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Author Topic: The value problem - explained  (Read 4466 times)
Erdogan
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September 05, 2014, 01:25:16 AM
Last edit: September 05, 2014, 01:35:24 AM by Erdogan
 #1

The purpose here is to explain the value of bitcoin, using a normal commodity as a starting point, and deriving the value of bitcoin from that.

A precondition is agreement of the theory of demand and supply. This is basically that value comes from the considerations of people in their minds and their actions, each person has a stepped curve of value per unit, and these demand and supply curves are aggregated on the market.

Take a commodity that is produced and consumed, and is durable (so it is possible to hold), like aluminum or copper.

There are only two types of actors in this model of the market, the producers and the consumers. Both the producers and the consumers can hold, the producers after it is produced, and the consumers before it is consumed. So the producers and consumers meet on the market with their supply and demand curves, where the curves cross, trade happens, and after the initial trades, more trades occur only when the curves change. The commodity moves like this:

Production -> store -> market -> store -> consumption

Obviously, when production parameters change, the supply curve changes, and some will be sold on the market. The same goes for the other side, when the stuff is consumed , the consumers take to the market to buy more. The equilibrium price changes accordingly.

When the price is low, the producer might increase his store, this can be called reservation demand. When price is high, more will be produced. Conversely, when the price is high, consumption goes down, and the consumer might turn seller by reducing their holding.

Now to money. The special thing with money (fiat or bitcoin, gold is a bit of both, money and consumable commodity) is that money is not consumed. Think of consumption as destruction of the goods for a purpose. When you consumed a candle, it was destroyed, but you got the light that you wanted. There is no reason to consume money by destroying them, it gives you nothing, (compared to what you get when you trade them).

On the other end, production, bitcoin is not produced either, after the initial amount is created. (Fiat is special, since more is continually printed, but they don't have to be).

So what we have left is this picture (producers are not producers any more, but sellers, and consumers are not consumers any more, but buyers).

Seller -> market -> buyer.

Since a seller can not sell more when he is empty, he also has to buy, to continue to be an actor. And the buyer can not buy more than he has other goods or services (or other money types) to sell, and he doesn't want to either, because he can not consume the money. Therefore we can combine the buyer and the seller:

Seller/buyer -> market -> seller/buyer

And they have to change roles sometimes, so

Seller/buyer <-> market <-> seller/buyer.

Conclusion: The value is from the demand and supply, where demand comes from the wish to hold, and the supply comes from the wish hold less.

Thats all, folks. That is all there is to it.














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September 05, 2014, 01:36:50 AM
 #2

Conclusion: The value is from the demand and supply, where demand comes from the wish to hold, and the supply comes from the wish hold less.

Long post.

The supply come from production. And production exists only if there is a demand for it and if the consumer is willing to pay price above the production cost.

The demand for btc exists because there are merchants out there willing to accept btc for payment and the merchant can sell the coin to speculators/investors.
Erdogan
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September 05, 2014, 01:38:48 AM
 #3

Conclusion: The value is from the demand and supply, where demand comes from the wish to hold, and the supply comes from the wish hold less.

Long post.

[...]


Probably too long to read...

odolvlobo
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September 05, 2014, 08:51:12 AM
 #4

Conclusion: The value is from the demand and supply, where demand comes from the wish to hold, and the supply comes from the wish hold less.

Sorry, but you are stating the obvious, and nothing in your explanation made it more obvious.

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Erdogan
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September 05, 2014, 08:55:16 AM
 #5

Conclusion: The value is from the demand and supply, where demand comes from the wish to hold, and the supply comes from the wish hold less.

Sorry, but you are stating the obvious, and nothing in your explanation made it more obvious.

Appearantly, it is not obvious to everyone, even seasoned meteoroeconomists, because some believe that the speed of the money changing hands is a factor. Anyway, congrats for being in the know.

odolvlobo
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September 05, 2014, 09:06:29 AM
 #6

Conclusion: The value is from the demand and supply, where demand comes from the wish to hold, and the supply comes from the wish hold less.

Sorry, but you are stating the obvious, and nothing in your explanation made it more obvious.

Appearantly, it is not obvious to everyone, even seasoned meteoroeconomists, because some believe that the speed of the money changing hands is a factor. Anyway, congrats for being in the know.

Oh I see, but the velocity affects supply and demand, so it is a factor if you consider it separately.

BTW, what is a "meteoroeconomist"?

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Erdogan
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September 05, 2014, 10:41:09 AM
 #7

Conclusion: The value is from the demand and supply, where demand comes from the wish to hold, and the supply comes from the wish hold less.

Sorry, but you are stating the obvious, and nothing in your explanation made it more obvious.

Appearantly, it is not obvious to everyone, even seasoned meteoroeconomists, because some believe that the speed of the money changing hands is a factor. Anyway, congrats for being in the know.

Oh I see, but the velocity affects supply and demand, so it is a factor if you consider it separately.

BTW, what is a "meteoroeconomist"?

You have formulas, and when they don't work, you blame the weather.

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September 05, 2014, 10:59:41 AM
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Good post.  Yes the conclusion is basic.  But you explained it well, like the subject of the post described
Erdogan
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September 05, 2014, 11:13:58 AM
 #9

 
Good post.  Yes the conclusion is basic.  But you explained it well, like the subject of the post described

 Smiley Thanks

Erdogan
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September 05, 2014, 11:24:09 AM
 #10

Conclusion: The value is from the demand and supply, where demand comes from the wish to hold, and the supply comes from the wish hold less.

Sorry, but you are stating the obvious, and nothing in your explanation made it more obvious.

Appearantly, it is not obvious to everyone, even seasoned meteoroeconomists, because some believe that the speed of the money changing hands is a factor. Anyway, congrats for being in the know.

Oh I see, but the velocity affects supply and demand, so it is a factor if you consider it separately.

BTW, what is a "meteoroeconomist"?

You have formulas, and when they don't work, you blame the weather.


I proposed that the speed of money changing hands is not a factor, since money is neither produced nor consumed. Trades can not change the value. The value comes from the mind, trades come from the change of mind. So if you change your mind every day and therefore trade a lot, as long as there is not an upward or downward trend in your valuation in your mind, the frequency of your changing your mind can not affect the value.


odolvlobo
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September 05, 2014, 03:55:30 PM
 #11

BTW, what is a "meteoroeconomist"?

You have formulas, and when they don't work, you blame the weather.

 Cheesy

I proposed that the speed of money changing hands is not a factor, since money is neither produced nor consumed. Trades can not change the value. The value comes from the mind, trades come from the change of mind. So if you change your mind every day and therefore trade a lot, as long as there is not an upward or downward trend in your valuation in your mind, the frequency of your changing your mind can not affect the value.

The velocity is determined by how long people hold bitcoins, whether due to hoarding or just waiting for confirmations. It is not constant, so it is a factor.

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Erdogan
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September 06, 2014, 10:50:01 AM
 #12

BTW, what is a "meteoroeconomist"?

You have formulas, and when they don't work, you blame the weather.

 Cheesy

I proposed that the speed of money changing hands is not a factor, since money is neither produced nor consumed. Trades can not change the value. The value comes from the mind, trades come from the change of mind. So if you change your mind every day and therefore trade a lot, as long as there is not an upward or downward trend in your valuation in your mind, the frequency of your changing your mind can not affect the value.

The velocity is determined by how long people hold bitcoins, whether due to hoarding or just waiting for confirmations. It is not constant, so it is a factor.


If you study the theory behind money velocity, you will see that they try to capture the production, distribution and consumption, not financial transactions. In fact, nobody measures money velocity directly, they derive it from gross domestic product and money volume. It is just another way to express gross domestic product. It is totally irrelevant for bitcoin. You could possibly get something meaningful if you aggregated bitcoin and fiat, and excluded financial transactions. Sending bitcoin to an exchange and convert bitcoin to and from fiat, would not be transactions included in the calculation of money velocity.

That is why I made the original post. The value comes only from the willingness to hold the money, from the peoples minds. When that willingness disappears, the money dies. This can also be seen in the multiple hyperinflation episodes in the past.


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September 06, 2014, 11:40:26 AM
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If you study the theory behind money velocity, you will see that they try to capture the production, distribution and consumption, not financial transactions. In fact, nobody measures money velocity directly, they derive it from gross domestic product and money volume. It is just another way to express gross domestic product. It is totally irrelevant for bitcoin. You could possibly get something meaningful if you aggregated bitcoin and fiat, and excluded financial transactions. Sending bitcoin to an exchange and convert bitcoin to and from fiat, would not be transactions included in the calculation of money velocity.

That is why I made the original post. The value comes only from the willingness to hold the money, from the peoples minds. When that willingness disappears, the money dies. This can also be seen in the multiple hyperinflation episodes in the past.

Yes, this "willingness to hold the money" is also referred to as "demand". With no demand the price will drop to zero and that is what causes hyperinflation—a collapse in demand for a currency.  If no one hoards a currency it is worthless.  It is the fact that someone is willing to hoard it that gives currency value.

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."   - Henry Ford
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September 06, 2014, 12:03:08 PM
 #14

Quote
The value is from the demand and supply, where demand comes from the wish to hold, and the supply comes from the wish hold less.

This is a nice quote to have as a signature, to reming bearish people that we are going nowhere than up.
Erdogan
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September 06, 2014, 03:15:47 PM
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Thanks both (last posters). It's great to have some support.

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September 06, 2014, 03:43:46 PM
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Interesting post.
But would all this be valid once we have derivatives in the market?

Quote
Since a seller can not sell more when he is empty, he also has to buy, to continue to be an actor.
Erdogan
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September 06, 2014, 05:29:57 PM
 #17

Interesting post.
But would all this be valid once we have derivatives in the market?

Quote
Since a seller can not sell more when he is empty, he also has to buy, to continue to be an actor.

Derivatives extend the money supply, so this is a real problem.Still, there is less reason to accept derivatives in bitcoin, since it is straightforward to have the real thing. You could sell a car, and receive a bitcoin deposit in a bank (this is currently what a "cash" transaction is in fiat money), but if there is a risk, any risk perceived at all, the seller would prefer to have the real money. Since that is so easy, it will prevail. That is my anticipation.

Loans and other financial services may have real value to the traders, but not on the scale that is currently the situation in the fiat market.

A government can use the central bank to create bitcoin credit (bitcoin promises) to pay for state consumption, but I think the sellers of goods and services to the state would prefer to convert that credit to real bitcoins. Especially if they make promises that they might not be able to keep.

Anyway, there is a large amount of threads created for that discussion.


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September 06, 2014, 05:48:18 PM
 #18

Interesting post.
But would all this be valid once we have derivatives in the market?

I don't think the market is going to consider a bitcoin derivative to be the equivalent of a bitcoin.  Time will tell.

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."   - Henry Ford
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September 07, 2014, 06:24:42 PM
 #19

Interesting post.
But would all this be valid once we have derivatives in the market?
I don't think the market is going to consider a bitcoin derivative to be the equivalent of a bitcoin.  Time will tell.
Derivatives require counterparties that reliably pay up when they lose big. That's not something the Bitcoin world does.
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September 07, 2014, 07:38:20 PM
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If you study the theory behind money velocity, you will see that they try to capture the production, distribution and consumption, not financial transactions. In fact, nobody measures money velocity directly, they derive it from gross domestic product and money volume. It is just another way to express gross domestic product. It is totally irrelevant for bitcoin. You could possibly get something meaningful if you aggregated bitcoin and fiat, and excluded financial transactions. Sending bitcoin to an exchange and convert bitcoin to and from fiat, would not be transactions included in the calculation of money velocity.

That is why I made the original post. The value comes only from the willingness to hold the money, from the peoples minds. When that willingness disappears, the money dies. This can also be seen in the multiple hyperinflation episodes in the past.

Yes, this "willingness to hold the money" is also referred to as "demand". With no demand the price will drop to zero and that is what causes hyperinflation—a collapse in demand for a currency.  If no one hoards a currency it is worthless.  It is the fact that someone is willing to hoard it that gives currency value.

What?  This is wrong.

Money has value because someone can settle debts with it.  How many people are hoarding Litecoins or Dogecoins?
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