How to estimate the value of a currency?

[Costia]

If I was talking about estimating the value of a USD compared to the ILS i would probably check the prices of specific items in both currencies, the government's policy on exchanging money and managing their currency, maybe have a look at the country's GDP and natural resources.
But how is it actually done?
How would you apply this to BTC?
It seems to me that currently there is almost nothing that can be purchased directly for BTC and most people exchange it for USD.
Meaning the actual use of BTC is something like: earn USD -> exchange for BTC -> send BTC to somebody else -> exchange BTC for USD -> buy products/services.
It seems that a lot of the evaluation of the value of BTC comes from speculations about the coin's future rather than its current use/value.
What are your estimations of the true value of 1BTC (i.e. its value now, without speculating about the future)?

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[koin]

What are your estimations of the true value of 1BTC (i.e. its value now, without speculating about the future)?

an anonymous currency gives little data about the nature of how it is used.   take out speculation and perhaps you only value the currency based on the demand related to daily transactions. because only about 0.4 million of the 8.0 million BTC transfer daily, that means that 95% of the currency would be unnecessary.  $6.50 * 0.05 equals $0.33  

because most of those transfers are to and from the exchanges or other speculation-related transactions, maybe only 10% of that is due to true demand for bitcoins for ecommerce (e.g., for paying airvpn or bitvps) and for international money transfer.  So $6.50 * 0.05 * 0.10 = $0.03.

there's your answer -- three cents per btc.

obviously, so much of the current value of bitcoin is in anticipation of its future potential.    enough people believe in bitcoin though that the exchange rate is supported at these levels.

[Costia]

1) why did you start from 6.5$ - this is the current exchane rate on MTgox - but its is purely a speculation of its real value
2) where do you take the tranfers data from?
3) if i take web hosting an valuable asset for comparing currencies - it seems that a hosting solution that costs 1.6BTC will be ~10USD from other providers - implying a value of ~6.25USD/BTC. But this is just a single product and it's pricing was probably set based on the speculative exchange rate of BTC.

I guess my actual question is : what would be the exchange rate if all speculative trading would stop, and BTC were bought\sold only for the purpose of acquiring goods/services and international money transfers.
Or this: If you were a farmer for how much BTC would you sell me a chicken? an egg? wheat? sugar? if you could not trade BTC for another currency.

[BTConomist]

If you were a farmer for how much BTC would you sell me a chicken? an egg? wheat? sugar? if you could not trade BTC for another currency.

As a marketeer, I would NOT sell an hour of my time for anything less than 10BTC, applicable only to bitcoin-related projects (since I'm a supporter of bitcoin). For any other projects, the price would be at least 30BTC/hr. The way I figure, if it costs a competitive/efficient miner less than $1.00 to generate 1BTC, it is only fair that I provide $1.00 worth (minus maybe a fair profit margin, say less than 50%) of my service in exchange for the services of bitcoin miners.

[Costia]

If you were a farmer for how much BTC would you sell me a chicken? an egg? wheat? sugar? if you could not trade BTC for another currency.

As a marketeer, I would NOT sell an hour of my time for anything less than 10BTC, applicable only to bitcoin-related projects (since I'm a supporter of bitcoin). For any other projects, the price would be at least 30BTC/hr. The way I figure, if it costs a competitive/efficient miner less than $1.00 to generate 1BTC, it is only fair that I provide $1.00 worth (minus maybe a fair profit margin, say less than 50%) of my service in exchange for the services of bitcoin miners.

that is actually not fair:
1) miners are currently people with certain knowledge and have to be paid for their time , not just the actual cost of the mining itself
2) there are high initial costs for mining and some money is required for maintanance as well ( replacing failed HW)
3) according to this logic if any paper money's worth should be the cost of its production - most of the countries would be screwed (and the people printing a 50$ are not rewarded with 50$)

IMHO the value of money comes from trading and provided goods/services. But I cant see a good way of estimating that. or even if i could - i do not know how to derive the value of BTC from such data.

another problem with evaluating BTC as mining cost is that the cost depends on difficulty and the actual amount of generated BTC is constant
so that the cause\effect part is reverse of what you described.
if there is a demand for BTC at 5$/BTC miners will join the network as long as the mining cost stays below that mark. as more miners will join the cost of generating a bitcoin will increase until its close enough to 5$ that it is not profitable enough for new miners to join.
If right now a few guys with supercluster joined and driven the cost of generating BTC above 20$/BTC - they would just lose money since no one (except speculators) will be willing to buy BTC at that price

[BTConomist]

If you were a farmer for how much BTC would you sell me a chicken? an egg? wheat? sugar? if you could not trade BTC for another currency.

As a marketeer, I would NOT sell an hour of my time for anything less than 10BTC, applicable only to bitcoin-related projects (since I'm a supporter of bitcoin). For any other projects, the price would be at least 30BTC/hr. The way I figure, if it costs a competitive/efficient miner less than $1.00 to generate 1BTC, it is only fair that I provide $1.00 worth (minus maybe a fair profit margin, say less than 50%) of my service in exchange for the services of bitcoin miners.

that is actually not fair:
1) miners are currently people with certain knowledge and have to be paid for their time , not just the actual cost of the mining itself
2) there are high initial costs for mining and some money is required for maintanance as well ( replacing failed HW)

Wouldn't you say that a 50% profit margin on top of every $1.00 in expenses (which include: time, electricity, rent, depreciation, maintenance, etc) should be more than enough to thank the miners for their contributions to the bitcoin network? (Basically, by providing an hour of my services for 10BTC, I will be buying each BTC at $2.00 from miners whose costs are less than $1.00/BTC.)

Keep in mind though, as bitcoin matures, mining as an activity will be akin to mass production - only the most cost-efficient miners will survive. Naturally, when that happens, it will cost more to mine/generate a bitcoin (as a bounty per block eventually will be reduced to zero)... and I will be ready to reduce my prices accordingly then. But we are not there yet... today we're mining at less than $1.00 in total cost (time, electricity, rent, depreciation, maintenance, etc).

3) according to this logic if any paper money's worth should be the cost of its production - most of the countries would be screwed (and the people printing a 50$ are not rewarded with 50$)

But bitcoin is not paper money, and as such, its mechanics are different, and the logic too.

IMHO the value of money comes from trading and provided goods/services.

The value of a currency comes from expectations about the future economic activity it will support.
What will be the value of all goods / services traded for bitcoin in 1,2,3 years from now?

[cbeast]

One thing for sure, Bitcoin is going to cause economists to take a second look at their belief systems about money, commodities, and currency.

[Costia]

today we're mining at less than $1.00 in total cost (time, electricity, rent, depreciation, maintenance, etc).

And that's why we are seeing the FPGAs being developed. In a year the introduction of Ghash rigs into the network will drive the generation price up until it is marginally profitable. and in a few years the BTC/block will drop significantly making the mining operation unsustainable at the current volume. Then there will be less miners and the difficulty level will make sure it becomes profitable again.

But bitcoin is not paper money, and as such, its mechanics are different, and the logic too.

what exactly makes it different? how this difference affect the logic? what is the logic? you need to be more specific with statements like this...

What will be the value of all goods / services traded for bitcoin in 1,2,3 years from now?

That's a good question. But its only a part of the value. even if people knew the network will go down in 5-10 years from now, they will still use it today.

One thing for sure, Bitcoin is going to cause economists to take a second look at their belief systems about money, commodities, and currency.

I agree with that. Bitcoin is a strange currency.

[BTConomist]

One thing for sure, Bitcoin is going to cause economists to take a second look at their belief systems about money, commodities, and currency.

I already did... Will be presenting my conclusions/findings in the near future (merely waiting for more bitcoin speculators to join the game).

[BTConomist]

But bitcoin is not paper money, and as such, its mechanics are different, and the logic too.

what exactly makes it different? how this difference affect the logic? what is the logic? you need to be more specific with statements like this...

Will provide the details in the near future (perhaps as new threads and/or blog posts).
In the meantime, see this and this as a general/raw overview of my conclusions.

[Meni Rosenfeld]

What are your estimations of the true value of 1BTC (i.e. its value now, without speculating about the future)?

This is usually referred to as the "fundamental value". It is established by an intricate interplay between various market forces, but in brief it would be equal to the value each bitcoin needs to have in order to facilitate the level of commerce being done with Bitcoin. For example, let's say the majority of BTC use is in the cycle you mentioned. There are (made up numbers) 10,000 people buying $1000 worth of goods with BTC each month, and to reduce the hassle of buying BTC they buy that amount every month. So everyone will carry on average $500 worth of BTC, for a total of $5M for everyone. This means the total worth of all BTC must be $5M, and if there are 8M coins each one will be valued at $0.625. If the exchange rate dropped below that, people would need to buy more BTC to satisfy their shopping needs, and the added buying pressure would drive the price back to the equilibrium value.

The more people use Bitcoin, and the more goods and services offered for them, the more commerce done in BTC and hence the higher its fundamental value.

You are correct that currently the rate is mostly determined by speculative forces. Here too the dynamics are complex, but if 10,000 people are each willing to risk $5000 on their belief that the price will appreciate, there will need to be $50M worth of bitcoins, giving a rate of $6.25 per bitcoin.

The closer Bitcoin gets to fulfilling its potential, the more significant the fundamental portion will be of the total price.

today we're mining at less than $1.00 in total cost (time, electricity, rent, depreciation, maintenance, etc).

Mining has a very low barrier of entry, so this is impossible - if there was that much profit to be had, more people would mine and the difficulty would adjust. The price of a bitcoin is necessarily very close to the total cost of mining, all things included - including the risk that any capital expenditure will greatly lose value due to future changes in the relevant parameters, and the limited availability of opportunities to mine at low electricity rate and efficient hardware.

[Costia]

I think the mining costs are around 2-3$/BTC - but it is a long term investment. you will need to run the rig for 6months-to a year just to return the cost of the equipment. and with the value of bitcoin jumping by 100% in 2 weeks  not many engineers are willing to take the risk.
Thats another thing - setting up and running a mining rig requires technical people and engineers - those people usually dont like speculating and taking chances. when an engineer designs a chip - it must work or he/his company will not get paid, he won't be using any techniques that have a 50% success rate.
If BTC drops to 2-3$ again - the miners are screwed, they don't have an option to sell even if they see it coming  - especially the ones who are buying FPGAs.
Edit:
forgot to add another risk: a lot of new miners and hashing power can drive the difficulty up in the next few months - making the whole thing unprofitable in the long run

[BTConomist]

If BTC drops to 2-3$ again - the miners are screwed, they don't have an option to sell even if they see it coming  - especially the ones who are buying FPGAs.

Perhaps the gold-rush miners (not to be confused with BTC miners) should take bitcoin for what it really is—a unit of account—and buy something with it rather than selling it via "market makers". If bitcoin today was treated more as a currency and less as a "perishable gold" (more on that in some other time), the transaction fees + bounty per block would keep the costs of mining well below $1.00 per bitcoin.

[Meni Rosenfeld]

If BTC drops to 2-3$ again - the miners are screwed, they don't have an option to sell even if they see it coming  - especially the ones who are buying FPGAs.

Perhaps the gold-rush miners (not to be confused with BTC miners) should take bitcoin for what it really is—a unit of account—and buy something with it rather than selling it via "market makers". If bitcoin today was treated more as a currency and less as a "perishable gold" (more on that in some other time), the transaction fees + bounty per block would keep the costs of mining well below $1.00 per bitcoin.

Are you aware that mining cost is proportional to the difficulty, which is proportional to the total computation power of all miners, which is influenced by the profitability of mining? So if mining is too profitable, more people will mine, making it less profitable? It's a self-balancing adjustment mechanism.

[BTConomist]

If BTC drops to 2-3$ again - the miners are screwed, they don't have an option to sell even if they see it coming  - especially the ones who are buying FPGAs.

Perhaps the gold-rush miners (not to be confused with BTC miners) should take bitcoin for what it really is—a unit of account—and buy something with it rather than selling it via "market makers". If bitcoin today was treated more as a currency and less as a "perishable gold" (more on that in some other time), the transaction fees + bounty per block would keep the costs of mining well below $1.00 per bitcoin.

Are you aware that mining cost is proportional to the difficulty, which is proportional to the total computation power of all miners, which is influenced by the profitability of mining? So if mining is too profitable, more people will mine, making it less profitable? It's a self-balancing adjustment mechanism.

What makes you think that I'm not aware of that?
Is it because I've suggested that without the gold-rush miners in the game, the cost of mining would be less than $1.00 per bitcoin.
All I'm trying to point out is that there's NO gold in bitcoin -- it's only a general ledger that is yet to be filled with valuable transactions.

[BTConomist]

If BTC drops to 2-3$ again - the miners are screwed, they don't have an option to sell even if they see it coming  - especially the ones who are buying FPGAs.

Perhaps the gold-rush miners (not to be confused with BTC miners) should take bitcoin for what it really is—a unit of account—and buy something with it rather than selling it via "market makers". If bitcoin today was treated more as a currency and less as a "perishable gold" (more on that in some other time), the transaction fees + bounty per block would keep the costs of mining well below $1.00 per bitcoin.

Bitcoin really is whatever people want it to be. Why try to pigeonhole it by suggesting it has a specific use?

Because it does have a specific use... Unfortunately, the gold-rush miners are postponing that use.
But not for long -- I think I've figured out the mechanics of BTC economy. And it's a beauty, I tell you! Best of all, it does not rely on the market makers.

[BTConomist]

Because it does have a specific use... Unfortunately, the gold-rush miners are postponing that use.
But not for long -- I think I've figured out the mechanics of BTC economy. And it's a beauty, I tell you! Best of all, it does not rely on the market makers.

Interesting. Although I disagree about the specific use, I am curious to hear what you have to say.

Just need some time to put everything into words that make just as much sense to others as they do to me. :-) Here's an outline.

[Costia]

So far you are only giving slogans without any explanation to support them.
I guess I should wait for the full paper. But until then I do not accept your claims.
"Trust me I will explain later" doesnt work for me

[BTConomist]

So far you are only giving slogans without any explanation to support them.
I guess I should wait for the full paper. But until then I do not accept your claims.
"Trust me I will explain later" doesnt work for me

While I'm getting ready to unveil my conclusions, feel free to play around with the quantity theory of money.
And this post (translated from Russian) discusses how to apply that theory specifically to bitcoin.
It should give you some feel of what bitcoin may be worth today.

[Costia]

google translate sucks. good thing i know russian