Thoughts on what truely backs Bitcoins.

[TheGer]

In responding to a thread on one of the more popular hardware review sites on the Internet I was exploring my thoughts on what actually backs Bitcoins.  This was in responce to some of the comments questioning the validity of Coins that were posted.  Any thoughts on the validity or retardedness of the following post I've made on where I consider the value of Bitcoins to come from is appreciated.  It's kind of a rough cut, but it's essentially how I view its value.

Link to forum at bottom for reference.

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Bitcoins are created, bought, and sold all day long everyday. 

Let's compare it to a Fiat Currency like the USD.  USD are created out of thin air with a keystroke, unlimited amounts can be created with current banking practices with little to no oversight, they can be counterfeited, and they are bought, sold, and traded for goods and services worldwide.  USD are backed by nothing.

Bitcoins are created with a little more effort(but lets just equate mining to a keystroke for this point).  Unlimited amounts cannot be created because of the way the Network designed.  All Bitcoins are created with oversight of all people participating in the Bitcoin Network.  Bitcoins cannot be counterfeited.  While to a much smaller scale, Bitcoins are bough, sold, and used worldwide for goods and services as well.  Bitcoins are backed by the resources and currencies used to purchase them. 

What I mean by this is the following. 

Let us think of Bitcoin Network as an empty water jug filled with beads beads for a moment.  When water(Value) is poured into the jug(Network) the beads begin to rise.  When enough water is poured in to force 1 bead out of the jug you've got yourself a Bitcoin.  Water in this exmple is ofcourse a currency or service of some sort.  As long as the water is in the jug, the Bitcoin is backed by that value.  Pour more water in, receive more Bitcoins, and add more value to the Network.  Take water out, and you will exchange Bitcoins for value previously invested in the Bitcoin Network.

As more Bitcoins are generated, the water jug gets bigger.  If no new water is added to the jug, the value of a Bitcoin starts to dilute as the invested resources in the Network are even distributed among all the coins.  Kind of like having a glass of Koolaid.  If the glass with the Koolaid in it becomes bigger but no extra Koolaid mix is added to the water, the taste of Koolaidness becomes diluted in the water and loses its value as a tasty drink.

So in essence you can say that Bitcoin's weakness is that if no one uses them then the value will degrade over time as new Bitcoins are produced an added to the Network.  Obviously this is not the trend as Bitcoins have increased in value from pennies up to around $13-14 and use of them for a multitude of reasons is up and rising everyday.

So ya, feel free to pass Bitcoins by, there are plenty of other people with more sense than that out there.  I am one of them.

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http://hardforum.com/showthread.php?t=1623740

[evoorhees]

OP- see this...

http://forum.bitcoin.org/index.php?topic=30980.0

[elk-tamer]

...  USD are created out of thin air with a keystroke, unlimited amounts can be created with current banking practices with little to no oversight ... 

Where did you get that from? USD are added to the money supply by buying assets.

[TheGer]

Fractions Reserve Banking allows creation of money out of thin air friend.  Thin Air.  Banks don't need permission to do this.

Fed prints, lends to Bank, Bank then lends out 10X that amount in thin air.  That's how it works.

[elggawf]

Fractions Reserve Banking allows creation of money out of thin air friend.  Thin Air.  Banks don't need permission to do this.

Fed prints, lends to Bank, Bank then lends out 10X that amount in thin air.  That's how it works.

Uhh, what?

Don't get me wrong, you're on the right track about why it's shitty without honest oversight... but I think you're very very confused about "how it works".

[evoorhees]

...  USD are created out of thin air with a keystroke, unlimited amounts can be created with current banking practices with little to no oversight ... 

Where did you get that from? USD are added to the money supply by buying assets.

USD are added in multiple ways. From The Fed side, they literally "create" the money in their system, and purchase the debt of the US Government in the form of Treasury bills. Called "quantitative easing," instead of "printing money."  Despite the clever economics-sounding name, the money is very much created out of thin air, at least in this case.

1) Fed creates money in Fed's account (with their keyboard)
2) Fed transfer that money to the Treasury in return for treasury bills (bonds)
3) Treasury spends that new money on a zillion things

Money supply is increased, without any increase in real goods. Prices will tend to rise, and everyone holding dollars is proportionally impoverished. It's both immoral and extremely contrary to the idea of a free market.

[TheGer]

Thanks for the link.  It is an interesting read but I don't quite agree with the posters point of view.  I don't think the poster is looking at Bitcoin's underlying value.  This is the value we place on it through investment of time, money, and resources into the network from which we take Bitcoins as a tradeable unit of the Networks value.

Instead of Bitcoins we could just as easily use 21,000,000 unique Seashells as the currency.  It wouldn't quite be as secure, but the result is the same.  We don't have to say Bitcoins have value because we agree they have value.  It's taken on a life of its own at this point due users having already invested money, time and resrources into it.  The value of these resources can be said to be held in escrow until such time as they are traded out of the Network for Bitcoins.  Value can ofcourse be traded back into the Network in the same fashion.  This is the true value that Bitcoins have.  

OP- see this...

http://forum.bitcoin.org/index.php?topic=30980.0

[TheGer]

To elggawf and evoorhees.  27+ Trillion in USD Bailouts was not used to buy Treasuries with.  It was handed out mostly to offshore Banks and those banks within the Fed umbrella in the US who then under Fractional Reserve Banking proceed to leverage it 10X and loan it out to customers.  Money created in this way is not required to be reported on to the Government.  This is why Banks send money back and forth.  It's a con job on the world.

Fractional Reserve Banking combined with the repeal of Glass-Steagall Act. put the nail in the coffin in the US.

[evoorhees]

Thanks for the link.  It is an interesting read but I don't quite agree with the posters point of view.  I don't think the poster is looking at Bitcoin's underlying value.  This is the value we place on it through investment of time, money, and resources into the network from which we take Bitcoins as a tradeable unit of the Networks value.

Instead of Bitcoins we could just as easily use 21,000,000 unique Seashells as the currency.  It wouldn't quite be as secure, but the result is the same.  We don't have to say Bitcoins have value because we agree they have value.  It's taken on a life of its own at this point due users having already invested money, time and resrources into it.  The value of these resources can be said to be held in escrow until such time as they are traded out of the Network for Bitcoins.  Value can ofcourse be traded back into the Network in the same fashion.  This is the true value that Bitcoins have.  

OP- see this...

http://forum.bitcoin.org/index.php?topic=30980.0

The work and resources which are expended on something have no direct relation to the value of that thing. I could spend a million dollars digging a massive crater in my back yard. How much would you pay for that? Probably nothing. Value is determined by supply and demand, not by cost of creating it. This is one of the great economic fallacies that many economists even still believe. You will see many people on this forum believe this myth, when they claim that bitcoins are valuable because miners have to invest money in creating them. It's a fallacy.

And we could not "just as easily use seashells." The entire usefulness of bitcoin comes from its specific and unique properties - and seashells share none of these properties. We value bitcoins not for any arbitrary reason, but because they are so damn effective as a money-commodity. The same is true for gold, though bitcoin and gold have some differing advantages/disadvantages.

The "true value" of Bitcoins is nothing more than their usefulness as things. Society will come to discover how vastly useful they really are, and market price will follow in turn.

[phillipsjk]

My one-liner: Bitcoins are backed by proof-of-work and the public anonymized transaction history.

Disclaimer: "Anonymized" data really isn't—and here's why not

[TheGer]

Nobody values a pit in your back yard except for maybe you.  On the other hand people DO value the money, products, and services used within the Bitcoin Network.  Your statement seems ridiculous sorry.  I could spend a million dollars renovating a barren acre of property for Business or Residential development and what you just told me is that said renovation will have no direct relation to its value when it was complete.  Or maybe that a House in disrepair that has $100,000 worth of repairs done to it has no direct relation to its value now.

A Bitcoin in a network that has had nothing invested in it(no money, product, service) has about as much value as stock in a company that has nothing invested in it(no money, product, service).

The Money, Products, and Services that are added and used within the Bitcoin Network are what adds Value.  Real Value, not Value made up in the minds of Man.


"The work and resources which are expended on something have no direct relation to the value of that thing. I could spend a million dollars digging a massive crater in my back yard. How much would you pay for that? Probably nothing."

Thanks for the link.  It is an interesting read but I don't quite agree with the posters point of view.  I don't think the poster is looking at Bitcoin's underlying value.  This is the value we place on it through investment of time, money, and resources into the network from which we take Bitcoins as a tradeable unit of the Networks value.

Instead of Bitcoins we could just as easily use 21,000,000 unique Seashells as the currency.  It wouldn't quite be as secure, but the result is the same.  We don't have to say Bitcoins have value because we agree they have value.  It's taken on a life of its own at this point due users having already invested money, time and resrources into it.  The value of these resources can be said to be held in escrow until such time as they are traded out of the Network for Bitcoins.  Value can ofcourse be traded back into the Network in the same fashion.  This is the true value that Bitcoins have.  

OP- see this...

http://forum.bitcoin.org/index.php?topic=30980.0

The work and resources which are expended on something have no direct relation to the value of that thing. I could spend a million dollars digging a massive crater in my back yard. How much would you pay for that? Probably nothing. Value is determined by supply and demand, not by cost of creating it. This is one of the great economic fallacies that many economists even still believe. You will see many people on this forum believe this myth, when they claim that bitcoins are valuable because miners have to invest money in creating them. It's a fallacy.

And we could not "just as easily use seashells." The entire usefulness of bitcoin comes from its specific and unique properties - and seashells share none of these properties. We value bitcoins not for any arbitrary reason, but because they are so damn effective as a money-commodity. The same is true for gold, though bitcoin and gold have some differing advantages/disadvantages.

The "true value" of Bitcoins is nothing more than their usefulness as things. Society will come to discover how vastly useful they really are, and market price will follow in turn.

[spruce]

My one-liner: Bitcoins are backed by proof-of-work and the public anonymized transaction history.

Disclaimer: "Anonymized" data really isn't—and here's why not

What does that disclaimer link have to do with bitcoin? I don't see much of a relation at all.

[phillipsjk]

Only transaction addresses are stored in the blockchain, but that does not imply that those addresses can't be tied to specific people. One example would be "vanity" addresses. It is not clear what percentage of addresses have to stay anonymous for everybody else to stay anonymous.

[spruce]

Only transaction addresses are stored in the blockchain, but that does not imply that those addresses can't be tied to specific people. One example would be "vanity" addresses. It is not clear what percentage of addresses have to stay anonymous for everybody else to stay anonymous.

I agree with that. But the quoted headline is a FUD generalization that doesn't really apply at all.

[Xephan]

The work and resources which are expended on something have no direct relation to the value of that thing. I could spend a million dollars digging a massive crater in my back yard. How much would you pay for that? Probably nothing. Value is determined by supply and demand, not by cost of creating it. This is one of the great economic fallacies that many economists even still believe. You will see many people on this forum believe this myth, when they claim that bitcoins are valuable because miners have to invest money in creating them. It's a fallacy.

As you mentioned, price is determined by suppler and demand. The point where the two curves intersect at any point in time, would be the price at that point in time. Since there are two curves, there must be factors that influences the shape/gradient of the curves.

Buyers will not pay more than what they value the item (be it bitcoin or otherwise) and similarly Sellers will not accept less than what they value the same item. Of course different people will have different valuations of the same item.

How do sellers determine their value for their stock/assets/property? One of the key factor would be their cost of procuring it. So it's not logical to say cost of production has no direct relation to the value of the item.

[evoorhees]

 Your statement seems ridiculous sorry.  I could spend a million dollars renovating a barren acre of property for Business or Residential development and what you just told me is that said renovation will have no direct relation to its value when it was complete.  Or maybe that a House in disrepair that has $100,000 worth of repairs done to it has no direct relation to its value now.

You misunderstood me. Of course a renovation improves the value of something, but it is not the cost of the renovation which provides value, it is the resulting product - the production - from which the value is derived. Stated differently, if Renovator A spends $100k on a project, and Renovator B spends $50k to get the same results (through more efficient sources and means), the buyer is not going to offer Renovator A more money just because that work costs more.

The buyer of a renovated property cares nothing for the cost of said renovation. He cares only (or should care only) for the resulting product. How such product was achieved is irrelevant to the buyer. There is a caveat... in those cases where learning the costs DOES induce a buyer to spend more, it is because he has learned more about the final condition of the thing by learning of the cost. But one should not confuse this with him caring anything for that cost itself.

Case in point: say you're selling me a used car. I offer $10,000 for the car, based on my assessment of its condition, etc. (Assume I am pretty knowledgeable in cars and can make an accurate assessment).  So I offer $10k.  If, after that offer, you then divulge to me that you had to spend $8,000 in order to get the car to that state, I will not change my offer if I am a rational buyer. Your costs are irrelevant to me. All that matters is the resulting product - I assess and bid on that thing alone, not the consumptive cost of resources which went into it.

The relevancy for Bitcoin should be clear: a buyer of Bitcoin (if he is rational) should only care about the usefulness of the coin itself, or if he is speculating then he cares about the usefulness to someone else in the future. He cares not at all for the costs of the miner's time, or his burden of equipment.

This is why it is false to say Bitcoin's value is "backed" by the cost and burden of mining. Try to sell some hard-earned sea mud and you will see quite quickly that your costs and struggle are irrelevant in the final bidding price.