the cost vs. the intrinsic value of bitcoin

[ericwang]

when we talk about why gold is a store of value, imo it is not because of its intrinsic value, just simply because of the cost of gold mining. Take a long term perspective,  whenever it is relatively easy to find or mine, its price
is low and when mining become more and more costly, its price go higher, as a long term trend.

So as bitcoin. when mining is more and more difficult,  the mining cost is bigger and bitcoin price gonna be higher in long term, regardless if it gonna be a global currency or a store of value. the long term price movement is the store of value.

[odolvlobo]

The cost of mining bitcoins has very little effect on the price bitcoins because the amount of mined bitcoins for sale is only a small portion of the total supply of bitcoins for sale.

[ericwang]

The cost of mining bitcoins has very little effect on the price bitcoins because the amount of mined bitcoins for sale is only a small portion of the total supply of bitcoins for sale.

Good point. Maybe I should say the value of bitcoin is based on the cost of mining. The price will be even higher if only part of bitcoin are circulating. If the gap between cost and price of bitcoin is wider, either the price will be pull back or the mining difficulty will soar to make the gap narrow. So when we treat bitcoin as a store of value, the value should be very much cost sensitve.

[deisik]

when we talk about why gold is a store of value, imo it is not because of its intrinsic value, just simply because of the cost of gold mining. Take a long term perspective,  whenever it is relatively easy to find or mine, its price
is low and when mining become more and more costly, its price go higher, as a long term trend.

So as bitcoin. when mining is more and more difficult,  the mining cost is bigger and bitcoin price gonna be higher in long term, regardless if it gonna be a global currency or a store of value. the long term price movement is the store of value.

Even the price of gold has little correlation (if any) with the cost of gold mining since annual output of gold mining makes only a small part of its total reserves (at about 2% per annum). Gold is not consumed like food and gold reserves have been growing for centuries (i.e. supply exceeding irreversible losses)...

The same holds true for bitcoin

[ericwang]

Even the price of gold has little correlation (if any) with the cost of gold mining since annual output of gold mining makes only a small part of its total reserves. Gold is not consumed like food and it has been there for centuries...

The same holds true for bitcoin

Right now, the price of gold is pretty much at the leavel of its mining cost, which is around $1200.

[deisik]

Even the price of gold has little correlation (if any) with the cost of gold mining since annual output of gold mining makes only a small part of its total reserves. Gold is not consumed like food and it has been there for centuries...

The same holds true for bitcoin

Right now, the price of gold is pretty much at the leavel of its mining cost, which is around $1200.

The level of gold mining costs is at around 600$ per troy ounce, if I am not mistaken. What are your sources?

[ericwang]

http://www.zerohedge.com/news/2013-12-15/perfect-storm-coming-gold

"At a price of $1,250, gold mining companies can no longer make a profit. Recent studies show their all in cash cost anywhere from $1,400 to as high as $1,700. Liquid fuels, human energy, and new exploration are costly in the mining process, so it is unlikely these costs can be cut to accommodate the low gold price."

[deisik]

http://www.zerohedge.com/news/2013-12-15/perfect-storm-coming-gold

"At a price of $1,250, gold mining companies can no longer make a profit. Recent studies show their all in cash cost anywhere from $1,400 to as high as $1,700. Liquid fuels, human energy, and new exploration are costly in the mining process, so it is unlikely these costs can be cut to accommodate the low gold price."

Goldbugs' hype

I have another, more reliable source. In 2012 marginal costs of gold were equal to $1,104 while the average cost of production was at 673$ per troy ounce. In the third quarter of 2013 average cost was $654, highest in South Africa ($928 per ounce), and lowest in Indonesia ($414 per ounce), Russia ($515 per ounce) and China ($549 per ounce)...

[ericwang]

Goldbugs' hype

I have another, more reliable source. In 2012 marginal costs of gold were equal to $1,104 while the average cost of production was at 673$ per troy ounce. In the third quarter of 2013 average cost was $654, highest in South Africa ($928 per ounce), and lowest in Indonesia ($414 per ounce), Russia ($515 per ounce) and China ($549 per ounce)...

yes, it is more reliable. I am thinking what makes gold valuable, and I believe it is because of scaricity which makes mining more and more difficult. So as bitcoin. As long as the mining difficulty is higher, the value of bitoin is greater.

[deisik]

Goldbugs' hype

I have another, more reliable source. In 2012 marginal costs of gold were equal to $1,104 while the average cost of production was at 673$ per troy ounce. In the third quarter of 2013 average cost was $654, highest in South Africa ($928 per ounce), and lowest in Indonesia ($414 per ounce), Russia ($515 per ounce) and China ($549 per ounce)...

yes, it is more reliable. I am thinking what makes gold valuable, and I believe it is because of scaricity which makes mining more and more difficult. So as bitcoin. As long as the mining difficulty is higher, the value of bitoin is greater.

But you still don't take into account the average production costs through the whole life of both gold and bitcoin (since they are not consumed in the way food is). Why should we count in only today's costs in the first place, as what you actually propose to do?

Your logic is self-contradictory (by the way, the labor theory of value has been thoroughly disproven since its very inception)...

[ericwang]

But you still don't take into account the average production costs through the whole life of both gold and bitcoin (since they are not consumed in the way food is). Why should we count in only today's costs in the first place, as what you actually propose to do?

Your logic is self-contradictory (by the way, the labor theory of value has been thoroughly disproven since its very inception)...

I understand your point. the average cost is much lower due to hoarding of early production. However, since the scarcity, the average cost is indeed higher and higher, not only today cost. What I dont get is why labor theory of value is not apply to gold or bitcoin.

[deisik]

But you still don't take into account the average production costs through the whole life of both gold and bitcoin (since they are not consumed in the way food is). Why should we count in only today's costs in the first place, as what you actually propose to do?

Your logic is self-contradictory (by the way, the labor theory of value has been thoroughly disproven since its very inception)...

I understand your point. the average cost is much lower due to hoarding of early production. However, since the scarcity, the average cost is indeed higher and higher, not only today cost. What I dont get is why labor theory of value is not apply to gold or bitcoin.

Because exchange value (commonly referred to as price) is ultimately determined by the balance of supply and demand, and the cost of production is only a factor among many others contributing to the establishment of this balance. There is a thread somewhere in this forum that statistically proves that price of bitcoin is not dependent on the mining cost/difficulty...

[porc]

when we talk about why gold is a store of value, imo it is not because of its intrinsic value, just simply because of the cost of gold mining. Take a long term perspective,  whenever it is relatively easy to find or mine, its price
is low and when mining become more and more costly, its price go higher, as a long term trend.

So as bitcoin. when mining is more and more difficult,  the mining cost is bigger and bitcoin price gonna be higher in long term, regardless if it gonna be a global currency or a store of value. the long term price movement is the store of value.

LOL. The value is what you can DO with GOLD. It is NOT dependent on SUPPLY.

The PRICE is determined by SUPPLY AND DEMAND.

[odolvlobo]

The cost of mining bitcoins has very little effect on the price bitcoins because the amount of mined bitcoins for sale is only a small portion of the total supply of bitcoins for sale.

Good point. Maybe I should say the value of bitcoin is based on the cost of mining. The price will be even higher if only part of bitcoin are circulating. If the gap between cost and price of bitcoin is wider, either the price will be pull back or the mining difficulty will soar to make the gap narrow. So when we treat bitcoin as a store of value, the value should be very much cost sensitve.

Again, the cost of mining bitcoins has very little effect on the price of bitcoins. The reverse is much more true. The cost of mining depends on the price of bitcoins because if it is cheaper to mine them, then more people will mine them, and because no rational person would mine bitcoins for a loss.

[deisik]

The cost of mining bitcoins has very little effect on the price bitcoins because the amount of mined bitcoins for sale is only a small portion of the total supply of bitcoins for sale.

Good point. Maybe I should say the value of bitcoin is based on the cost of mining. The price will be even higher if only part of bitcoin are circulating. If the gap between cost and price of bitcoin is wider, either the price will be pull back or the mining difficulty will soar to make the gap narrow. So when we treat bitcoin as a store of value, the value should be very much cost sensitve.

Again, the cost of mining bitcoins has very little effect on the price of bitcoins. The reverse is much more true. The cost of mining depends on the price of bitcoins because if it is cheaper to mine them, then more people will mine them, and because no rational person would mine bitcoins for a loss.

I would be very careful about that point. Some people surely mine bitcoins for a loss and not because they are irrational about what they are doing. They may pursue some other goals beside just getting profit (as the opposite of loss), and as long as their choice of their ends is rational they remain that...

[hilariousandco]

when we talk about why gold is a store of value, imo it is not because of its intrinsic value, just simply because of the cost of gold mining.

The intrinsic value of gold is that it's a useful physical metal. You can make jewellery and even teeth with it, so that's what intrinsic value it has in the real world.

[skovbitcoin]

An intrinsic theory of value suggests that the intrinsic value of anything is largely related to it's cost of production or acquisition. However, this is obviously made more complicated as things have also a utility. Utility is simplistically the usefulness of an item, as an example water has tremendous utility and can also have tremendous intrinsic value. However, generally its value is low. Why? Utility is valued far less when there is an excessive amount of an item. Water is not generally scarce and as such it's utility is not valued highly. There are also subjective theories of value which say that the value of an item is based on a person's perception of the item's benefit to them.

Bitcoin is scarce and it's becoming more costly to mine. However, I think at the moment we are paying a premium on it's value due to speculation. It's price should rise with it's increasing production costs, so long as it has actual utility. Here's hoping 2014 leads to much greater adoption for purchasing and penetrates the public's imagination even more. If so, then the sky is the limit for Bitcoin value.

[DeathAndTaxes]

http://www.zerohedge.com/news/2013-12-15/perfect-storm-coming-gold

"At a price of $1,250, gold mining companies can no longer make a profit. Recent studies show their all in cash cost anywhere from $1,400 to as high as $1,700. Liquid fuels, human energy, and new exploration are costly in the mining process, so it is unlikely these costs can be cut to accommodate the low gold price."

Goldbugs' hype

I have another, more reliable source. In 2012 marginal costs of gold were equal to $1,104 while the average cost of production was at 673$ per troy ounce. In the third quarter of 2013 average cost was $654, highest in South Africa ($928 per ounce), and lowest in Indonesia ($414 per ounce), Russia ($515 per ounce) and China ($549 per ounce)...

This is something people don't really understand and it is one way that gold (or any commodity) naturally balances supply and demand.  In the "will bitcoin always be a bubble thread" it got me thinking that an altcoin could attempt to replicate this behavior by allowing miners to mine more coins at a higher cost to simulate the effect of marginal production.

To simplify what he is saying.  Gold doesn't have one production cost.  It varies considerably from one mine to another based on yield, complexity, labor costs, etc. 

As an example lets say There are mines with a production cost of $300 per ounce, some with $900 per ounce, some with $1200 per ounce and some which aren't being used with an estimated production of $2,000 an ounce.

Now the $300 mine never stops mining.  That mine runs 24/7/365 and no matter what the price of gold does they keep mining because it has remained above their cost of production for years.  Sometimes they make a larger profit sometimes they make a smaller profit but they always keep mining. 

The $900 mine has been in pretty solid production for some time now.  It is less profitable per ounce than the $300 mine and it is a little more risky (as prices falling below $900 is more likely than below $300) but it probably hasn't shut down in the past couple years.

The $1200 mine is hit or miss.   Sometimes it mines and sells off, sometimes it mines and holds onto the gold looking for better prices, and sometimes it just shuts down the mine because it doesn't make any sense to mine an ounce of gold for $1,200 and then sell it for $1,000.

The $2,000 mine has never operated other than some research drilling.  It still has some value on the books because someday the price of gold may rise above $2,000 or improved technology may drive the production cost down but it remains idle.

So how does this help to stabilize price?   As the price rises more mines go into production and as the price falls more mines go into an idle status.   Thus when prices are spiking increased production absorbs some of that increased demand and slows the rise in price, and when it slumps the shrinking supply offsets the shrinking demand and slows the price decline.

I haven't really thought it all the way through but I am thinking if there was some method (alt-coin Bitcoin will never be radically changed) that allowed a miner to mine extra coins at higher cost (electricity) then they would when the price spikes and that additional supply would act as an offset.

[odolvlobo]

... an altcoin could attempt to replicate this behavior by allowing miners to mine more coins at a higher cost to simulate the effect of marginal production.

For that to work well, the supply from mining has to be a significant fraction of the total supply.

Actually, bitcoin already works that way to a very limited extent. When the price rises, the hash rate goes up and blocks are produced more often than 6 per hour. However, the result is insignificant.

[deisik]

http://www.zerohedge.com/news/2013-12-15/perfect-storm-coming-gold

"At a price of $1,250, gold mining companies can no longer make a profit. Recent studies show their all in cash cost anywhere from $1,400 to as high as $1,700. Liquid fuels, human energy, and new exploration are costly in the mining process, so it is unlikely these costs can be cut to accommodate the low gold price."

Goldbugs' hype

I have another, more reliable source. In 2012 marginal costs of gold were equal to $1,104 while the average cost of production was at 673$ per troy ounce. In the third quarter of 2013 average cost was $654, highest in South Africa ($928 per ounce), and lowest in Indonesia ($414 per ounce), Russia ($515 per ounce) and China ($549 per ounce)...

This is something people don't really understand and it is one way that gold (or any commodity) naturally balances supply and demand.  In the "will bitcoin always be a bubble thread" it got me thinking that an altcoin could attempt to replicate this behavior by allowing miners to mine more coins at a higher cost to simulate the effect of marginal production.

No, with gold it doesn't work the same way as with any other commodity, since gold is not consumed like most other commodities. Only tiny portion of gold was lost through history. Add to this ~2,500 metric tons of gold mined every year plus the volume of virtual gold in the financial markets, and you will see that the matters with gold pricing become very complicated beside just assuming the newly mined gold balancing the demand for it...

The same holds true for bitcoin, though to a lesser extent...