First off I love the idea of a currency that is decentralized and I'm invested in a diverse amount of alt coins.
I did have a 'discussion' with my dad (he is pretty smart with economics and tax laws). I was saying how its good to have a currency that is backed up and can't just mine or print more for whatever reason. He did have some points that made me want to find out where to find the answers.
1st point he made was who determines the value of bitcoin? As of now the price changes every second. Hypnotically you have the equivalent of $1 in your account you want to buy a soda with it but then the stock drops a little your 1 dollar is now $.98?
Can't buy that soda that will effect business owners in a negative way..
Who determines the value of ANYTHING? Value is ALWAYS determined by agreement between a supplier and a recipient. A supplier of a thing determines how much of something else they are willing to accept in exchange for that thing. The recipient of the thing determines how much of something else they are willing to give to the supplier of the thing that they want. If the supplier and recipient are in agreement, then the value is determined. If they are not in agreement, then the exchange does not occur and the market value is not established.
This is how stocks work, this is how gold works, this is how crude oil and other commodities work. This is how the world works.
Companies called "exchanges" provide a convenient way for buyers (recipients) and sellers (suppliers) to find each other and make offers of exchange. These exchanges match up offers that are in agreement and facilitate the exchange of Bitcoin for other forms of currency. Those exchanges are what determines thee value.
Bitcoin is NOT a stock. Here's a similar "hypothetical" transaction. You have the equivalent of $1 worth of Euros in your wallet. You walk into a store in France to purchase a soda. Then the exchange rate between U.S. dollars and Euros changes and the Euros you are holding are now only worth 0.9 Euros. You still have the same amount of Euros in your wallet, and the merchant hasn't altered their posted price yet. You get to buy the soda. Just think of Bitcoins as Euros?
Here's another way the transaction can work... The merchant has an electronic system that updates the Bitcoin price of each item every minute so that the item is always $1 worth of bitcoins. You pay with $1 worth of bitcoins, and the merchant uses a service that instantly exchanges those bitcocins for dollars at the current market price and provides the merchant with U.S. dollars in their account.
2nd point was what happens if many of the big corps start holding bitcoin but continue to pay bills with their cash/ credit methods and lets say these big corps manage to collect 17m Bitcoins out of the 21m.. With those remaining 4m coins actually in circulation won't that increase the prices in some way?
As less and less bitcoin were available to be exchanged in the market, assuming that demand for bitcoins stayed the same, the exchange rate would change. You would have to give more value (ex: dollars) for the same amount of bitcoins. As such, people would pay less bitcoins to the big corps for the same products or services. It would become harder and harder for those "big corps" to acquire significant amounts of bitcoins. Meanwhile, those individuals that are already holding would see the value of their bitcoins increase. They'd be able to acquire more "stuff" (money, cars, houses, food, entertainment, clothing, etc) for the bitcoins that they have. The "big corps" would eventually run out of cash and credit. At that time they'd HAVE to pay their bills and suppliers with Bitcoin OR they'd have to sell some of their bitcoin on exchanges to acquire more cash. Either way, that bitcoin would make it's way back into the market stabilizing the price.
3rd point he made was many people are not financially smart what happens when a person fails at paying back a personal loan they obtained? the coins where spent to idk pay off an electric bill. Said borrower fails to pay back but now the people/persons that lent the coins have lost their investments. Yes investing is a risk but without investors putting up their assets loans will cease or have outrages interest rates to guarantee they make.
Lending always involves risk. If you don't trust someone to pay back the bitcoins that you lend them, then you need to either NOT lend them the bitcoins OR make sure that you have enough value in collateral to protect you from any forfeiture on the loan.
However, what does lending have to do with bitcoin? Lending is something that you CAN do with bitcoin, just like you can lend cars, or property, or money, or most anything else. But bitcoin exists without needing any type of lending. You started out with 2 questions about Bitcoin itself, but then oddly ended with an unrelated general question about the risks of lending stuff with inadequate collateral?
Where can I read more on Bitcoin to further my knowledge?
I'm happy to answer questions as you think of them. Beyond that I'm sure someone here can recommend some good books. I hear "The Bitcoin Standard" recommended frequently.
