scared of them at all.  I want $5000.

Which option has least risk for me (and let's assume a timescale were bitcoins are going to change value significantly): (a) a stack of dollars; (b) paypal; (c) bank transfer done in my presence; (d) bitcoins.

(a) Fake notes are close to indistinguishable nowadays.
(b) Ha.  Not while I'm still in my right mind
(c) Stolen bank details is a possibility; reversed transactions or even a faked web page that looks like an online bank.  Let's remember the three day clearing period.
(d) MINE, MINE, MINE.  I can see the broadcast transaction instantly.  In ten minutes it'll be in the block chain and require more computing power than the NSA to double spend.  In an hour it'll be so confirmed that it couldn't be undone by Bletchley park.

Given that; I could probably knock 5% off the selling price for Bitcoins.  Therefore bitcoins are not a proxy for dollars.

So, instead, you're talking about a face-to-face transaction. Cash would be inherently simpler than BTC, free from bank fees, anonymous, instantaneous, and I pay my suppliers in it.

BTC would be preferable to credit cards, especially for small transactions, but currently transactions are verified so much more slowly that there might actually be a greater security risk involved. Plus, I can't pay my suppliers with it.

If there is greater risk, then you might offer a discount for dollars.  The point is the same: bitcoins are not proxy dollars; and so aren't bonds.

Double spending is a risk; but it's not a big risk.  Seriously the amount of investment an attacker would have to make to steal one loaf of bread is ridiculous.  No one would do it.

Even for a car sale; I personally wouldn't be that upset at 0 confirmations.  I'd probably wait for one or two.  I'd like to hear any single report of anyone having being fleeced on a double-spend attack.  Or even an attempted double spend.

They just are not happening.

So, if anything, I would probably have to charge a small premium for BTC, although I might waive this if I'm confident that they'll be a more valuable asset long-term. This confidence is going to be based on the speculation marketplace which, hey surprise, is denominated in dollars.

I'm pretty sure you can set Mt.Gox up to convert instantly from incoming BTC to USD for a merchant account.

I don't think OP's point was to criticize BTC or the technology underlying them-- nor is this my point-- merely to suggest that the value of that technology is limited by the social systems which accept them.

I don't think that either; I'm happy with just a discussion.

However, bitcoins are definitely not bonds.  There is far too much decoupling them to make this true, whether you think bitcoins are better or worse; they aren't the same.

[indio007]

Bitcoins most definitely are not bonds. The idea is absurd.

A bond is merely an obligation under seal. Commonwealth v. Smith, 92 Mass (10 Allen) 448, 455, 87 Am. Dec. 672.
A "bond" may be briefly defined to be a sealed obligation to pay money. 1t may be either single and absolute, or upon condition and contingency. However complicated may be the condition or contingency, and however alien from pecuniary considerations may seem the inducements to its execution or the circumstances surrounding the parties, a bond will always be found to resolve itself into an obligation to pay money sooner or later— either absolutely or upon some condition or on the happening of some future event Rawson v. Taylor (Neb.) 95 N. W. 1033, 1036 (citing Murfree, Off. Bonds).
A bond, as defined by Blackstone, is a deed whereby the obligor obligates htmself, his heirs, executors, or administrators, to pay a certain sum of money on a day appointed. Williams v. State, 6 South. 831, 832, 25 Fla. 734, 6 L. R. A. 821; Rondot v. Rogers Tp. (U. S.) 99 Fed. 202, 209, 39 C. C. A . 462.
"A bond is what binds. Therefore any instrument in writing that legally binds a party to do a certain thing may be called a bond." Courand v. Vollmer, 31 Tex. 397, 401.
Bonds are obligations payable at a definite time, running through a series of years. They are payable when the time of their maturity arrives, independent of any presentation. Shelley v. St Charles County Court (U. S.) 21 Fed. 699, 701.
The term "bond" la sometimes used as a generic term—as a written instrument by which a person has become bound or committed legally. Usually the word is taken to mean a secondary or accessory securing a primary obligation in favor of some third person. Thus, an instrument declaring, "1 agree to stand security for L. to the amount of his contract," is not technically a bond. State T. Leo, 32 South. 447, 452, 108 La. 496.
The word "bond" has a definite legal signification. 1t is a clause, with a sum affixed as a penalty, binding the party to pay the same, conditioned, however, that payment of the penalty may be avoided by the performance by one or more of the parties of certain acts. United States v. Rundle (U. S.) 100 Fed. 400, 403, 40 C. C. A. 450 (citing 1n re Fitch [N. Y.] 3 Redf. Sur. 457).
A bond by specialty to pay a certain sum of money is a deed or instrument under seal, by which the maker or obligor binds himself to pay a designated sum of money to another, usually with a clause to the effect that, on the performance of a certain condition, the obligation shall be void. "A bond is said to be prima facie a penal obligation, and the sum mentioned therein is not construed as liquidated damages unless other language used in the instrument, or accompanying circumstances, shows that such was the intention of the contracting party; but, if the sum named is to be taken as penalty only, on a breach of the obligation the obligee is en
titled to recover only such actual damages as he may suffer from the breach of the condition." Turck v. Marshall Silver Min. Co., 5 Pac. 838, 839, 8 Colo. 113.
A bond is a deed or obligatory instrument in writing whereby one doth bind himself to another to pay a sum of money or do some other act 1t contains an obligation with a penalty and a condition, which expressly mentions what money is to be paid or other thing performed, and the limited time for the performance thereof, for which the obligation is peremptorily binding. The ceremony, as necessary to a bond or obligation, consists of writing on paper or parchment, sealing, and delivering. Boyd v. Boyd (S. C.) 2 Nott 4 McC. 125, 126.
The word "bond" necessarily imports that there is a written instrument Pierson v. Townseud (N. Y.) 2 Hill, 550, 551.

[elk-tamer]

Bitcoins most definitely are not bonds. The idea is absurd.

A bond is merely an obligation under seal. ...

Sure, that's a book definition, but here  in the bitcoin forum, when we use a word,  it means just what we choose it to mean — neither more nor less.

[indio007]

Bitcoins most definitely are not bonds. The idea is absurd.

A bond is merely an obligation under seal. ...

Sure, that's a book definition, but here  in the bitcoin forum, when we use a word,  it means just what we choose it to mean — neither more nor less.

Well i think a glossary needs to be included in the post then ....

[elk-tamer]

Well i think a glossary needs to be included in the post then ....

Glossary

[ShireSilver]

a milligram of gold could be traded easily as gold leaf encased in clear plastic the size and shape of a credit card.

Shire Silver already makes these. No idea if he accepts Bitcoin though.

Sorry to wake a sleeping thread, but there's news somewhat relevant to the thread. As of last week Shire Silver does now accept bitcoin using our shopping cart! (We did accept it on an ad-hoc basis before that, but it was too clunky.)

And we are a fan of letting currencies float against each other.

[triplehelix]

the more bitcoin is used for retail transactions, the more stability it will have.  i honestly believe that is were the current stretch of stability is founded on, with silkroad accounting for a large percentage of the transactions.

[niko]

What if major exchanges got shut, perhaps due to legal isssues?  People would have a much harder time exchanging BTC to/from fiat in centralized fashion. The market would get fragmented and really decentralized, with exchange value varying significantly from one location to another due to differences in supply/demand. Perhaps then people would start simply assigning a BTC price to goods/services they offer, rather then to the USD?  This would be a reboot of the current economy, and we would be starting from scratch, but it may be a good thing.  The way things are now, BTC simply serves as an intermediary in fiat transactions.

[triplehelix]

What if major exchanges got shut, perhaps due to legal isssues?  People would have a much harder time exchanging BTC to/from fiat in centralized fashion. The market would get fragmented and really decentralized, with exchange value varying significantly from one location to another due to differences in supply/demand. Perhaps then people would start simply assigning a BTC price to goods/services they offer, rather then to the USD?  This would be a reboot of the current economy, and we would be starting from scratch, but it may be a good thing.  The way things are now, BTC simply serves as an intermediary in fiat transactions.

i think if mtgox got shut down, another exchange would step in to fill the vacuum.  there is enough money in play to be relatively confident of that.

as for bitcoin mostly being an intermediary in fiat transactions, i think that will remain bitcoins ultimate potential.  at least in my lifetime.  i think we'll see the ability to use bitcoin in retail transactions increase, possibly signifigantly, but i believe its misguided to think bitcoin is going to usurp the USD, RMB, Euro and/or BP.