The Bitcoin Price Paradox

[jaysabi]

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.

Abstract art is an incredibly volatile and illiquid market. Not exactly a good example to counter the criticism here. Store of value is only useful if it has high liquidity and a common shared perception of value.

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[bitgolden]

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.

Specially the second one is 100% correct, because if something worths less than what it costs, that means miners will stop, if you mine 1 bitcoin with 100k dollar electricity, why keep mining it? People will stop and that means miners will once again have lower difficulty and that means it will once again be cheaper as well.

There is no need to keep miners on the profitable side neither, bitcoin wasn't created because we needed people to mine something, it was created to be a currency and we could always reach to a point where we no longer need miners and still be stable and secure as well. We all trust bitcoin like you do, and we all love it and that is why we put on a value to it, mine came from my HUGE hate towards banks, I hate them and everything they do and everything they stand for, so I decided to go to bitcoin and become my own bank, much better option.

[amishmanish]

There is no need to keep miners on the profitable side neither, bitcoin wasn't created because we needed people to mine something, it was created to be a currency and we could always reach to a point where we no longer need miners and still be stable and secure as well.

A state where you don't have miners and are still secure is not attainable. The miners are the security. Decentralized PoW is the guarantee against double spends. PoS or Delegated forms of it mean that those with the most wealth control it. ETH is moving to PoS so that mining is not needed any longer. I don't understand clearly that how PoS will be secure.

We all trust bitcoin like you do, and we all love it and that is why we put on a value to it, mine came from my HUGE hate towards banks, I hate them and everything they do and everything they stand for, so I decided to go to bitcoin and become my own bank, much better option.

Right. Unfortunately, we all have to deal with banks, taxes and the whole regulation, rent-seeking shit-show imposed as part of the world order. It is not necessarily a bad thing to keep things going but after a whole century, it needs an overhaul and an alternative. Bitcoin, cryptos and these budding experiments in decentralization are people's way of letting the world-order know that all is not well and that we can see and understand their corruption and manipulations. That is why We Bitcoin.

[tygeade]

Well, Bitcoin is not bad as you have said, and another thing you have to know is that Bitcoin is never going to become the currency for any country, the only thing that government around the world might do is to come together and regulate Bitcoin, and the reason that might lead to this when there happens to increased rate of scamming and all that.

It’s just like what happened in Nigeria, I saw the news that their government banned Bitcoin and when researched I saw the reason why, because their Central Bank got report from the Western government about scammers using Bitcoin, so they decided to ban. In a situation like this if they are going to lift the ban, they might decide to join hands together with those other countries and regulate crypto.

[dnprock]

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.

Let's say there's 0.1 bitcoin on an exchange. Someone bids $1M for it. That's $10M / bitcoin. If supply continues to shrink, for example, to 0.01. That's $100M / bitcoin. Infinite price is possible.

[dnprock]

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.

Bitcoin has no intrinsic value. Its price is a narrative. Mining is driven by price narrative. Bitcoin is deflationary. It sucks up more and more energy. At infinite price, we'll spend all energy on mining Bitcoin. It doesn't sound like a good world to live in.

[dnprock]

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?

The market always finds its way. Crypto is inflationary through altcoins. But altcoins also have their own very limited supplies. They are deflationary like Bitcoin. They're volatile like Bitcoin. I think an inflationary crypto is what we need. It breaks the trend and creates new use-cases.

[odolvlobo]

Let's say there's 0.1 bitcoin on an exchange. Someone bids $1M for it. That's $10M / bitcoin. If supply continues to shrink, for example, to 0.01. That's $100M / bitcoin. Infinite price is possible.

$100M per bitcoin is not infinite, and even if the supply shrinks to a single satoshi, which would imply a price of $10 trillion per bitcoin in your world, that is still not infinite.

Here's a more grounded example:

Let's say it's 1914 and there's only one known passenger pigeon left in the world. How much would someone pay for one more? I'll let you look up the answer, but I'll tell you now that it is far short of infinity.

Furthermore, now that there are 0 passenger pigeons in the world, what is the price of 1? Well, there are proposals to recreate passenger pigeons through genetic engineering and selective breeding. In your terms, supply is 0, and demand is positive, but do you really believe that someone will pay an infinite amount for that one passenger pigeon?

Your model is clearly broken.

[dnprock]

Let's say there's 0.1 bitcoin on an exchange. Someone bids $1M for it. That's $10M / bitcoin. If supply continues to shrink, for example, to 0.01. That's $100M / bitcoin. Infinite price is possible.

$100M per bitcoin is not infinite, and even if the supply shrinks to a single satoshi, which would imply a price of $10 trillion per bitcoin in your world, that is still not infinite.

Here's a more grounded example:

Let's say it's 1914 and there's only one known passenger pigeon left in the world. How much would someone pay for one more? I'll let you look up the answer, but I'll tell you now that it is far short of infinity.

Furthermore, now that there are 0 passenger pigeons in the world, what is the price of 1? Well, there are proposals to recreate passenger pigeons through genetic engineering and selective breeding. In your terms, supply is 0, and demand is positive, but do you really believe that someone will pay an infinite amount for that one passenger pigeon?

Your model is clearly broken.

I discuss a paradox, not a model. The current models of Bitcoin's price are broken. For example, the Stock-to-flow model. It runs into this paradox. S2F is a model that references itself. It has no grounded reality. I think it's broken. If Bitcoin's price is about supply and demand, any model is a self-referencing model.

I read the pigeon story. The pigeon is worth as much as someone is willing to pay for it. The same logic applies to Bitcoin. Bitcoin is worth as much as someone is willing to pay for it. How should we determine the price? Bitcoin uses Proof of Work mining. This translates to how much energy we spend on mining Bitcoin. Is it 10%, 20%, 50%, 80% of the world's energy? The paradox is the energy is limited and we can't determine Bitcoin's price.

[amishmanish]

Bitcoin has no intrinsic value.

What intrinsic value did a bunch of servers running a page-ranking algorithm and a plain webpage with a single input had until it started to be used by people. The value of bitcoin is its network effect, being permissionless and unmatched record. That is not something you can simply recreate.

Its price is a narrative.

That is your personal opinion if you buy or bought any crypto because of the narrative. Many people want to pump it because of the narrative and many people fall for it. Yet, these are exactly the kind of people who we don't find here when bitcoin is at 4K.

At infinite price, we'll spend all energy on mining Bitcoin. It doesn't sound like a good world to live in.

What "model" are you referring to that says that bitcoin will have "infinite" price? Or that the world will spend all the energy on mining? Is that just conjecture or you are talking based on study and sources?

[davis196]

This article is full of nonsense and BS theories.
1.There's no way that the BTC supply would reach zero.BTC supply isn't equal to BTC mining.
When BTC mining stops,the BTC supply will continue to exist,because supply is the amount of sell orders in the market.You should learn what supply and demand means.
2.The theory of "hyperbitcoinization" is complete BS,because Bitcoin will never be accepted as the one and only global currency.
3.The Bitcoin price will never be stable.Mass BTC adoption might lower the price volatility,but the price will always be more of less unstable.
Bitcoin makes perfect sense,but all the fiat supporters refuse to admit it.
4.BTC mining consumes more energy,but there will be way more ways to produce cheap and environmental friendly electricity in the future.

[jaberwock]

1.There's no way that the BTC supply would reach zero.BTC supply isn't equal to BTC mining.
When BTC mining stops,the BTC supply will continue to exist,because supply is the amount of sell orders in the market.You should learn what supply and demand means.
2.The theory of "hyperbitcoinization" is complete BS,because Bitcoin will never be accepted as the one and only global currency.
3.The Bitcoin price will never be stable.Mass BTC adoption might lower the price volatility,but the price will always be more of less unstable.
Bitcoin makes perfect sense,but all the fiat supporters refuse to admit it.
4.BTC mining consumes more energy,but there will be way more ways to produce cheap and environmental friendly electricity in the future.

It’s good that you pointed out all these things. Saying that the value of Bitcoin will drop to zero is something I am not going to believe at all, that’s not possible in anyway, and not with the extent that the market has gotten to; the market has gotten to a level where such a thing is not going to happen because the market will keep on growing there will always be traders who are steady trading cryptocurrency everyday without stopping.

And even when mining ends it wouldn’t be the end of bitcoin, there will still be supply and as I said, people are steady trading bitcoins everyday.

[dnprock]

Nassim Nicholas Taleb just wrote on Twitter that he thinks Bitcoin is a failure.

https://twitter.com/nntaleb/status/1360276917992230919

He highlights the problem with volatility. Bitcoin's volatility originates from this paradox. When supply goes to zero, we'd get a divide by zero. The price could be 0 or infinite. It is whatever the narrative the market is following.

[jaysabi]

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".

It needs to be stable if you want to use it as a currency. And yes, the USD has a stable value. It may depreciate slowly over time, but the value of the dollar doesn't swing by wildly on a daily basis like bitcoin. The difference between the USD and bitcoin is that the USD is a useful currency and bitcoin isn't.

[Mauser]

Nassim Nicholas Taleb just wrote on Twitter that he thinks Bitcoin is a failure.

https://twitter.com/nntaleb/status/1360276917992230919

He highlights the problem with volatility. Bitcoin's volatility originates from this paradox. When supply goes to zero, we'd get a divide by zero. The price could be 0 or infinite. It is whatever the narrative the market is following.

Nassim Taleb is a great author, I really like his books. He was right about the 2008 financial crisis and got rich with his famous tradrs
 He is kind of famous for betting against popular trades with low risk derivatives. Who knows how much he is betting against bitcoins. It might just be his own agenda to bet against us.

[Karartma1]

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?

My exact same feeling! I ended my read asking myself a big damned SO WHAT!? I'm not surprised at all since cyclically the infamous bitcoin price paradox shows up.
Bitcoin's critics need to find better ways to knock it down.
I find it exceptionally amusing that they can't think that bitcoin is something different from what they've seen before. Anyway, a closed mind is the worst attitude towards a factual understanding of the many bitcoin dynamics.

[jaysabi]

Bitcoin has no intrinsic value.

What intrinsic value did a bunch of servers running a page-ranking algorithm and a plain webpage with a single input had until it started to be used by people. The value of bitcoin is its network effect, being permissionless and unmatched record. That is not something you can simply recreate.

Are you referring to Google? Cuz that's a bad comparison.  Google's intrinsic value is the cash the business generates.  Bitcoin isn't a business that generates cash, it's value is entirely dependent on outside sources (what people believe it's worth).  That's the exact definition of not having intrinsic value.

I agree with you that the value of bitcoin is in the network effect, but that doesn't change where value comes from.  Because there is no cash generation, value comes exclusively from external sources.  Don't confuse people agreeing to ever and ever higher value with intrinsic value, because the source of that value is still extrinsic.  To differentiate with Google, people could all agree that Google's business is worth $0 and everybody agrees that because it's worth $0 not to buy the stock for any amount of money, however because the business would still generate cashflow for the owners, that is the intrinsic value because it's not dependent on outside forces or everybody's consensus about value.  Bitcoin doesn't have that, it's only worth what a large group of people agree it's worth.

[buwaytress]

Lol Bitflate shill. I do agree, money does need to be altered, and all these different "elastic supply" currency ideas being floated around (algorithmic and with flexible supply, etc.) will probably have some traction once they find a manner for it to withstand manipulation.

But it doesn't take away what Bitcoin already does as alternative, secure, sovereign money. All markets are a paradox if you apply the same supply demand theory (which anyway cannot be applied in irrational real world scenarios).