Medium of Exchange vs Store of Value - and effect on BTC worth

[natd]

Ok, in that case (BTC  is "backed by the strength and security of the network as well as the safety"), where is the download link where I can redeem my BTCs for that in order to store some safety in my own home, or use it in my laptop once in a while?
See? It's not backed by anything of value. You cannot trade subjective stuff as strenght, security or safety. My 2 bit cents

If you saved your paper dollars under the mattress, this wouldn't be much different from saving some files on the storage media in your computer. Whether material or immaterial, the form in which value is saved or stored plays no role. What really does is the subjective value people attribute to the things and which you cannot redeem in order to store safely in your home. If security as well as safety are among them, then anything that provides security and safety will have that subjective value (which you just can't squirrel in the backyard because it is purely a mental construct in people's heads)...

So you're actually confusing issues here (I hope unintentionally)

Well, I understand the form in which value is stored is not important: besides paper dollars and metal coins under my mattress, I use credit cards and checks, and I understand my bank keeps dollars in files in their computers. But that's all dollars, legal tender.

So maybe I'm just a confused old guy, perhaps my 50 yo old brain can't catch up with you guys

[Ibian]

So maybe I'm just a confused old guy, perhaps my 50 yo old brain can't catch up with you guys

Don't play that card. My 66 year old dad understands it. Whippersnapper. Address the issues brought forward.

[deisik]

If you saved your paper dollars under the mattress, this wouldn't be much different from saving some files on the storage media in your computer. Whether material or immaterial, the form in which value is saved or stored plays no role. What really does is the subjective value people attribute to the things and which you cannot redeem in order to store safely in your home. If security as well as safety are among them, then anything that provides security and safety will have that subjective value (which you just can't squirrel in the backyard because it is purely a mental construct in people's heads)...

So you're actually confusing issues here (I hope unintentionally)

Well, I understand the form in which value is stored is not important: besides paper dollars and metal coins under my mattress, I use credit cards and checks, and I understand my bank keeps dollars in files in their computers. But that's all dollars, legal tender.

So maybe I'm just a confused old guy, perhaps my 50 yo old brain can't catch up with you guys

The notion of legal tender is useful only when you pay your debts to banks or taxes to the state (which are debts too). In many jurisdictions, you can be lawfully refused to do business with and may not insist on striking a deal. This would render legal tender (lol) effective only as an offered payment for debts...

[porc]

Is Bitcoin primarily a medium of exchange or a store of value? No financial instrument can be both things equally well. Despite what some Bitcoin proponents believe, specialization in one direction is inevitable (many people who seem to think it can somehow be both are the same ones advocating 'buy and hold forever'...).

The BTC paradox is that when it was created, it was intended to become primarily a medium of exchange (so Satoshi claimed) but the manner in which the protocol was devised makes it far more suited to be a store of value.

If it does become a significant store of value what might it be worth? Obviously we still cannot say with any certainty, but to determine the upper limit assume Bitcoin somehow fully replaced gold. Then the price of 1 BTC would roughly equal $330,000 (5.6 billion ounces*1250/21,000,000). Of course that is the upper limit and not very realistic.

Here is my reply (I have made a new thread about it so this might be repetitive.)


Bitcoin is going up in price because people believe it will be used as a medium of exchange and store of value. If they realise this wont happen it will collapse in price. So lets look at these two aspects.

1) Medium of exchange.

Bitcoin is only a medium of exchange when merchants accept it and hold onto it. Right now merchants are dumping bitcoin for dollars, so its not being used as a medium of exchange. This btw. also throws the transaction cost benefit argument right out of the window (spread).

Now will merchants ever accept bitcoin and hold onto them?
No.

Why?

a) Governments have already effectively made it impossible for people to use bitcoin as a medium of exchange, as they expect taxes to be paid on bitcoin gains. Thus it cant function as a medium of exchange (same goes for gold btw.). Unless Government loses its control on its money monopoly this law wont be altered.

b) Governments will prohibt merchants from accepting bitcoins. Again: They will never give up their monoply on money.

2) Store of Value

After people realize that merchants are not adopting bitcoin and that it is not used as a medium of exchange, it will collapse in price. Will anybody store significant wealth in Bitcoin after this spectacular collapse? Not likely.

Also Bitcoin is a technology, that can be outcompeted by other altcoins. Your wallet can be hacked. The average citizen cant judge if the code can or can not be hacked and thus more bitcoins created. If you want to store wealth over a long period of time investing in a technology is not the best and easiest option. Also Bitcoin is not useful or wanted. If you ask a Bitcoiner what can I do with it they will say: dump it on the next guy it will go up in price! Gold and Silver where always wanted (jewlery and nowadays industry) and thats why they became MONEY in the first place! They have unique properties and everybody loves to hold them in their hand. This will always be the case ensuring significant value and acceptance. Nothing like this can be said for bitcoins. Thus I dont believe bitcoin will function as a store of value in any significant way.

Conclusion:

I predict bitcoin to collapse in price (close to 0 worth), as I believe it will not be used as a store of value or medium of exchange.

EDIT: The price increasing shows bitcoin is used as a speculative vehicle. It does not demonstrate bitcoins viability as a store of value or medium of exchange.

(Additional line of attack for governments: If I am wrong about these points government will come down hard on miners. They could make it illegal to mine bitcoins. Then bitcoin will lose all of its advantages compared to alternative cryptocurrencies. It will be a code like the rest of them.)

[Ibian]

I predict bitcoin to collapse in price (close to 0 worth).

That's nice. And original. When?

[natd]

So maybe I'm just a confused old guy, perhaps my 50 yo old brain can't catch up with you guys

Don't play that card. My 66 year old dad understands it. Whippersnapper. Address the issues brought forward.

I was just being sarcastic

[npl]

2) Store of Value

After people realize that merchants are not adopting bitcoin and that it is not used as a medium of exchange, it will collapse in price. Will anybody store significant wealth in Bitcoin after this spectacular collapse? Not likely.

The viability of a commodity as store of value is unrelated to its viability as medium of exchange. A Picasso painting is a poor medium of exchange but a decent store of value. BTC could be a store of value in the long term if it is perceived as rare and desirable.

[natd]

I predict bitcoin to collapse in price (close to 0 worth).

That's nice. And original. When?

When speculators decide to sell  BTC short. It's not impossible at all. BTC is like stock of a corporation that doesn't do anything, doesn't own anything and has no real revenue. Like a .COM corp in 2000.

[deisik]

To be short and simple, economic "value" is the price of goods and services. BTC is not backed by any good or service. Exemplifying, as some can say miners are providing services,  BTC would be backed by a service if 1 BTC could be redeemed by 1 doctor visit. On the other hand, the service by miners is not value, it is operational cost.
Please understand I'm not against virtual currencies, I think they can be very useful in the future.

Fiat is not backed by anything at all. Not only that, banks lend out more than ten times the amount they nominally have. I'm close to just writing you off as a troll at this point.

Actually, it is backed by all the goods and services which are denominated in that fiat. The price suggested for an exchange is a confirmation of the trust the producer has in the currency. When you accept payment for your work, you do the same. If you think thoroughly about this, you will inevitably come to a conclusion that such a system doesn't differ very much from a money system where currency is backed up by some hard asset like gold...

Like many on this forum you seem not to understand how FRB actually works. If you think otherwise, please explain how a bank can have more liabilities than assets?

[Ibian]

To be short and simple, economic "value" is the price of goods and services. BTC is not backed by any good or service. Exemplifying, as some can say miners are providing services,  BTC would be backed by a service if 1 BTC could be redeemed by 1 doctor visit. On the other hand, the service by miners is not value, it is operational cost.
Please understand I'm not against virtual currencies, I think they can be very useful in the future.

Fiat is not backed by anything at all. Not only that, banks lend out more than ten times the amount they nominally have. I'm close to just writing you off as a troll at this point.

Actually, it is backed by all the goods and services which are denominated in that fiat. The price suggested for an exchange is a confirmation of the trust the producer has in the currency. When you accept payment for your work, you do the same. If you think thoroughly about this, you will inevitably come to a conclusion that such a system doesn't differ very much from a money system where currency is backed up by some hard asset like gold...

Like many on this forum you seem not to understand how FRB actually works. If you think otherwise, please explain how a bank can have more liabilities than assets?

So all that's needed is for people to accept payment in bitcoin and it magically becomes "real"? Cool.

[pjviitas]

To be short and simple, economic "value" is the price of goods and services. BTC is not backed by any good or service. Exemplifying, as some can say miners are providing services,  BTC would be backed by a service if 1 BTC could be redeemed by 1 doctor visit. On the other hand, the service by miners is not value, it is operational cost.
Please understand I'm not against virtual currencies, I think they can be very useful in the future.

Fiat is not backed by anything at all. Not only that, banks lend out more than ten times the amount they nominally have. I'm close to just writing you off as a troll at this point.

Actually, it is backed by all the goods and services which are denominated in that fiat. The price suggested for an exchange is a confirmation of the trust the producer has in the currency. When you accept payment for your work, you do the same. If you think thoroughly about this, you will inevitably come to a conclusion that such a system doesn't differ very much from a money system where currency is backed up by some hard asset like gold...

Like many on this forum you seem not to understand how FRB actually works. If you think otherwise, please explain how a bank can have more liabilities than assets?

So all that's needed is for people to accept payment in bitcoin and it magically becomes "real"? Cool.

So all that's needed is for people to accept that a piece of paper has value and it magically does? Cool.

[deisik]

Actually, it is backed by all the goods and services which are denominated in that fiat. The price suggested for an exchange is a confirmation of the trust the producer has in the currency. When you accept payment for your work, you do the same. If you think thoroughly about this, you will inevitably come to a conclusion that such a system doesn't differ very much from a money system where currency is backed up by some hard asset like gold...

Like many on this forum you seem not to understand how FRB actually works. If you think otherwise, please explain how a bank can have more liabilities than assets?

So all that's needed is for people to accept payment in bitcoin and it magically becomes "real"? Cool.

In short, yes. But why do you think that most people would agree to receive payments in bitcoins in the first place? The real magic would be if you could persuade them to...

[Impaler]

Been over this countless times just in the short while I have been on the board. Bitcoin is backed by the strength and security of the network as well as the safety compared to fiat. Ultimately it all comes down to trust, even with government "backed" (in that it is not actually backed by anything physical) paper money.

You confuse BACKING with SECURITY, Backing a Currency means giving it value, government legal tender laws and the ability to pay your taxes in a currency, or in the past pegging the currency unit to quantity of precious metal all BACK the currency, aka they give it some minimum value and allow it to act as a store of value.  Security is preventing a currency from being stolen or counterfeited and governments also generally provide Security both by making paper bills hard to counterfeit and punishing thieves, the nature of paper-bills as an bearer-bond put limits on how secure such a currency can ultimately be though.

The BTC computer network provides SECURITY only, it keeps BTC from being counterfeited, and it kind-of prevents bogus transactions by cryptographic signatures, while turning a blind eye to scams, hacked wallets and black-markets making the security arguably inferior to that provided by government (note that all the prosecution of theft/scam under BTC is in fact being done by Government, so BTC security is effectively being subsidized now).  But all of these things are just guaranteeing your continued ownership of BTCs not that the coins will be WORTH anything.  BTC is semi-secured but not backed by anything.

[Ibian]

Been over this countless times just in the short while I have been on the board. Bitcoin is backed by the strength and security of the network as well as the safety compared to fiat. Ultimately it all comes down to trust, even with government "backed" (in that it is not actually backed by anything physical) paper money.

You confuse BACKING with SECURITY, Backing a Currency means giving it value, government legal tender laws and the ability to pay your taxes in a currency BACK the currency, or in the past pegging the currency unit to quantity of precious metal.  Security is preventing a currency from being stolen or counterfeited and governments also generally provide Security both by making paper bills hard to counterfeit and punishing thieves.

The BTC computer network provides SECURITY only, it keeps BTC from being counterfeited, and it kind-of prevents bogus transactions by cryptographic signatures, while turning a blind eye to scams, hacked wallets and black-markets.  But all of these things are just guaranteeing your continued ownership of BTCs not that the coins will be WORTH anything.  BTC is secured but not backed.

What happens when the government is the thief?

Cyprus was just a test case. All members of the EU are essentially governed by a central authority - somewhere north of 50% of all laws are made by them, and the rest fall within the borders of those 50%+. Any of the member countries could wake up on monday to find their bank accounts have shrunk by whatever arbitrary percentage.

[deisik]

You confuse BACKING with SECURITY, Backing a Currency means giving it value, government legal tender laws and the ability to pay your taxes in a currency BACK the currency, or in the past pegging the currency unit to quantity of precious metal.  Security is preventing a currency from being stolen or counterfeited and governments also generally provide Security both by making paper bills hard to counterfeit and punishing thieves.

The BTC computer network provides SECURITY only, it keeps BTC from being counterfeited, and it kind-of prevents bogus transactions by cryptographic signatures, while turning a blind eye to scams, hacked wallets and black-markets.  But all of these things are just guaranteeing your continued ownership of BTCs not that the coins will be WORTH anything.  BTC is secured but not backed.

At the level where it matters for the question discussed (i.e. subjective utility), there is not much difference between these two concepts. Actually, at this level security becomes what gives the currency some value (indeed this is not enough) because it all finally boils down to trust. As a counter-argument, I can just as easy say that backing up by gold is simply preventing government from abusing their power. And security, all of a sudden, now begins to play in the same field...

Simple mental exercise, suppose you have to pick up between two currencies. One can be counterfeited more easily than the other, otherwise they are on a par. Which currency would you choose?

[Impaler]

What happens when the government is the thief?

Cyprus was just a test case. All members of the EU are essentially governed by a central authority - somewhere north of 50% of all laws are made by them, and the rest fall within the borders of those 50%+. Any of the member countries could wake up on monday to find their bank accounts have shrunk by whatever arbitrary percentage.

What makes you think that a Bank in Cyprus that had held BTCs would have been immune to the haircut?  Once you put a deposit in a bank your trusting not the currency but the banking system and government.  Thus your point is irrelevant, try addressing the actual point I made, if you disagree explain how the BTC network BACKS Bitcoin.

[Ibian]

What happens when the government is the thief?

Cyprus was just a test case. All members of the EU are essentially governed by a central authority - somewhere north of 50% of all laws are made by them, and the rest fall within the borders of those 50%+. Any of the member countries could wake up on monday to find their bank accounts have shrunk by whatever arbitrary percentage.

What makes you think that a Bank in Cyprus that had held BTCs would have been immune to the haircut?  Once you put a deposit in a bank your trusting not the currency but the banking system and government.  Thus your point is irrelevant, try addressing the actual point I made, if you disagree explain how the BTC network BACKS Bitcoin.

We each hold our own coins. Not some bank. Anyone who lets others handle their money these days, especially governments or banks, are fools and deserve what they get.

[Impaler]

We each hold our own coins. Not some bank. Anyone who lets others handle their money these days, especially governments or banks, are fools and deserve what they get.

Then go tell everyone to stop trading on Mt.Gox and all other exchanges, they are doing exactly that, holding other peoples coins.  Now would you PLEASE address my point on Backing vs Security.

[Ibian]

We each hold our own coins. Not some bank. Anyone who lets others handle their money these days, especially governments or banks, are fools and deserve what they get.

Then go tell everyone to stop trading on Mt.Gox and all other exchanges, they are doing exactly that, holding other peoples coins.  Now would you PLEASE address my point on Backing vs Security.

Sure. Government backing is not secure.

Edit: Not even being flippant. This time. It really isn't.

[Impaler]

You confuse BACKING with SECURITY, Backing a Currency means giving it value, government legal tender laws and the ability to pay your taxes in a currency BACK the currency, or in the past pegging the currency unit to quantity of precious metal.  Security is preventing a currency from being stolen or counterfeited and governments also generally provide Security both by making paper bills hard to counterfeit and punishing thieves.

The BTC computer network provides SECURITY only, it keeps BTC from being counterfeited, and it kind-of prevents bogus transactions by cryptographic signatures, while turning a blind eye to scams, hacked wallets and black-markets.  But all of these things are just guaranteeing your continued ownership of BTCs not that the coins will be WORTH anything.  BTC is secured but not backed.

At the level where it matters for the question discussed (i.e. subjective utility), there is not much difference between these two concepts. Actually, at this level security becomes what gives the currency some value (indeed this is not enough) because it all finally boils down to trust. As a counter-argument, I can just as well say that backing up by gold is simply preventing government from abusing their power. And security all of a sudden now begins to play in the same field...

Simple mental exercise, suppose you have to pick up between two currencies. One can be counterfeited more easily that the other, otherwise they are on a par. Which currency would you choose?

Their is a lot of difference, something can not be an effective store-of-value if it lacks EITHER.  For a person to store value a person needs to do two things, they need to RETAIN an asset and the asset needs to RETAIN purchasing power.  If I had an object with perfect ability to retain purchasing power but it could be stolen very easily it would be a poor store-of-value, alternatively something that's very hard to steal but which has unstable in purchasing power would likewise be bad.  My total risk of loss is Retention Risk (losing the asset) + Valuation Risk (asset loses value).  So any logical and subjective personal assessment of an assets store-of-value is going to need to take both risks into account.