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

[Impaler]

Impaler was absolutely wrong about security of Bitcoin adding nothing to its strength as a store of value for rather evident reasons which I have shown (it works the same way as taxes and legalization of money do), but this doesn't make your argument more valid. What you say here is a consequence of the factors that back up Bitcoin, but this is not what gives it strength or backs it up by itself. In fact, I have already explained this in one of my previous posts in this thread...

I've said that an asset needs BOTH security and backing to be a good store-of-value, and BTC has security (of a sort) but no Backing.  I'm arguing that no amount of security can compensate for the lack of backing, the relationship is Multiplicative not Additive, a Million x Zero = Zero, you seem to be arguing that if something is just Secure enough that Backing is unnecessary.  If we reverse the relationship and hypothesize an asset that's backing is perfect but is impossible to secure from theft, no one would call that asset a good store-of-value.

[deisik]

Impaler was absolutely wrong about security of Bitcoin adding nothing to its strength as a store of value for rather evident reasons which I have shown (it works the same way as taxes and legalization of money do), but this doesn't make your argument more valid. What you say here is a consequence of the factors that back up Bitcoin, but this is not what gives it strength or backs it up by itself. In fact, I have already explained this in one of my previous posts in this thread...

I've said that an asset needs BOTH security and backing to be a good store-of-value, and BTC has security (of a sort) but no Backing.  I'm arguing that no amount of security can compensate for the lack of backing, the relationship is Multiplicative not Additive, a Million x Zero = Zero, you seem to be arguing that if something is just Secure enough that Backing is unnecessary.  If we reverse the relationship and hypothesize an asset that's backing is perfect but is impossible to secure from theft, no one would call that asset a good store-of-value.

Ok, let's start again. A currency in the gold standard is backed up by gold, right? Gold has some value, but this value is subjective in nature as well as for all other goods. This means that it is not determined by some property of gold (or amount of labor required to produce it, for that matter), but is determined by the importance an individual places on it for the achievement of his aims. Without this subjective valuation shared by the majority of people gold would be worth next to nothing. Now, if you agree that security of Bitcoin has value in the eyes of the individual as it does, you inevitably come with logical necessity to the conclusion that security IS backing up Bitcoin. Actually, anything inherent to a store of value that has subjective value will be backing it up, and the more people share this attitude, the more strength the store of value gets

It's a pity really that you went on a path of obfuscating and confusing matters here...

[pjviitas]

All currency including Bitcoin is a confidence game.

If you are confident that it has value then it has value...its as simple as that.

[davidgdg]

For a modern capitalist economy to function properly the following must hold true, in the long run:

A. currency in actual circulation (i.e. circulating paper money) must be expected to decline in terms of purchasing power in the long run. Otherwise there is no incentive to turn to stores of values (which, as explained below leads to decreased spending and no new investments = economy grinding to a halt).

Grrrr. If I read this stupid idea one more time I will cry. The incentive is that in the long run we are all dead and you can't take it with you.

[Pente]

I will eventually spend part of a deflationary money. Why not? The remaining amount will just increase in value. I just need to make sure that the amount I spend is less than the increase in value of my remaining money.

[deed02392]

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'...).

I disagree with your premise. Bitcoin makes a fantastic medium of exchange (best in human history), and due to the predictability and certainty of mining new Bitcoins (at predetermined rates), and the lack of monetary inflation, it will also make a great store of value.

Please explain why one cannot both save and spend in Bitcoin?

For a modern capitalist economy to function properly the following must hold true, in the long run:

A. currency in actual circulation (i.e. circulating paper money) must be expected to decline in terms of purchasing power in the long run. Otherwise there is no incentive to turn to stores of values (which, as explained below leads to decreased spending and no new investments = economy grinding to a halt).

assuming A is fulfilled, and people turn to stores of value, then:

B. commodity stores of value (gold) must expected, in the long run, to not outperform investment vehicles that provide a return on value (i.e. growth from anticipated real price increase plus dividends). When people no longer believe that to be the case (e.g. because of strong economic or political turmoil) they increasingly turn to gold, thus putting further pressure on the economy (because not enough money being directed to investment).

bottom line: BTC can be both store of value and medium of exchange - but only in the context of a sustained strong economic downturn (or even collapse) of a capitalist economic system. If this is desirable or not - I leave to you to decide for yourself.  

Why does it have to decline in the long run? Your point B makes it look like too many people turning to stores of value is a bad thing for the economy (ie the currency being used for active exchange). So if it doesn't decline in the long run and people have no need to turn to a store of value (because it stays so stable if it has full investment) then we don't worry about people sitting on it - they have no incentive to do that.

[alexeft]

Impaler was absolutely wrong about security of Bitcoin adding nothing to its strength as a store of value for rather evident reasons which I have shown (it works the same way as taxes and legalization of money do), but this doesn't make your argument more valid. What you say here is a consequence of the factors that back up Bitcoin, but this is not what gives it strength or backs it up by itself. In fact, I have already explained this in one of my previous posts in this thread...

I've said that an asset needs BOTH security and backing to be a good store-of-value, and BTC has security (of a sort) but no Backing.  I'm arguing that no amount of security can compensate for the lack of backing, the relationship is Multiplicative not Additive, a Million x Zero = Zero, you seem to be arguing that if something is just Secure enough that Backing is unnecessary.  If we reverse the relationship and hypothesize an asset that's backing is perfect but is impossible to secure from theft, no one would call that asset a good store-of-value.

Are you Ben Bernanke or something?

You keep theorizing about inflationary fiat "backed" by governments. I'm from Greece. Do you want to know who's backing our euro (and its motherf... banks along with it)? The pension that I will not get. The youngsters that have no jobs. It is OUR backs backing the fucking euro!!!

NO MORE!!!

[Impaler]

Ok, let's start again. A currency in the gold standard is backed up by gold, right? Gold has some value, but this value is subjective in nature as well as for all other goods. This means that it is not determined by some property of gold (or amount of labor required to produce it, for that matter), but is determined by the importance an individual places on it for the achievement of his aims. Without this subjective valuation shared by the majority of people gold would be worth next to nothing. Now, if you agree that security of Bitcoin has value in the eyes of the individual as it does, you inevitably come with logical necessity to the conclusion that security IS backing up Bitcoin. Actually, anything inherent to a store of value that has subjective value will be backing it up, and the more people share this attitude, the more strength the store of value gets

It's a pity really that you went on a path of obfuscating and confusing matters here...

Yes all value is subjective including that of gold, even the many industrial uses that we now have for gold ultimately fulfill desires that are subjective (like having a cell-phone).  Heck even FOOD can be considered to have subjective value, we might all desire to be Anorexic Yogi ascetic tomorrow and the value of food would plummet though probably not to zero unless everyone were really planning to starve to death.

But security and backing are still two different things.  Security is a guarantee of ownership, backing is a guarantee of value.  In the case of a commodity backed currency the guarantee rests upon the value of another commodity, it won't ever be less valuable then a set quantity of said commodity, but obviously the underlying commodity could still collapse.  Also states can enforce legal-tender laws and accept only their currency in payment of taxes, this is a very strong backing if the state is strong but it is still dependent on something that can ultimately fail just like a commodity.  Perfect backing is an impossibility, as is perfect security, but it's wrong to confuse of substitute them.

Saying that people have some personal subjective valuation of the security in BTC is a meaningless statement, it can not be quantified into value per unit of BTC.  Security is best expressed in a degree of confidence, the percentage probability that I will successfully retain ownership in the face of the random theft/loss chance, over a period of time.  I am equally secure regardless of how many BTC I own so why is a larger quantity worth more then a smaller quantity?  Lets suppose my confidence level is 99% per year, how do I turn that number ALONE into a valuation?  I would need to multiply it by a value derived from backing and take into account the risks that are inherent in any backing.  The only thing BTC enthusiasts can point to to back the UNIT of BTC having value is the ability to sell them to the greater fool in the future, aka they are not backed.

[deisik]

Ok, let's start again. A currency in the gold standard is backed up by gold, right? Gold has some value, but this value is subjective in nature as well as for all other goods. This means that it is not determined by some property of gold (or amount of labor required to produce it, for that matter), but is determined by the importance an individual places on it for the achievement of his aims. Without this subjective valuation shared by the majority of people gold would be worth next to nothing. Now, if you agree that security of Bitcoin has value in the eyes of the individual as it does, you inevitably come with logical necessity to the conclusion that security IS backing up Bitcoin. Actually, anything inherent to a store of value that has subjective value will be backing it up, and the more people share this attitude, the more strength the store of value gets

It's a pity really that you went on a path of obfuscating and confusing matters here...

Yes all value is subjective including that of gold, even the many industrial uses that we now have for gold ultimately fulfill desires that are subjective (like having a cell-phone).  Heck even FOOD can be considered to have subjective value, we might all desire to be Anorexic Yogi ascetic tomorrow and the value of food would plummet though probably not to zero unless everyone were really planning to starve to death.

But security and backing are still two different things.  Security is a guarantee of ownership, backing is a guarantee of value.  In the case of a commodity backed currency the guarantee rests upon the value of another commodity, it won't ever be less valuable then a set quantity of said commodity, but obviously the underlying commodity could still collapse.  Also states can enforce legal-tender laws and accept only their currency in payment of taxes, this is a very strong backing if the state is strong but it is still dependent on something that can ultimately fail just like a commodity.  Perfect backing is an impossibility, as is perfect security, but it's wrong to confuse of substitute them.

If we follow your logic, then taxes and backing are yet more different things. If security gives value to bitcoin through positive feedback making it more useful than without it, then taxes add value to legal tender in the opposite way, i.e. through negative feedback. Legal tender gets value by taxes because you will be forfeited for not having it through prosecution due to an alleged tax evasion...

It is absurd really that you deny security in backing bitcoin and at the same time easily accept that taxes are backing legal tender

[deisik]

Saying that people have some personal subjective valuation of the security in BTC is a meaningless statement, it can not be quantified into value per unit of BTC.  Security is best expressed in a degree of confidence, the percentage probability that I will successfully retain ownership in the face of the random theft/loss chance, over a period of time.  I am equally secure regardless of how many BTC I own so why is a larger quantity worth more then a smaller quantity?  Lets suppose my confidence level is 99% per year, how do I turn that number ALONE into a valuation?  I would need to multiply it by a value derived from backing and take into account the risks that are inherent in any backing.  The only thing BTC enthusiasts can point to to back the UNIT of BTC having value is the ability to sell them to the greater fool in the future, aka they are not backed.

Subjective valuation reflects usefulness (utility) of some property in achieving an individual's personal ends, whether it helps him to reach these ends or not. If there weren't subjective valuation of security of bitcoin, it would necessarily be equal to saying that security is not a useful property of bitcoin, which is definitely not the case. So, what you say here substantially boils down to whether you admit that security of bitcoin is useful or not...

[deisik]

And how on earth are you going to quantify and measure the usefulness of some property inherent to anything if it may not go beyond simple binary yes or no (whether it is useful or not), let alone quantifying it into "value per unit of BTC"? Are you confusing price and subjective value here?

[porc]

Ok, let's start again. A currency in the gold standard is backed up by gold, right? Gold has some value, but this value is subjective in nature as well as for all other goods. This means that it is not determined by some property of gold (or amount of labor required to produce it, for that matter), but is determined by the importance an individual places on it for the achievement of his aims. Without this subjective valuation shared by the majority of people gold would be worth next to nothing. Now, if you agree that security of Bitcoin has value in the eyes of the individual as it does, you inevitably come with logical necessity to the conclusion that security IS backing up Bitcoin. Actually, anything inherent to a store of value that has subjective value will be backing it up, and the more people share this attitude, the more strength the store of value gets

It's a pity really that you went on a path of obfuscating and confusing matters here...

Yes all value is subjective including that of gold, even the many industrial uses that we now have for gold ultimately fulfill desires that are subjective (like having a cell-phone).  Heck even FOOD can be considered to have subjective value, we might all desire to be Anorexic Yogi ascetic tomorrow and the value of food would plummet though probably not to zero unless everyone were really planning to starve to death.

But security and backing are still two different things.  Security is a guarantee of ownership, backing is a guarantee of value.  In the case of a commodity backed currency the guarantee rests upon the value of another commodity, it won't ever be less valuable then a set quantity of said commodity, but obviously the underlying commodity could still collapse.  Also states can enforce legal-tender laws and accept only their currency in payment of taxes, this is a very strong backing if the state is strong but it is still dependent on something that can ultimately fail just like a commodity.  Perfect backing is an impossibility, as is perfect security, but it's wrong to confuse of substitute them.

Saying that people have some personal subjective valuation of the security in BTC is a meaningless statement, it can not be quantified into value per unit of BTC.  Security is best expressed in a degree of confidence, the percentage probability that I will successfully retain ownership in the face of the random theft/loss chance, over a period of time.  I am equally secure regardless of how many BTC I own so why is a larger quantity worth more then a smaller quantity?  Lets suppose my confidence level is 99% per year, how do I turn that number ALONE into a valuation?  I would need to multiply it by a value derived from backing and take into account the risks that are inherent in any backing.  The only thing BTC enthusiasts can point to to back the UNIT of BTC having value is the ability to sell them to the greater fool in the future, aka they are not backed.

Great post.

[godislove]

 In the case of a commodity backed currency the guarantee rests upon the value of another commodity, it won't ever be less valuable then a set quantity of said commodity, but obviously the underlying commodity could still collapse.

Which is why a BASKET of commodities has always been the "gold" standard in measuring and determining constant "value". 

[deisik]

 In the case of a commodity backed currency the guarantee rests upon the value of another commodity, it won't ever be less valuable then a set quantity of said commodity, but obviously the underlying commodity could still collapse.

Which is why a BASKET of commodities has always been the "gold" standard in measuring and determining constant "value".  

And as long as you can exchange your fiat dollars for goods denominated in dollars, they are backed up by the whole US economy and part of the world's...