How do we separate the fundamental value from the speculative value

[right wing authoritarian]

Hey guys I am trying to work out some new ways of valuing bitcoin.

Obviously the price reflects bitcoin's fundamental value as a medium of exchange as well as a speculative value based on expectations of increased value in the future. What I want to know is how to separate the two in some kind of rational way?

All suggestions welcome

[1714019938]

1714019938

[knightcoin]

Real value is always related to time/function ( like in real-time ) that a trade can be made, for instance... you have an orange and want to trade it for an apple, so in order to trade you need to find somebody who thinks his apple has less value than your orange or vice-versa ( check http://en.wikipedia.org/wiki/Financial_market_efficiency ). From an exchange point of view...for me is like the real-time that the machting engine system finds the agreement between buyer and seller ... also called "touchline prices" anything out of that moment is king of speculative margin ...

so except you're atomic quant trader, it's all related to time-frames ... would you make a bitcoin contract price from here to 10 years ahead ? or whould you preffer trade at 5 minutes timeframe ?  

[Dalmar]

Look at old trend lines. You can estimate what the fair value of bitcoin is today without rampant speculation. Currently it is somewhere between 375 (most bullish) and 100 (most bearish case) on bitstamp.

[Peter R]

How guys I am trying to work out some new ways of valuing bitcoin.

Obviously the price reflects bitcoin's real value as a medium of exchange as well as a speculative price based on expectations of increased value in the future. What I want to know is how to separate the two in some kind of rational way?

All suggestions welcome

I've been promoting my Metcalfe Valuation technique here at the forum.  It is based on Metcalfe's Law that says the value of a network is proportional to the square of the number of nodes. This model has fit surprisingly well over the last four years and would suggest that if bitcoin use and adoption continue to grow, so will bitcoin's market cap:

[knightcoin]

How guys I am trying to work out some new ways of valuing bitcoin.

Obviously the price reflects bitcoin's real value as a medium of exchange as well as a speculative price based on expectations of increased value in the future. What I want to know is how to separate the two in some kind of rational way?

All suggestions welcome

I've been promoting my Metcalfe Valuation technique here at the forum.  It is based on Metcalfe's Law that says the value of a network is proportional to the square of the number of nodes. This model has fit surprisingly well over the last four years and would suggest that if bitcoin use and adoption continue to grow, so will bitcoin's market cap:

As a networking geek I luv it, felt like we're pulling cables, pumblimg, etc

( ps for some reason reminsds me Sue, I lmao .. on that show ... she's adorable and after 2 glasses of wine she's amazing )

http://packetpushers.net/show-117-a-rope-a-chair-and-helping-hands-sue-hares-and-the-ietf/

[odolvlobo]

In my view, the fundamental (real) value depends on the current utility of Bitcoin, whereas the speculative value is just the present value of an expected future value.

I would use M = PQ/V as a starting point, though it is not as simple as that equation implies.

[knightcoin]

In my view, the fundamental (real) value depends on the current utility of Bitcoin, whereas the speculative of the value is just the present value of an expected future value.

I would use M = PQ/V as a starting point, though it is not as simple as that equation implies.

nice logics indeed  .. now I just trying to figure it out on greek symbols

[dogechode]

I think a big part of the problem is that alts are tied to bitcoin value. I think this is bad for both btc and the alts. I don't know what is the best way to remedy this, but people should be comparing doge, mint, zeit, etc to fiat values rather than "1 XYZcoin is equal to 0.00000213 btc" terms.

For now though, bitcoin is being traded and held almost exclusively by 'speculators' so the real value actually is the speculative value, for now. The number of 'real' transactions (ie someone buying something with bitcoin or paying someone for a service in bitcoin, etc) is so pitifully low when compared to the number of transactions between miners and investors, that in reality the speculative market is just about all there is at the present time.

[knightcoin]

I Just thinking with myself what "bit" < BTC means ...

[pening]

I'm not sure if it can be separated rationally as you have to discount the speculative component historically.  At any point in the past few years that value has been there and become built into the price, then becoming assumed part of the real value over time.  Or put it another way, if you knew how, you'd make a mint in normal stocks, bonds, asset trading as you could accurately predict those that are over-valued (or under for that matter).

[Peter R]

Paradox:  if you remove the speculative component from bitcoin's price, its value increases.

Here's why:

Imagine that tomorrow everyone believes that the price of bitcoin will no longer increase.  But the price will no longer decrease either.  1 BTC will forever buy the same basket of goods.  What would happen?  Aggregate demand for bitcoin would increase due to its useful properties as a store of value.  But of course this can't happen without also increasing the price, and thus the paradox.   

The only reason bitcoin's price isn't much higher is because people believe it could also be much lower. 

[dogechode]

Paradox:  if you remove the speculative component from bitcoin's price, its value increases.

Here's why:

Imagine that tomorrow everyone believes that the price of bitcoin will no longer increase.  But the price will no longer decrease either.  1 BTC will forever buy the same basket of goods.  What would happen?  Aggregate demand for bitcoin would increase due to its useful properties as a store of value.  But of course this can't happen without also increasing the price, and thus the paradox.   

The only reason bitcoin's price isn't much higher is because people believe it could also be much lower. 

I get what you are saying but I disagree. I think people are buying/holding/mining bitcoin to make a profit. I really think the number of people who just totally believe in the idea and would use it as a regular currency is extremely small right now. The bottom line is that acquiring and using bitcoin right now is risky, costly, and complex. There isn't any huge advantage that would make someone want to accept these risks/complications and use it over say a credit card, paypal, etc. The reason people are involved with it is because they think it will go up and they can make a massive profit.

So if you removed speculative value, I think it would crash and crash hard.

[right wing authoritarian]

Such good responses! you guys are awesome

It seems if you believe Peter.R then bitcoin is either correctly valued or the speculative component has not changed proportionally over time expect for brief periods. I quite like this idea because it makes sense that the network effect is the basis of bitcoin's fundamental value.

@odolvlobo what do M, P, Q and V stand for?

[NotLambchop]

Paradox:  if you remove the speculative component from bitcoin's price, its value increases.

Here's why:

Imagine that tomorrow everyone believes that the price of bitcoin will no longer increase.  But the price will no longer decrease either...

That's not a paradox but rather begging the question.

Sure, if you assume that
1. a token buys a set percentage of "stuff," <==boldface text
2. the number of tokens remains constant while
3. "stuff" increases, it follows that
4. ∴ each token will buy more "stuff" in the future. <==Profit!

[dogechode]

This is flawed logic. If there is no more speculative reason for the price to change then the price shouldn't stay stable it should drop as more bitcoins are mined and the supply increases. This would logically continue at least until all bitcoins had been mined.

[NotLambchop]

^yeah (if you were responding to me).  I'm just fast-forwarding to where Bitcoin stops being an inflationary currency (no more coins created).  Just for simplicity's sake.  But yeah, miners aren't doing it for the tx fees

P.S:  If it's not clear, the pseudo-derivation I posted fails because the premise begs the question.

[twiifm]

The speculative component is based on mainly one thing:  The arbitrary limit on supply of bitcoin at 21M.  For real adoption to occur current holders have to spend their holdings. But the only reason they own BTC is for speculation.  There is no incentive for spending.  They can loan out their holdings and act as a bank.  But its suicidal to borrow a deflationary currency.  

I believe 3 possibilities of future of BTC based on observing history of banking:

1.  Bitcoin functions as "gold":  Colored coins are created by independent 'banks' that hold a reserve of BTC.  This would allow the market to price BTC as a commodity money.  If any individual colored coin fails the user could convert his holdings back into BTC and move on to the next colored coin.  In this money system the cryptos might exist for niche uses.  BTC is still priced in fiat.  This would be best scenario for BTC to stay around.  

2.  Bitcoin functions as "currency":  All alt-coins compete for consumer adoption.  In a free market the best coins stick around and the ones not useful eventually go extinct.  Whether it'll be BTC or some other alt-coin that dominates this economy, nobody can say.  In this scenario, cryptos are also priced in fiat but they would have niche uses.  This scenario view crypto as a technology more so than money

3.  Bitcoin as "banking":  The original dream of Satoshi Nakamoto.  Bitcoin competes and eventually replace fiat.  I find this scenario the most unlikely because it only benefits speculators.  Govt's & business (the dominant users of money) would not want a unstable deflationary money.  The non-speculating average Joe would not want this either.  His assets are in the form of salary,  401-Ks, mortgages - things which would be harmed by deflationary currency.  Some huge catastrophic event would have to occur in order for this scenario to play out.  Its possible that BTC become widespread to the national level for some small nation state w currency problems.  But I can only imagine a anarchy state embracing this.  Any state that has a govt would need central controls on its own currency if it's to engage in foreign trade.

It is possible that a hybrid of any of these scenarios could exist in the same world. BTC as 'banking" in a tiny nation state w/ currency problems.  BTC as "gold" for niche e-commerce applications (convertible airline miles, convertible online casino chips, etc..).  BTC as "currency" for black market use, or whatever it was mostly used for before the speculators drove up the price.  

[Peter R]

Paradox:  if you remove the speculative component from bitcoin's price, its value increases.

Here's why:

Imagine that tomorrow everyone believes that the price of bitcoin will no longer increase.  But the price will no longer decrease either.  1 BTC will forever buy the same basket of goods.  What would happen?  Aggregate demand for bitcoin would increase due to its useful properties as a store of value.  But of course this can't happen without also increasing the price, and thus the paradox.    

The only reason bitcoin's price isn't much higher is because people believe it could also be much lower.

That's not a paradox but rather begging the question.

We assumed the price would no longer increase or decrease as part of the thought experiment.  The purpose was to remove the speculative component and ask what effect that would have on demand.  I then show that the demand would very likely increase, suggesting that price cannot be stable at its current level.

Obviously in reality the price can both increase or decrease, but that wasn't the point.  

"Begging the question" means that you start where you want to end up.  It would be like assuming the price can't go up or down and then using that assumption to show that the price should remain constant.  I did the opposite.  I started with the assumption that the price would remain fixed to show that this assumption was very likely invalid.  

[NotLambchop]

1.  You start with an assumption that "1 BTC will forever buy the same basket of goods." <==price remains same
2.  You go on to say "Aggregate demand for bitcoin would increase due to its useful properties as a store of value ... this can't happen without also increasing the price" <==price rises

1.  Assume that 1 Lambcoin will forever buy the same basket of goods. <==Lambcoins are Bitcoin clones.
2.  Aggregate demand for the Lambcoin would increase due to its useful properties as a store of value.  But of course this can't happen without also increasing the price, and thus the paradox.

Yes, the two statements are mutually exclusive, (2) contradicts (1), but this is not a paradox, simply a pair of mutually contradictory premises.    

[Peter R]

...this is not a paradox...

It seems you now agree the argument I used to explain the paradox wasn't "begging the question."  

The statement that's a paradox is the one I labelled "Paradox: if you remove the speculative component from bitcoin's price, its value increases."

The definition of a paradox is "a statement that apparently contradicts itself and yet might be true."

The apparent contradiction is the idea that the speculative component is actually negative; i.e., if you remove it the value would increase.  Yet this might be true.  

I think perhaps you think this shows that the price must increase.  It doesn't.  It just shows that at our current level of bitcoin adoption the price probably can't remain constant (and non-zero).  It holds in the case of lambcoins too--the value quickly plummets!