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Author Topic: implied value of bitcoin  (Read 927 times)
jupiter111 (OP)
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January 20, 2014, 10:22:17 PM
 #1

Recently, many different parties have tried to value Bitcoin by equating the value of the network to the amount of efficiency generated by it. For example:

- Fred Ehrsam from Coinbase wrote an article in Re/Code suggesting that the value of a bitcoin can be viewed as the sum of the cost savings of using the bitcoin network rather than alternative payment networks

- An article from Coindesk looked at market capitalizations of companies involved in transaction processing (MA, V, WU) and other related fields as a proxy for how much the bitcoin network could be worth

- Many commentators make the assertion that there is $500bn-$1trn of transaction fees incurred annually which can be reduced/eliminated by bitcoin and therefore the network and the bitcoin currency can be the beneficiary of this value.

Widespread adoption of the network/currency can definitely destroy the fee-based models of these companies, but why should the bitcoin market capitalization increase by the offsetting amount? When someone buys MA or V stock, they are buying future earnings from these companies. But when someone buys a bitcoin, there is no stream of fee revenue to create present value in bitcoin.

I think bitcoin price will be a function of adoption rates that drive the demand/supply curve; these other attempts to put an intrinsic value floor on bitcoin seem alluring but are inherently flawed.
davidrangel
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January 21, 2014, 02:12:13 AM
 #2

I agree with you. These are not the right ways to look at the value.

Cost savings is too amorphous - you can't value anything based on what you may or may not save people down the road. Basing value on possible cash flows would make more sense, but it's still not correct. The decentralized Bitcoin network will not have the equivalent cash flows of a company. Plus the cash flows in any case would only be a fraction of those of the companies since in theory costs will be lower.

The value of Bitcoin comes from its ability to pay for a valuable service. That valuable service is what miners do: processing transactions that can be global, fast and done with minimal friction. That is actually a useful thing to be able to do - in fact, you cannot do it with the traditional companies out there. So it's worth paying for it. As it happens, the only way to pay for it is via Bitcoins. Therefore the Bitcoins have value.

But how do you set a number on that value? It's too uncertain today. Per your point, it will depend on the demand for Bitcoins. Which will depend on the number of transactions that are eventually being pumped through the entire system.

I write about that in a set of blog posts, starting with this one:
http://www.thebusinessofbitcoin.com/2014/01/the-nature-of-bitcoin.html
aminorex
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January 21, 2014, 02:57:10 AM
 #3

Price is driven by supply/demand, commodity dynamics, but it will tend toward value, which is described by Fisher's equation, and determined by velocity and the size of the denominated economic activity (bitcoin GDP).  Deviations of price from value admit arbitrage.

Give a man a fish and he eats for a day.  Give a man a Poisson distribution and he eats at random times independent of one another, at a constant known rate.
mestar
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January 21, 2014, 03:19:02 AM
 #4

How do you put miners' costs and hoarded coins in the equation?

JoelKatz
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January 21, 2014, 03:23:00 AM
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How do you put miners' costs and hoarded coins in the equation?
Those don't affect the value, so you don't have to.

I am an employee of Ripple. Follow me on Twitter @JoelKatz
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aminorex
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January 21, 2014, 03:30:37 AM
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How do you put miners' costs and hoarded coins in the equation?

Hoarded coins either decrease M or decrease V depending on whether you want to include them in M.  Miner's costs are already part of PQ if they are transacted in bitcoin.  Otherwise they represent an inflow of fiat into the bitcoin economy, which has the impact of increasing PQ over time.

Give a man a fish and he eats for a day.  Give a man a Poisson distribution and he eats at random times independent of one another, at a constant known rate.
johnyj
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January 21, 2014, 05:19:43 AM
Last edit: January 21, 2014, 05:30:23 AM by johnyj
 #7

How do you put miners' costs and hoarded coins in the equation?

Hoarded coins either decrease M or decrease V depending on whether you want to include them in M.  Miner's costs are already part of PQ if they are transacted in bitcoin.  Otherwise they represent an inflow of fiat into the bitcoin economy, which has the impact of increasing PQ over time.

MV=PQ only applies to one currency to a certain degree, when there are several currencies in an economy, it is all uncertain

Bitcoin can be regarded as a world wide value-transfer-container, if there are large amount of value transfer happening, then each container will worth much more. But without these container, value can still be transferred at a higher cost, the demand for using bitcoin to reduce the cost of transfer value is not that significant. The largest driven power comes from its limited supply, it will hedge the inflation long term wise, that can not be done by any other currency, since every country's monetary policy is inflative

aminorex
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January 21, 2014, 06:51:11 AM
 #8

MV=PQ only applies to one currency to a certain degree, when there are several currencies in an economy, it is all uncertain

You would have to make a strong argument to persuade me of that.  Not without reason do I consider that it applies categorically, regardless of diversity of exchange, albiet only within each single denominated economy, and only when the transaction levels are high enough to form liquid markets.  It's like the ideal gas law, again.  You can use it to deal with partial pressures of gas mixes.  Analogously, the quantity theory.  The analogy is strong because the structure of the cases is so similar. A principled, detailed argument will have to await another occasion.

Give a man a fish and he eats for a day.  Give a man a Poisson distribution and he eats at random times independent of one another, at a constant known rate.
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