The Bitcoin Price Paradox

[dnprock]

I came across a discussion on Hacker News: Bitcoin still makes no sense. I see it as an honest assessment from someone open-minded about Bitcoin. The article’s author, Evan Kozliner, made some interesting observations. Bitcoin supporters claim that they understand money better. Bitcoin is THE money. Bitcoin supporters mostly agree that Bitcoin has no intrinsic value. It’ll be the mother of all assets. In the future, values will be based on Bitcoin. But this future has a problem. If Bitcoin’s price continues to rise, we’d be spending more and more energy to mine it. Since Bitcoin has no intrinsic value, its price cannot be determined. We can spend an infinite amount of energy. We don’t have infinite energy.

A lot of confusion about Bitcoin originates from a fundamental problem. I call this problem the Bitcoin Price Paradox. It works like this:

Bitcoin Price = Demand / Supply

When supply reaches zero and demand is a positive number, Bitcoin’s price is infinite. If Bitcoin is not grounded in some physical reality, we have no way to price it. Bitcoin is a narrative-driven asset. People compare Bitcoin to gold. In this narrative, its market cap should be something around 10 trillion dollars as of 2021. But after that, we’d have the real estate market, the bond market, the equity market. If Bitcoin’s price is infinite, we’d be spending an infinite amount of energy to mine it.

The Bitcoin Standard and Hyperbitcoinization

Some Bitcoin supporters advocate for the Bitcoin Standard or Hyperbitcoinization. In this future world, everything would be denominated in Bitcoin. When this happens, Bitcoin’s price would become stable. This logic seems to make sense if we assume the world is stable. But what if the world is unstable? We see the world as unstable. We want to base it on Bitcoin for its stability. For Hyperbitcoinization to happen, the world needs to become stable on itself. Bitcoin is a reflection of the world’s value and vice versa. There are two possibilities:

• The world is unstable and Bitcoin is unstable. This is where we are.
• The world is stable and Bitcoin is stable. This is Hyperbitcoinization.

The question is which stability happens first. We really can’t know. Bitcoin depends on the world. The world depends on Bitcoin. We have a circular dependency. Hyperbitcoinization is also a paradox. Hyperbitcoinization does not solve the Bitcoin Price Paradox. It is another paradox sitting on top.

Turtle All The Way Down

The Bitcoin Price Paradox is the origin of confusion in Bitcoin. We attempt to solve it by reasoning on top of it. These efforts lead to more paradoxes. They are circular. We just go around in a loop. Bitcoin’s price cannot be infinite. We don’t have an infinite amount of energy. Physical reality is bounded. Humans are finite. Energy is finite. The Fed only prints so much money, not infinite. Bitcoin cannot be priced if it exists only in the virtual world and has no connection to physical reality. Basing money on Bitcoin is like putting reality on top of ungrounded reality. We’ll keep making ungrounded reality. Bitcoin cannot lift itself from gravity.

The Bitcoin Price Paradox is the mother of all paradoxes in Bitcoin. It is a version of Turtle All The Way Down.

Solving The Paradox

I believe the solution to the Bitcoin Price Paradox is inflation. Let’s say we have a hybrid crypto that has inflated supply. The price equation becomes:

Hybrid Crypto Price = Demand / Supply

In this case, the supply is never zero. So the price is never infinite. It is the way to get out of the Bitcoin Price Paradox. This is where an inflationary crypto is useful. Bitflate is an experiment in this direction. It has a moderately high inflation of 7%. It is the opposite of Bitcoin. Another way to think about this solution is through the philosophy of Yi Ching. Money Yin and Yang are Deflation and Inflation. They’re complementary to each other.

Original Post: https://bitflate.org/post/2021/02/05/the-bitcoin-price-paradox.html
Hacker News - Bitcoin still makes no sense: https://news.ycombinator.com/item?id=25319849

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[odolvlobo]

Bitcoin Price = Demand / Supply

Did you just make that up? Here is the correct formula: D(q) = S(q)

To find the price, you solve for q and then evaluate D(q) or S(q).

When supply reaches zero and demand is a positive number, Bitcoin’s price is infinite.

The price when the supply is 0 is D(0). D(0) is not necessarily infinity.

[Lorence.xD]

The price when the supply is 0 is D(0). D(0) is not necessarily infinity.

If there is no supply but there is still a demand then it could be lynchpin to a increase in prices, I don't think that it should be infinite but if scarcity is in play, bitcoin market will not be a good indicator for the prices because people will put their own price tag having the knowledge that bitcoin supply is zero.

[jaysabi]

To me, the bitcoin price paradox is that the more volatile the price is, the more people it attracts trying to day trade it. And the more people trying to day trade it, the more volatile the price is.  And the more volatile the price is, the worse it is as a store of value. That's the paradox; bitcoin's success is bad for bitcoin adoption as a currency since a volatile currency is useless. The most important aspect for a currency is stability.

[bits4books]

I'm afraid with this approach, "fanatics" and other wonabies will now run in and start throwing stones at you, that cryptocurrencies are created to save the world from inflation and generally make money "real and great".
But in general-indeed, BTC, like any other cryptocurrency, does not make sense as such. Cryptocurrencies do not produce anything, but only create a reason for discussion and for getting even more dollars. The paradox of cryptocurrencies is not that it is described but that all its users hate fiat but at the same time use cryptocurrencies to get even more and more fiat. This is really a paradox.

[webtricks]

Ah! You disappointed me. Reading all way down, I thought you were going to put some interesting economic flaw in bitcoin pricing. But in the end, it turned out that the thread was just a shill for Bitflate and you were advocating the inflationary supply of bitcoin all along. You do realize that your argument is hilarious, right?

[shenmedoubudong]

Bitcoin as a virtual currency with a gradual increase in the total fixed stock in the future, to a certain extent, has the performance of a currency tool. However, because consumption is necessary and the vitality of social mobility, the currency must be preserved or devalued. Basically cannot appreciate, otherwise it will hinder the desire to consume, so economic development must issue additional currency, so in the long run, the total amount of Bitcoin is fixed against this demand

[benedikt_sofronov]

Bitcoin exchange rate is stable-----> Its anonymity and ease of cross-border transactions are used for money laundering, asset transfer and illegal transactions----> This demand is increasing, and the total amount of Bitcoin is limited--- --> Promote the gradual rise of the Bitcoin exchange rate-----> Speculators see the rise in the Bitcoin market and continue to pour in for speculative hype----> The Bitcoin exchange rate rises further, even soaring----> Miners and currency holders sell at a high level-----> The exchange rate declines-----> The market panic spreads further and the decline accelerates----> Bitcoin re-enters a period of exchange rate instability-----> Exchange rate Unable to stabilize, causing Bitcoin to fail to fulfill its monetary responsibilities -----> the international monetary system and governments of various countries do not recognize Bitcoin's currency role-----> Bitcoin can only be reduced to speculation.

[volodar_v_]

Bitcoin cannot provide functions as a measure of value and cannot be regarded as currency in the traditional sense
But what needs to be explained is that the unstable currency value does not mean that he has no value. It only shows that he is a high-risk investment. Don't play if you don't think clearly. If you want to play, prepare you will lose

[dota2bestplayer]

Bitcoin, in a nutshell, is a slightly innovative thing developed by Japanese scholars, and then it is enthusiastically sought after by anarchists, and then deliberately hyped by people with ulterior motives to cash out, otherwise their books will become rich It's not really getting rich.

[Haunebu]

Most crypto investors like me actually feel that the limited supply of BTC and other popular cryptocurrencies is actually a good thing since an unlimited amount could probably lead to lower prices in the long-term.

BTC has risen from a couple of cents to $45K primarily because of this feature which is why I don't feel that we need inflation based crypto like Bitflate honestly.

[Hydrogen]

Bitcoin supporters mostly agree that Bitcoin has no intrinsic value.

Au contraire. I'll contend bitcoin has intrinsic value in the form of its supply limiting algorithm, construction and design.

If Bitcoin’s price continues to rise, we’d be spending more and more energy to mine it.

The majority of electricity for bitcoin mining is derived from surplus energy. Which does not affect or strain existing grids.

The productivity of mining hardware increases over time due to moore's law. While the energy consumption of mining hardware decreases for identical reasons.

When supply reaches zero

Correction: mining rewards reach zero.

Supply does not necessarily follow the trend.

If Bitcoin’s price is infinite, we’d be spending an infinite amount of energy to mine it.

If bitcoin's price is infinite.  BTC = ∞

There isn't a scenario where any of us complain about it.  

We simply build a dyson's sphere around the sun with a fraction of bitcoin's value.

[jaysabi]

Bitcoin supporters mostly agree that Bitcoin has no intrinsic value.

Au contraire. I'll contend bitcoin has intrinsic value in the form of its supply limiting algorithm, construction and design.

That doesn't make it intrinsically valuable though. The value comes from everyone agreeing it has value, that's extrinsic. The difference is that a business that generates cash flow has intrinsic value regardless what people's common opinion is on the business.  Whatever cashflow it produces for shareholders is the intrinsic value because it's value which doesn't come from an opinion. Bitcoin doesn't have intrinsic value because it's value comes entirely from people's perceptions of what it is worth.

If Bitcoin’s price continues to rise, we’d be spending more and more energy to mine it.

The majority of electricity for bitcoin mining is derived from surplus energy. Which does not affect or strain existing grids.

The productivity of mining hardware increases over time due to moore's law. While the energy consumption of mining hardware decreases for identical reasons.

Power plants scale to energy demand. There is no such thing as surplus power. When more energy is demanded by miners or for any other reason, power plants scale to meet the demand and use more resources to do so. Further, your second point ignores that fact that power consumption goes up over time because more and more miners are brought online to compete for blocks, far more than offsets due to efficiency improvements.  I don't necessarily buy the arguments against bitcoin because of energy consumption anyway, but your points don't prove it.

[SquallLeonhart]

It is not really that complicated, we just buy it, hold it, and people who wants to buy it will need to pay more, and eventually there will always be some people who are willing to sell and that's it. Hybrid crypto price would never be a solution because we are not an index, that type of index thinking is what makes you lose, those "wrapped" ideas are the cause of what happened in the regular world to fiat as well.

I buy 5 bitcoins, I now have nearly 200k worth of coins, and then I put them all together and I name it "fivebtcshare" and sell that too for 200k, now I have only 200k worth of bitcoins but sold it again so now I have 400k. I combine 10 things like this and instead of having 2 million dollars, I have 4 million dollars, what is backing that extra 2? Nothing at all. The more you combine things together, the less money you start to make.

[coolcoinz]

When supply reaches zero and demand is a positive number, Bitcoin’s price is infinite.

But supply cannot reach 0. First of all, it will take decades before we reach 21 million, so you don't have to worry about it running out. Maybe your children will face this problem if Bitcoin exists in their age. As long as there are buyers there will be sellers. For every price level there's a seller. They're here now at 30k and there will be some at 300k USD.

If Bitcoin is not grounded in some physical reality, we have no way to price it.

How do you price abstract items like art? How do you price domains?
There are always buyers willing to pay what they feel is right. What for you could be worth $100, for someone else will be priceless. I don't see a problem here.

[Obito]

It is not really that complicated, we just buy it, hold it, and people who wants to buy it will need to pay more, and eventually there will always be some people who are willing to sell and that's it.

That is the most grueling solution in this case because it takes time to jack up the prices as you have mentioned that there will be people that are going to sell when the offer is too big to pass on and hodl. We can pull this off if we gather enough people that have enough money to not sell their bitcoin to hodl it and buy everytime a coin is available, but that too will be difficult to organize.

[hatshepsut93]

There's no paradox, because your logic is flawed. Bitcoin price won't reach infinity or any unjustifiably high value, it will never consume more electricity than the governments would allow - there are already precedents when governments had to restrict mining because it was straining their energy grid too much.

Bitcoin price doesn't need to be stable, and in fact no currency actually has a stable price - it's all just a degree of volatility. So, again, there's no paradox with "bitcoin stability" and "world stability".

This is where an inflationary crypto is useful. Bitflate is an experiment in this direction. It has a moderately high inflation of 7%.

Admit it, you are just shilling for your Bitflate shitcoin project.

[Mauser]

Solving The Paradox

I believe the solution to the Bitcoin Price Paradox is inflation. Let’s say we have a hybrid crypto that has inflated supply. The price equation becomes:

Hybrid Crypto Price = Demand / Supply

In this case, the supply is never zero. So the price is never infinite. It is the way to get out of the Bitcoin Price Paradox. This is where an inflationary crypto is useful. Bitflate is an experiment in this direction. It has a moderately high inflation of 7%. It is the opposite of Bitcoin. Another way to think about this solution is through the philosophy of Yi Ching. Money Yin and Yang are Deflation and Inflation. They’re complementary to each other.

But isn't this excatly the idea behind bitcoins, to have a coin with a finite supply? I always thought bitcoins were created to find a coin that can't be manipulated and just be increased in supply whenever needed? Maybe I am wrong but I find this a pretty good idea. So when the supply goes to 0 and the demand is constant the price is going to rise. That is why I think holding bitcoins long term is such a great idea.

[Stedsm]

It is not really that complicated, we just buy it, hold it, and people who wants to buy it will need to pay more, and eventually there will always be some people who are willing to sell and that's it.

It's not that easy mate. Even if you buy something (let's say an electronic item) and someone badly needs it and you are interested in selling it for more than 70% of its value but the buyer isn't ready to pay anything above 55% of its original value, then you'll either come to a midway or you'll just leave it as it is. In BTC's case, even though the supply is getting lower, retailers may end up leaving BTC and putting their money somewhere else if it becomes totally unaffordable for them to buy it at a higher scale. I believe that either negotiations will take place and get BTC to a price range where it'll work out for both ends - institutions and retailers OR institutions will just keep their BTC and hodl for higher offers, then you can say that "less supply and more demand increases the price logic" will take place.

[amishmanish]

A lot of "assumptions" about bitcoin that this article seems to want to break have been wrongly assumed. Most bitcoiners would agree that:

1. Hyperbitcoinization is just an imaginary construct, a utopia. It won't happen.

2. Bitcoin mining will not continue to need infinite energy. It will stabilize with how the fee-market looks.

3. There are no guarantees that Bitcoin will survive the deprecation in block subsidy and miners will continue to direct hashpower. Though, it seems highly likely due to the importance of economy on top of bitcoin that would have been built by that time.

I think when such "studies" question the value of Bitcoin, it is best to go to the bottom of your own values as to why Bitcoin holds value to you.

Personally, I find Bitcoin valuable because I can actually store it without trusting a third party, I know that a whole economic system will agree to that value without having a war-machine to back it. It feels good because I don't really love wars and I think Governments and Banks have exploited Democracies to benefit the top few. I think Bitcoin is one of the things that will diversify the evolution of democracies and economic policies solely because it allow people to coordinate without having to go through diplomatic channels imposed on us in the name of National security.

For these reasons, I feel that Bitcoin is important and will always hold it as much as my financial condition allows. I believe that a lot of people feel this way, despite the greed and scams and blatant manipulations, people still have a choice with Bitcoin. If I continue to hold it and if many people feel the same way, Bitcoin will continue to have value.

If you need more reasons than this, then Bitcoin really is not for you.