aminorex
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Sine secretum non libertas


October 29, 2013, 02:41:34 AM 

I'm more interested in what it can buy, and when, in the future. I'm always puzzled when people construct fanciful theories as to how the fundamental value of bitcoin is to be derived. I consider these to be relatively simple things to analyze, albeit with both alleatory and epistemic unknown model parameters:
Bitcoin derives value from demand. Demand may be collectible, speculative, investment, or monetary. Initially collectible demand dominated. Today, speculative demand dominates. In the future investment demand will dominate for an epoch. Ultimately, monetary demand will determine value. Monetary demand is described by Fisher's quantity theory of money: PQ = MV. This is a tautology. As such it is not up for debate, or suitable quarter for partisanship. V is and will always be roughly 6. In the long run M = 21mm BTC. To determine the value of a bitcoin in any future year, determine the value of the goods, services, &c, transacted in BTC during that year, and divide by 72mm. To be more accurate, reduce that 72mm to the number in circulation during that year while withholding lost, dead, or future mining coins. This will increase the estimated value, of course.
The longterm valuation of bitcoin, the attractor to which it must asymptote, is simply PQ/n for n < 72mm. If PQ = 2tln USD2013, i.e. the current UN estimated global black market, then 1 BTC =~ 27777 USD2013. If PQ = wGDP = 70tn USD2013, then 1 BTC =~ 1mm USD2013. If the whole of global wealth were to turn over in 1 year and every bitcoin be used only once, 10mm USD. You might consider that last number to be a sort of speed of light figure  a willnotexceed figure, which can only be approached asymptotically with infinite difficulty.
Another way of estimating the order of magnitude of longterm bitcoin value is to place it at parity with gold. This provides a figure which is almost certainly wrong: Either bitcoin becomes pervasive, and its features make it preferrable to physical gold for all uses, or it fails to achieve that degree of penetration and its value remains forever far less than global gold. But if all monetaryeligible gold is 2.8 bn oz, then this repulsive valuation is 133.33 troy oz Au, or ~175k USD2013. This is consistent with the notion that at maximal conceivable penetration BTC should be about 1mm USD2013.
For a lower bound, assume silkroad numbers forever. That's the failure scenario.
Either it fails, or it becomes much more valuable. While it is young, the perceived risk of failure is much greater, and nonmonetary value is collectible or speculative. As it ages, the perception of stability increases, and the nonmonetary value becomes investment, looking forward to future increases in PQ. These nonfundamental factors are social and depend on chaotic social dynamics which are exceedingly difficult to model effectively, but should eventually submit to various forms of inductive technical analysis.
