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Author Topic: Bitcoin's Future Value, Weighted Scenario Analysis  (Read 9803 times)
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rpietila
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December 05, 2013, 11:57:31 AM
Last edit: December 05, 2013, 02:19:35 PM by rpietila
 #1

To understand the purchasing power of 1mBTC in the future, one way to do it is to group the possible outcomes into a few scenarios, describe what must happen in order for them to take place, and then assess the probabilities to each of the scenarios.

By multiplying the percentage probabilities with the future values and summing up, we have the weighted average future value ("expected value", EV). We may discount it to present value if we like, however in this model I don't do it but rather assume that the sums measured in dollars represent the purchasing power in today's dollars.

**

A. Money becomes ubiquituous coupled with the proliferation of altcoins (thousands of them, perhaps everybody having his own coin), yet continues to have its functions in value storage, measurement and transactions as much as applicable. The world will be very much different and nobody anywhere will be poor in the sense of not having his basic needs met. In this utopian and hard-to-desribe scenario it does not really matter what the price of mBTC is, and it may have evolved to other forms. At any rate, we can evaluate that mBTC buys minimum $1,000. Dollars have of course been forgotten in this scenario.


B. Bitcoin totally replaces fiat worldwide and becomes the sole reserve currency. Since the valuation of the world is $400T, and most of it is financial assets, which lose their raison d'etre in the non-inflationary Bitcoin-based economy, we can conservatively estimate that the hard monetary stock of bitcoins is worth $100T and thus a mBTC is $5,000. Maybe more, but if more, then it just means that the world will be different than what it is now and conventional valuations (I want a new car!) don't hold, due to the rapidly advancing technology.


C. Bitcoin becomes an important independent world currency or a reserve currency with real bills, moderate fractional reserve, etc. Then it can go to the same value as the stock of world's gold, which is in the same ballpark as the M1 money of USD, EUR or JPY. This would put 1mBTC=$300.


D. Bitcoin's ascent is somehow stopped so that it spends a longer amount of time valued "something in between", not going up, but not losing its potential either. This I don't think can be a permanent situation, but then again - I never believed in 2006 that the fiat money system could be extended for 7 more years (even though there was no Bitcoin then)! Sometimes imbalance persists. A logaritmic midpoint between $1 and $300 (the following target) is $17.


E. Bitcoin fails, resulting in its value going to zero or near zero. It is actually very hard to think of a credible scenario where Bitcoin would do just this Smiley But let's have it just as a reminder that it is in beta and also that the world is just becoming so interesting that negative as well as positive things may happen unexpectedly.

**

If all the scenarios receive equal probability of 20%, the future (2015-2020) value of 1mBTC is $1,263.

- Are there possible outcomes that are not groupable to existing scenarios and thus require an additional one?

- Should the percentage probabilities be adjusted and if so, how?
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December 05, 2013, 12:35:26 PM
 #2

Congratulations on the ingenious approach. I like it.

My thoughts:
Scenarios A and E can be statistically ruled out (percentage wise) due to their extreme nature. I'd give both of them 1-10% at best.
Scenarios B and D have more possibilities to exist than A and E since there's already evidential data for both of them. I'd give both 10-30%.

The most possible scenario is IMHO the C. This is happening already and we're witnessing every day. More data will value it with more percentage in the future, but I strongly believe that this will be the case. I'd give it a 40-80% of existence.

I have already posted in the very beginning here of a thought I had about a world wide currency. This was a case study among friends back then. You might find it entertaining...

I so much enjoy reading this thread; really. Before learning about BC, I've discussed an idea with a friend of mine (he's into stock exchange business). I've asked him to imagine how the perfect monetary system would look like. I proposed a saying from Alvin Toffler who predicted ''the society in order to preserve itself should be evolved into a hypersociety and declare money obsolete''.

There was a huge brainstorming that night; I guess the red wine from Nemea, Greece helped a lot; but there was a conclusion. We've came along to the fact that a certain productivity factor should arise. One that should baptise each and everyone's effort for the community to evolve, with a certain grade. Not one should be left without one. Grades should be given to everyone, regardless how small or big they were. Even animals and plants should be graded.

We agreed that the grades should reflect money... well not really; points taken should get you more to the ''respect'' rate of the society system. The more respected, the louder the voice you'd had in order to make a decision for the society to maintain its evolvement. And then... it came to me. I've proposed that the ''points'' should be measured in ''Energy''. Joules, W/h, kW/h and so forth. For instance you are a plumber and fixed a hose; how much hours did you spend? A. Your points should be: (A_hours_spent x Productivity_Factor)=Points_taken. Productivity factors should -of course- include the quality of work done; but that's a different chapter...

The only worry of ours was how could you fix a system that incorporates high security, viability and most important; the 'inability' of someone to create some points out of thin air... and then came BitCoin... and here I am! Smiley

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December 05, 2013, 12:39:26 PM
 #3

Congratulations on the ingenious approach. I like it.

My thoughts:
Scenarios A and E can be statistically ruled out (percentage wise) due to their extreme nature. I'd give both of them 1-10% at best.
Scenarios B and D have more possibilities to exist than A and E since there's already evidential data for both of them. I'd give both 10-30%.

The most possible scenario is IMHO the C. This is happening already and we're witnessing every day. More data will value it with more percentage in the future, but I strongly believe that this will be the case. I'd give it a 40-80% of existence.

I have already posted in the very beginning here of a thought I had about a world wide currency. This was a case study among friends back then. You might find it entertaining...

I so much enjoy reading this thread; really. Before learning about BC, I've discussed an idea with a friend of mine (he's into stock exchange business). I've asked him to imagine how the perfect monetary system would look like. I proposed a saying from Alvin Toffler who predicted ''the society in order to preserve itself should be evolved into a hypersociety and declare money obsolete''.

There was a huge brainstorming that night; I guess the red wine from Nemea, Greece helped a lot; but there was a conclusion. We've came along to the fact that a certain productivity factor should arise. One that should baptise each and everyone's effort for the community to evolve, with a certain grade. Not one should be left without one. Grades should be given to everyone, regardless how small or big they were. Even animals and plants should be graded.

We agreed that the grades should reflect money... well not really; points taken should get you more to the ''respect'' rate of the society system. The more respected, the louder the voice you'd had in order to make a decision for the society to maintain its evolvement. And then... it came to me. I've proposed that the ''points'' should be measured in ''Energy''. Joules, W/h, kW/h and so forth. For instance you are a plumber and fixed a hose; how much hours did you spend? A. Your points should be: (A_hours_spent x Productivity_Factor)=Points_taken. Productivity factors should -of course- include the quality of work done; but that's a different chapter...

The only worry of ours was how could you fix a system that incorporates high security, viability and most important; the 'inability' of someone to create some points out of thin air... and then came BitCoin... and here I am! Smiley

Excellent analysis by both of you.  Well done.  Great reading.

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December 05, 2013, 12:41:47 PM
Last edit: December 05, 2013, 03:06:43 PM by farfiman
 #4

Great post.  I actually would give the 5th option ( bitcoin fails) A much higher probability, maybe 50%.

All 4 other options mean bitcoin has succeeded with different outcomes so they get 50% together.

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December 05, 2013, 12:46:33 PM
 #5

Bitcoins have various uses.  An arbitrage argument implies that the values derived from all uses equalize.  One use is as a circulating currency.  In that use, the value is described by PQ=MV.   In this case, M can be taken as the fraction of the bitcoin which is in use as a circulating currency.  In that application V is approximately 6, which is consistent with fiat economies and the current blockchain turn-over.  Gresham's law dictates that bitcoin are hoarded in preference to fiat.  My best first estimate of M therefore is 10% of supply.  Let's be conservative in valuation and lazy in math, and allow it to be 1/6 to balance V.  PQ is the volume of goods and services transacted times the price at which they are transacted, using bitcoin.  On this basis, the market cap of bitcoin should be approximately equal to the bitcoin annual GDP.  As a best-effort first guess, I would call it, say, France, about 2.6 tln USD2013.  For a semi-durable bound, we take the all-uses bitcoin supply at 18mn.  Thus, 1 mBTC = $15.

The parameters of the model are up for debate, but the model itself is inescapable.

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December 05, 2013, 01:23:41 PM
 #6

You can already rule out scenario A and B because China expressed as openly as they possibly could that Bitcoin is NOT a currency and is NOT money. Good luck trying to be the worldwide anything without China's backing.

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December 05, 2013, 01:27:51 PM
Last edit: December 05, 2013, 01:49:44 PM by macsga
 #7

Bitcoins have various uses.  An arbitrage argument implies that the values derived from all uses equalize.  One use is as a circulating currency.  In that use, the value is described by PQ=MV.   In this case, M can be taken as the fraction of the bitcoin which is in use as a circulating currency.  In that application V is approximately 6, which is consistent with fiat economies and the current blockchain turn-over.  Gresham's law dictates that bitcoin are hoarded in preference to fiat.  My best first estimate of M therefore is 10% of supply.  Let's be conservative in valuation and lazy in math, and allow it to be 1/6 to balance V.  PQ is the volume of goods and services transacted times the price at which they are transacted, using bitcoin.  On this basis, the market cap of bitcoin should be approximately equal to the bitcoin annual GDP.  As a best-effort first guess, I would call it, say, France, about 2.6 tln USD2013.  For a semi-durable bound, we take the all-uses bitcoin supply at 18mn.  Thus, 1 mBTC = $15.

The parameters of the model are up for debate, but the model itself is inescapable.

+1
Statistically speaking, your bitcoin-as-currency assumptions are fairly adequate. Chances are it's missing a strong point here. This is the physical meaning of BTC. This is the most important aspect IMHO. IF (and that's a strong one) it evolves to a currency the approach you've came along with, will be possible. If it remains as a vague multi-system (as it is now) then the parameters are totally different and it requires *a lot* of work to be done in order to predict a realistically fair price... Wink

You can already rule out scenario A and B because China expressed as openly as they possibly could that Bitcoin is NOT a currency and is NOT money. Good luck trying to be the worldwide anything without China's backing.
This is nothing but a political statement IMHO. Political statements can be different from one day to another (especially to political systems like the Chinese). So, I wouldn't hold my breath on the todays announcement. After all, it's a vague one. People are free to use it; while monetary corps are not? Something is *REALLY* fishy here if you change the optical angle you're looking at it...
Hint: Ever tried to make a *corporate* exchange account on Gox or Kraken? Wink

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December 05, 2013, 02:59:20 PM
 #8

Fantastic intelligently calculated analysis repietilla, was a good read.

C seems like the likely scenario at the moment, D sounds like gold in the past 2 years.

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December 05, 2013, 03:02:42 PM
 #9

Very informative post. As things are right now, I would be inclined to believe that Option C might prevail:

C. Bitcoin becomes an important independent world currency or a reserve currency with real bills, moderate fractional reserve, etc. Then it can go to the same value as the stock of world's gold, which is in the same ballpark as the M1 money of USD, EUR or JPY. This would put 1mBTC=$300.

Time will tell though, and in the meanwhile it's usefull to have a summary of possible scenario's
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December 05, 2013, 03:08:02 PM
 #10

Nice approach!

Still, while I accept the existence of scenarios B (sole currency) and E (failure), it seems to me the other scenarios are variations on X, which is co-existence; I'm not quite sure what to make of A!

I'm pretty sure $100T of money stock is an over-estimate in a non-inflationary world. The world's 2010 money supply was only put at $55T. I suspect we might get by with only $20T.

I would break failure down into three possibilities resulting in low/zero value ($0.1): technical failure/limitation: 5%; political suppression: 10%; commercial/competitive failure: 15%.

I see two possibilities yielding high value success (somewhere between $1,000 - $5,000): competitive/Darwinian domination: 15%; political adoption with the suppression of alternatives: 10%.

Successful co-existence is another possibility, as per cases C and D ($300 and $17): 45%, yielding a middling value.

So I'd calculate 1mBTC's expected value to be $0.03 + ($250 to $1250) + $142.6 = $393 to $1393, depending on the likely value of bitcoin as the world's exclusive currency.
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December 05, 2013, 03:47:24 PM
 #11

Bank of America analysts just said that C has a maximum valuation of $1300 ($1.30 per mBTC).

I don't believe that of course, just wanted to make everyone on here laugh.

I think that rpietila's per coin dollars are inflated.  I think in a C to C- scenario (C- being where bitcoin replaces major functions of PayPal, WU and MG) that we would see a valuation of about $30-$40 per mBTC.  That's an order of magnitude difference from the $300 that rpietila is saying.

I see A and B as very remote (less than 10% together) and E as about 10% as well.

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December 05, 2013, 05:19:08 PM
 #12

I would put C-/D , as the most probable scenario. Given the technology and goverment regulatory risks.
i.e.,
a) Bitcoin handles the same volume as Paypal, but both have different areas of application
b) Bitcoin is a major player in international remittances , Western Union and Money gram are wounded but still limp along as the lower end customer base still use them.
c)  As a store of value Bitcoin captures 10% of the market share of gold.


Why just 10% of gold and not 100%.
a) After 15 years, online sales are just 10% of retail sales
b) There will be some medium to small size govt that will ban bitcoin.
c) The greater the market cap of Bitcoin, more incentive for creation and propagation of viruses, botnetworks etc...
d) Inflation from Altcoin's in the future.

That still puts it at at around 30k per coin.
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December 05, 2013, 05:42:03 PM
 #13

Someone has to play the devils advocate.

Everybody here is painting a mostly good to great future for bitcoin.

Risto's E option (bitcoin fails) seems to be almost not an option to most of you. There are so many reasons that this
option will play out that it's not even funny. I'll leave the technical reasons out of this. The most threat is from the current elite of the world that basically control everything. Sure, they might just climb on the bandwagon and try to make even more wealth with bitcoin but the chances are not small that they will come down hard if it looks like bitcoin is "upsetting". It's not a matter of the U.S.  or U.K. banning bitcoin. If this happens it will be practically a worldwide ban. The bitcoin technology will continue to exist of course but not as anything we wish it would be.

For this reason I suggested in my 1st post  a 50% possibility for option E.

"We are just fools. We insanely believe that we can replace one politician with another and something will really change. The ONLY possible way to achieve change is to change the very system of how government functions. Until we are prepared to do that, suck it up for your future belongs to the madness and corruption of politicians."
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December 05, 2013, 06:06:58 PM
 #14

I wouldn't try to guess a future valuation, but C feels like a realistic scenario. As an asset class its future would be pretty peaceful and secure.

There would be a dedicated attempt at all-out eradication if it ever came close to completely upending a major currency. I've no idea whether such an attempt could ever succeed, but the wars on drugs and terrorism don't make a whole load of sense either and they're piffling sideshows in comparison.

What's worth taking into account are the uses that are still to be fully explored. It's possible previously unthought of new economic opportunities could be created.







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December 05, 2013, 06:26:14 PM
 #15

http://www.zerohedge.com/news/2013-12-05/bofaml-sees-bitcoin-fair-value-1300

$1300 apparently is a fair value... seems a bit plucked out of thin air, but there you go!
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December 05, 2013, 06:27:38 PM
 #16

The tackling of this question is commendable since answering it is not something that many (or any) of us are up to individually.

Option A seems rather unlikely in the near future. In order for us to not have a lower class "poor in the sense of not having his basic needs met" we would need a massive technological change, ala Star Trek's replicator, transporter, etc. Scarcity of basic resources such as food, clean water and adequate shelter for the masses who still don't possess a smart phone is not a trivial problem to overcome. Without some incredible change in technology and/or motivation by those with means, I can't see worldwide distribution of wealth as a benefit for any digital currency - maybe I'm just missing something. In my opinion money may become ubiquitous, but the value of money in relation to resources will still challenge those who struggle today.

Option B seems unlikely since there is going to be a massive tug of war between the desire for the government to maintain control and the ability for technological advances to thwart such control, without either side being able to declare ultimate victory. It would be like the Pirate Bay buying out and taking over iTunes/Apple - it gives one giggles to think about an awesome day like that, but it's hard to envision a reality where this is the case.

In my opinion, Option E is also unlikely under any scenario except for technical failure. The world has just barely discovered peer to peer financial transactions. Even if bitcoin fails because of a technical reason, how do you put the desire to perform these transactions back in the bottle? Most likely bitcoin is adaptable to technical failures and if it isn't then bitcoin 2.0 takes its place. Considering that there is a likely point where you can exchange the value of bitcoin 1 for bitcoin 2, I don't see that as a failure. Similar to the war on drugs or peer to peer file sharing, the government can have an impact, but it never really is able to fully stamp out the public's desire for drugs or the spread of information.

Options C and D seem plausible. I can't fathom what kills the momentum when bitcoin reaches perhaps the value of $17/mBTC mentioned in Option D but then again the future is always hard to see before you get there. I'll take a stab at it though:

TL;DR version:

Option D happens ($17/mBTC) and at that point, major governments decide to adopt the components of distributed currencies making officially sanctioned competitors for bitcoin that the elite of the world can get behind and embrace. This mollifies the masses into being provided with officially endorsed cryptocurrencies without banning bitcoin. Bitcoin is overly regulated and becomes a tool for only the technologically capable, the criminals or fringe anarchist/libertarians (no offense intended). I could see bitcoin managing to stay valuable but not be accepted by the masses due to fear of being scrutinized or persecuted for choosing to use the 'shady' version of digital currencies. Back to the bit torrent comparison again, how many users don't choose to use torrent for fear of being prosecuted and instead go with iTunes? Between fear and ease of use, the majority choose the sanctioned version, I wager.

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December 05, 2013, 06:48:47 PM
 #17

Someone has to play the devils advocate.

Everybody here is painting a mostly good to great future for bitcoin.

Risto's E option (bitcoin fails) seems to be almost not an option to most of you. There are so many reasons that this
option will play out that it's not even funny. I'll leave the technical reasons out of this. The most threat is from the current elite of the world that basically control everything. Sure, they might just climb on the bandwagon and try to make even more wealth with bitcoin but the chances are not small that they will come down hard if it looks like bitcoin is "upsetting". It's not a matter of the U.S.  or U.K. banning bitcoin. If this happens it will be practically a worldwide ban. The bitcoin technology will continue to exist of course but not as anything we wish it would be.

For this reason I suggested in my 1st post  a 50% possibility for option E.

And yet the US Treasury and FBI have REPEATEDLY said that there are legitimate uses of bitcoin.  The more senators, Second Market customers, hedge fund managers and billionaires that get involved in bitcoin, the less likely this is.

Since we are seeing a fair amount of this, I'm setting the government ban possibility as very low.

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December 05, 2013, 07:23:10 PM
 #18

Alternative A is utopistic, some people have explained it to me but it was above my understanding. Similar as the Internet is now, compared to the life in the 1980s. The change has been so profound, yet so gentle.

As 100x cleverly pointed out, the expected value (weighted average of the outcomes) does not change significantly whether the zero case is weighed with 3% or 50%. It is much more important that there are realistic scenarios with enough zeros after the significant digits. And based on sound mathematics and economical thinking, this is the case. This drives level-headed investors to take Kelly bets and many more take smaller bets.

This new fiat pushes the prices higher. Compare this to an old thread from last March. Price was about $50 and we run the same thought experiment. We arrived at the conclusion that the EV is $2200 or so. The background was that price had quickly risen 5x after several months of flatlining, so essentially identical to our situation. It was scary to buy more after such a runup, but this analysis was irresistible.

It is self-fulfilling. If 9 months ago Bitcoin was undervalued by 1:44, now it is undervalued by 1:100, 1:300, 1:1000 or so, depending on the weights. If Bitcoin is considered as even more sure bet now than it was then, it is all the more probable that 9 months from now we estimate that the most positive scenarios are the most realistic.

As long as bitcoin price relentlessly rises (and we are already seeing about 50% awareness among general population), everybody is faced with the decision whether to buy or not. Oh, I had so much to talk to you from last night's conversations Smiley
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December 05, 2013, 07:43:29 PM
 #19

interesting reading, I would like to share my imagination for these scenarios

A- If I understood this right than I think this is happening already, we have so many worthless coins out there I mean really so many that we have a coin for every word in the dictionary (sarcasm) but this really worries me, I thought of having 2 mx 3 alts as a backup but this went out of control now I am starting to think what is the point of alts.

B- I personally think that is the last thing to happen, even to think about it is hard for a simple reason, this could be a scenario only if a big revolution start to take down all currepted systems and replace them with a system who adopts the concept have.

C- I think this is the most realistic scenario and the closest to what we are at now, and I personally believe on this one, in fact just few minutes ago I posted something about it, feel free to read it   https://bitcointalk.org/index.php?topic=358943.0;topicseen

D- to be honest I really do not understand how can this happen exactly.


F- I didnt like seing it on the list but for the sake of the argument it is a possible scenario, but there is really a small chance of this happening.
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December 06, 2013, 01:35:05 AM
 #20

Bitcoins have various uses.  An arbitrage argument implies that the values derived from all uses equalize.  One use is as a circulating currency.  In that use, the value is described by PQ=MV.   In this case, M can be taken as the fraction of the bitcoin which is in use as a circulating currency.  In that application V is approximately 6, which is consistent with fiat economies and the current blockchain turn-over.  Gresham's law dictates that bitcoin are hoarded in preference to fiat.  My best first estimate of M therefore is 10% of supply.  Let's be conservative in valuation and lazy in math, and allow it to be 1/6 to balance V.  PQ is the volume of goods and services transacted times the price at which they are transacted, using bitcoin.  On this basis, the market cap of bitcoin should be approximately equal to the bitcoin annual GDP.  As a best-effort first guess, I would call it, say, France, about 2.6 tln USD2013.  For a semi-durable bound, we take the all-uses bitcoin supply at 18mn.  Thus, 1 mBTC = $15.

The parameters of the model are up for debate, but the model itself is inescapable.
Nice argument.
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