Why bitcoin isn't currency.

[Erdogan]

I hate to come in and puncture the discussion, but:

Intrinsic value means value that is not money value aquired because the stuff is used in indirect exchange. Gold and silver is the only money which have intrinsic value, if you don't regard real estate as money too. Some do. Fiat money and bitcoin does not have intrinsic value
You can not eat it, live in it or make pretty decorations.

Bitcoin and fiat only have value because others want it. And they want it because others again want it. Eventually it comes back to you. It seems like a circular argument, and it is, and we don't care, because the value is real.

No intrinsic value is perfect. Imagine if grain was money. People would starve as you hoard it. Hoarding money harms nobody, it just enables others to use, now, the resources that you, the hoarder, does not use even if you have earned it.

Currency just means the most used money. It does not mean the best money. The traders, that is you and me, decides what is money, the most used ad the best. For me, the non-printing is the best quality, others like the most used. So I adapt to the requirements of the seller of goods. No problem. There is no restrictions on conversion.

[MoonShadow]

And this is why the term "intrinsic value" is such a poor choice of words.

[BadBitcoin (James Sutton)]

What you here refer to as the value of the total amount of labor is known as "cost", or unit cost 

Correct! I wrote that pretty fast, but I felt that no one else was saying it

[NewLiberty]

What you here refer to as the value of the total amount of labor is known as "cost", or unit cost 

Correct! I wrote that pretty fast, but I felt that no one else was saying it

Unit cost is not such a very good measurement of value.
If something is only worth its cost, one is better off expending that same cost on something else with more virtue.  That further suggests the design would be a poor one, and valueless.

[Erdogan]

Nothing has intrinsic value. Intrinsic value is value in and of itself. It is contrasted with instrumental value, which is value as a means of achieving something else.
[...]

It just means direct use value. It is well defined in the money realm. Do we really have to repeat this a thousand times?

[BadBitcoin (James Sutton)]

What you here refer to as the value of the total amount of labor is known as "cost", or unit cost 

Correct! I wrote that pretty fast, but I felt that no one else was saying it

Unit cost is not such a very good measurement of value.
If something is only worth its cost, one is better off expending that same cost on something else with more virtue.  That further suggests the design would be a poor one, and valueless.

True, however as that energy could have been expended to produce other work, as you can most likely (however more indirectly) convert the economic cost to electricity consumption, you can figure out the value of the production of a bitcoin in comparison to other energy intensive exploits, such as gold mining, food production, etc.

Would you guys value such a calculation? I might get to work and try and derive a total economic value up to this point, but I don't know if I can easily get data on the cost to produce all the PH/s that we currently use, unless I take a standard total electric cost/PH/s

[MoonShadow]

What you here refer to as the value of the total amount of labor is known as "cost", or unit cost 

Correct! I wrote that pretty fast, but I felt that no one else was saying it

Unit cost is not such a very good measurement of value.
If something is only worth its cost, one is better off expending that same cost on something else with more virtue.  That further suggests the design would be a poor one, and valueless.

True, however as that energy could have been expended to produce other work, as you can most likely (however more indirectly) convert the economic cost to electricity consumption, you can figure out the value of the production of a bitcoin in comparison to other energy intensive exploits, such as gold mining, food production, etc.

Would you guys value such a calculation? I might get to work and try and derive a total economic value up to this point, but I don't know if I can easily get data on the cost to produce all the PH/s that we currently use, unless I take a standard total electric cost/PH/s

What you guys are discussing here is commonly called the 'labor theory of value' in economices, and is generally considered a false method of valuation.  As an example, I might be able to get competitive bids on how much it woudl cost me to have a 16 foot by 8 foot by 8 foot hole dug in my backyard, but that does not mean that I can automaticly increase the selling price of my home by the labor cost of theat swimming pool.  The value of the property is whatever the buyer with the highest desire is willing and able to offer for it.

[BadBitcoin (James Sutton)]

The value of the production of a bitcoin is the BTC created by that bitcoin multiplied by the exchange rate.

The cost of the electricity is (part of) the cost, not the value. And it's not even the largest portion of the cost. The cost of the labor to build the system, the cost of the labor to build the ASICs, the cost of the labor to put build and maintain the mining equipment, etc., far outweighs the cost of the electricity.

True, I was going to take an average ASIC value (when ASIC's arrived on the scene), and before that an average GPU value and plug those into the system, however that would take a little more research than the simple thought experiment version. EDIT: It would probably be easier to put everything into terms of dollars, since its significantly easier to get a dollar value of a GPU/ASIC than the total electrical energy costs of producing one.

EDIT: In response to moonshadow, the price of bitcoins is currently the price on mtgox, in your analogy that's what people value that house with a swimming pool, the cost of labour of putting that in however, is generally the "true value" of whatever work you put into the swimming pool, however without a perfect system the true value is never reached due to speculation.

[BadBitcoin (James Sutton)]

In that case it would be close to that, however that gets into some different issues, if EVERYONE used slave labour to build pools, then it would be the value of the food required to feed the slaves + the lost labour that could have gone towards productive enterprise such as mining (assuming a roman slavery system). However if only a handful of people were doing this, the market value would be the same as all others, however the true economic value would be the total cost of building the pool, theres a similar parallel with bitcoin mining / cypherlocker botnet masters, both are extremely unethical but produce a product indistinguishable from the legitimate.

EDIT: I've never taken an economics course outside of engineering, so this is mostly just conjecture, however I can't see how the true value of a bitcoin would be less than the total amount of productive  energy that was diverted to its production. I can certainly see it being higher as there is significantly more utility to bitcoin than gold, however.

SECOND EDIT (I'm interested now!): What if on top of the diverted labour value (what was discussed before), you factor in a coeffecient of utility, the coeffecient would take into consideration the amount of transactions that bitcoin competitors (paypal, western union, etc) deal in on a volume basis as a percentage of the rest of the global economy and used that as a multiplicitve factor in the derivation, I feel like that would be more accurate and would factor in the "intrinsic value."

[BadBitcoin (James Sutton)]

The true value of a bitcoin will be less than the total amount of productive energy that was diverted to its production if this whole exercise turns out to have been a mistake.

What if the math behind Bitcoin is flawed, and tomorrow it is announced that anyone can steal bitcoins from anyone else, and there's nothing we can do about it. You agree at that point the "true value" of bitcoin will be nearly zero, right?

(I don't mean to imply that there's much of a chance of this, but it's possible.)

The total amount of productive energy that was diverted to the production of bitcoin is roughly a lower limit on the total value that miners <i>expected</i> bitcoin to have. But the miners might have been wrong. (I say roughly because some miners in the past and probably even today are mining for the fun of it rather than because they think they're producing something valuable. There are also miners in the past and probably even today that are stealing electricity and processing power from others.)

Good point, in that case a risk factor should be added as well to the calculation, I do believe my "borrowed" corporate finance textbook has examples of risky endeavours, however bitcoin's risk is sort of unknown at this point and I could probably only create a time based speculative risk factor (we've existed for this long without any fundamental flaws, the chance of a major flaw decreases by n% every year.) I think that risk assumption is valid, particularly because we have very excellent programmers/white hats that have been attacking the bitcoin protocol since its inception, and it's been adapted and reinforced considerably since.

There used to be a ton of hobbyist miners, which is why I believe the price before used to be quite low in comparison to now. There is very little chance of "hobbyist" miners being able to produce any amount of bitcoins, compared to the "serious" miners who have invested considerable amount of economic value (aka diverted labour) into buying bitcoin ASIC mining farms, which is a partial reason why I believe the price increased, the miners themselves value Bitcoin more now than they did previously. Also the amount of money going to pay electricity per PH has been decreasing steadily, which means that the people with "free" power don't have anywhere near the advantage they once had.

Again this all looks past the speculative nature and looks just at the concrete value of a single bitcoin, which I think will continuously rise until the "value" reaches a meaningless value (in relation to Fiat, the "current" standard of potential labour)

[BadBitcoin (James Sutton)]

Fair enough. Don't forget that the risk changes dramatically over time. The risk in 2009 was tremendous. So tremendous that many people mining in 2009 were more likely doing so for reasons other than trying to create value. Also so tremendous that people probably had difficulty performing rational calculations.

Furthermore, we don't really have a good idea even today what the risk is. What are governments going to do about this? How well will we scale from less than one transaction per second to tens of thousands? How well will we cope with quantum computing? Will some new technology utilizing quantum entanglement better solve the double-spend problem and render the whole concept of Bitcoin obsolete? When will all these things happen?

---

The bottom line is that, in my humble opinion, I think you have your cause and effect backwards. Estimates of the expected value of bitcoin cause the market rate to rise, and when the market rate rises, people spend more money mining.

But maybe the best way to be convinced of that is to work it all out and see how it all connects. Let us know what conclusions you come to. If you start a new thread, feel free to ping me by PM so I can follow it.

My risk factor is mostly the chance that a 0 day exploit might surface before the general white hat programming community see and fix the issue in a client update, since the protocol is in a constant state of updating I don't see this being an issue unless SHA-256 itself is broken and needs to be updated, in that case I could see an issue, however I feel that besides that potential outcome, my risk factor reaching an asymptotic low sometime in ~2020 would take this particular outcome into consideration, I'll talk to gmaxwell about it.


Will do, I'm writing a spreadsheet right now, to be honest this will probably fit better in blog format but I'll do both to start. I'm not sure exactly what constants I should use for some of these coeffecients so I'll be putting it all in a google docs for everyone to see once I build the framework.

[deisik]

Intrinsic value means value that is not money value aquired because the stuff is used in indirect exchange. Gold and silver is the only money which have intrinsic value, if you don't regard real estate as money too. Some do. Fiat money and bitcoin does not have intrinsic value
You can not eat it, live in it or make pretty decorations.

What you name here as "intrinsic value" acquired through exchange is properly called utility. It exists only in our minds, and it's exactly the difference between our conceptions of what has more utility ("intrinsic value") at the time of exchange that makes this exchange ever possible. Money plays only auxiliary role here...

[deisik]

No intrinsic value is perfect. Imagine if grain was money. People would starve as you hoard it. Hoarding money harms nobody, it just enables others to use, now, the resources that you, the hoarder, does not use even if you have earned it.

If you do really think that hoarding money harms nobody then you are flat-out wrong. They can't use the resources you mention because there is no money that you have stashed away (provided there's no additional emission to make up for the "loss"). Ultimately, this would provoke a drop in prices, so producers will suffer

And don't try to argue against what I have just said. All of this has been known and proven long ago...

[Zangelbert Bingledack]

No intrinsic value is perfect. Imagine if grain was money. People would starve as you hoard it. Hoarding money harms nobody, it just enables others to use, now, the resources that you, the hoarder, does not use even if you have earned it.

If you do really think that hoarding money harms nobody then you are flat-out wrong. They can't use the resources you mention because there is no money that you have stashed away (provided there's no additional emission to make up for the "loss"). Ultimately, this would provoke a drop in prices, so producers will suffer

And don't try to argue against what I have just said. All of this has been known and proven long ago...

Can't tell if serious.

[deisik]

I'm not sure any other choice of words would make the argument any better.

Bitcoin is objectively valuable for much the same reason as gold: divisibility, durability, limited supply, etc. On these measures it's probably better than gold. It's certainly more easily transportable.

Almost everything somehow related to money that people refer to in this topic with ad hoc names has been properly termed in economic literature...

[deisik]

Would you guys value such a calculation? I might get to work and try and derive a total economic value up to this point, but I don't know if I can easily get data on the cost to produce all the PH/s that we currently use, unless I take a standard total electric cost/PH/s

I don't think the number you calculate would make any sense because too different equipment in too diverse conditions has been employed to make all those coins out there. In short, too much variance within each variable...

[deisik]

Sure, but different economic literature uses different terms. Economics based on the doctrine of intrinsic value exists. It's just wrong.

If what you call "intrinsic value" is actually what the eggheads call "utility" then, I'm afraid, it is you who is wrong here...

[deisik]

If what you call "intrinsic value" is actually what the eggheads call "utility" then, I'm afraid, it is you who is wrong here...

Yeah, well, it isn't.

http://plato.stanford.edu/entries/value-intrinsic-extrinsic/

The notion of intrinsic value in economics is nothing but an extension of the notion in philosophy.

So if you substitute utility (which exists only in subjective form) for intrinsic value, you will get rid of the confusion that might have arisen from using incorrect terms...

[crumbs]

If what you call "intrinsic value" is actually what the eggheads call "utility" then, I'm afraid, it is you who is wrong here...

Yeah, well, it isn't.

http://plato.stanford.edu/entries/value-intrinsic-extrinsic/

The notion of intrinsic value in economics is nothing but an extension of the notion in philosophy.

So if you substitute utility for intrinsic value, you will get rid of the confusion that might have arisen from using incorrect terms...

If you read what I've written more carefully, you'll see that I've only brought up the notion of intrinsic value in order to knock it down.

You can't substitute "utility" for "intrinsic value": The notion of intrinsic value is the notion that things have value in and of themselves, rather than as a means to something else. It's false. The notion of utility is not the notion that things have value in and of themselves, rather than as a means to something else. It's not false.

"Intrinsic value," used in economics context, simply means the underlying value of an asset (as opposed to its market value).
It can always be quantified in dollars, that's what makes it useful.
The philosophical concept is literally "valuable in itself," with examples being truth, beauty & love.  These things can not be quantified in units other than themselves, unless by "love" you mean "a tuggy from a hooker."

[deisik]

You can't substitute "utility" for "intrinsic value": The notion of intrinsic value is the notion that things have value in and of themselves, rather than as a means to something else. It's false. The notion of utility is not the notion that things have value in and of themselves, rather than as a means to something else. It's not false.

This notion of intrinsic value that things have value in and of themselves has no application in economics. Economics begins and ends with what people think about value (i.e. subjective assessment of value), intrinsic value as you describe it here is of no interest to economics... And if you read me more closely, you will see that I said it directly that utility is not intrinsic value but subjective valuation existing only in the mind. Now you blame me of confusing these two notions... 

I just said that you substitute utility for intrinsic value to keep things correct and clear