Store of value, fungibility, fiat, and liquidity relationships.

[cbeast]

These terms seem to be those most frequently used to describe the properties of currencies. I am trying to understand how any currency attains a market value. Can someone explain how these are interrelated?  Are there any good online resources that explain these?

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[cbeast]

I guess I'm wondering why Bitcoin has a certain value and litecoin has another when they are so similar in nature. Why do some fiat currencies that inflate lose so much value, while other do not? I don't think I'm looking for a basic lecture in economics. I want to know the direct relationships in formulaic form. If there are theories that include other terms like velocity, I still want to know how they relate to these four terms.

I think the key to Bitcoin's success to replace fiat currencies will be the ability to become a store of value. I'm just not sure how to realize this.

[benjamindees]

Value in an economy is created by specialization and trade.  (Velocity, by the way, is just a metric used to measure specialization and trade.)  Specifically, by relying on the market to provide for things that you need, but otherwise could not economically produce.  In this way, capital is invested efficiently.  Yet there is risk involved.  What if the market doesn't produce what you need?  What if a monopoly arises and the price is too high?  So there is a tradeoff.

The best currencies reduce or eliminate this risk.  They do so in different ways.  Some (commodity currencies) are valuable in and of themselves.  This creates a buffer of resources that can be used whenever markets fail.  Fiat currencies, on the other hand, rely on government force in order to simply steal and redistribute whatever the market lacks.  Fungibility and liquidity are related, and just refer to the ease with which a currency can be exchanged.  Highly fungible and highly liquid currencies reduce the risk that you will not be able to trade away your currency if necessary.

While not technically currency, there is a lot of activity lately in gold and silver exchange-traded funds, which are more liquid than physical metals while (ostensibly) still backed by the commodities themselves.  Some fiat currencies (Canadian and Australian dollars) achieve stable value by virtue of their country's vast commodity wealth, restrained monetary policies and the notion that these resources back the currency.

Litecoin, for what it's worth, will never have much value, because there are people out there who have the computing resources to crush it overnight.  That is too much risk for a currency.

Bitcoin doesn't have that problem.  As a currency, Bitcoin is now extremely resistant to failure, is infinitely fungible, is not reliant upon fiat or government force, and is slowly reaching a stable value.  Yet it still has difficulties with liquidity.  And the value of Bitcoin is not readily apparent.  It is almost identical to precious metals in this regard.

If there were a nuclear war, you could use a bar of gold to re-build modern civilization.  Eventually.  But you can't use it to buy a hamburger.

Same with Bitcoin.  If you lose your job, you could use Bitcoins to trade for almost anything you need, as long as you can wait a week or so.  But you can't use them to pay your water bill.

The difference, of course, is that while you will never be able to buy a hamburger using gold barring a complete collapse in world population, Bitcoin has a decent chance of eventually achieving this level of liquidity and, thus, value.

[Etlase2]

These terms seem to be those most frequently used to describe the properties of currencies. I am trying to understand how any currency attains a market value. Can someone explain how these are interrelated?  Are there any good online resources that explain these?

Prior to fiat, currencies were pegged to (or were) a commodity. Obviously gold was the most common recently, but salt and barley among other commodities were used in the past. By "market value" I assume you mean how do currencies valuate against each other, and this is almost entirely a factor of forex. Before dropping gold, it was generally the measure of a currency's value, though a lot of countries pegged their currencies to the US dollar in some fixed ratio. Since then, they float based on supply/demand through forex. But a "market value" does not necessarily translate to a local value, as prices tend to be sticky, and pricing in general is not an entirely well understood concept in economics.

[cbeast]

Thanks for all the replies. I'm not trying brainstorm, because I understand that there are far more qualified people than me developing Bitcoin. I just want to more clearly see the direction that this development is leading. Let's all make sure we have real goals in mind to achieve optimum adoption.

[hazek]

These terms seem to be those most frequently used to describe the properties of currencies. I am trying to understand how any currency attains a market value. Can someone explain how these are interrelated?  Are there any good online resources that explain these?

It's beyond simple to answer your question. All prices are a result of the supply and demand equation.

I'm pretty sure when you're trying to understand how any currency attains a market value you are more precisely asking what about a particular currency drives it's demand.

For instance you compare bitcoins with litecoins and you're asking yourself why they have a different exchange rate. Well first of all both currencies's supply is different and not equal, so already you have a very important difference that will reflect in the exchange rate. But even if you had both at the same supply, their properties would most likely "fuel" different degrees of demand and again you end up with a difference in the exchange rate.

It's all about the supply and demand, and I believe you are asking why bitcoins or any currency are in demand at all, to which I'd say you should look to their utility and properties to figure it out.

[cbeast]

It's all about the supply and demand, and I believe you are asking why bitcoins or any currency are in demand at all, to which I'd say you should look to their utility and properties to figure it out.

Let's look instead at platinum vs palladium vs gold. Palladium is more rare that platinum, and both are rarer than gold. They all have about equal utility. Platinum and gold are similar in value, but palladium is much cheaper. If it's about supply vs demand, and if supply of palladium is much smaller, then if all other things being equal, why is demand so much smaller as well?

[Etlase2]

Primarily because gold is in another bubble right now as people lose faith in fiat currency.

You're asking "why do people do what they do?" and if you can answer that, here is your nobel prize.

[hazek]

They all have about equal utility.

Is this your opinion or do you have some facts to back that statement? Because if it is true it will be news to me. Besides you left out their properties that are equally important.

why is demand so much smaller as well?

I don't know precisely, no one does as Etlase2 pointed it out, but there are theories that you can speculate on based off of their utility and properties.

[cbeast]

They all have about equal utility.

Is this your opinion or do you have some facts to back that statement? Because if it is true it will be news to me. Besides you left out their properties that are equally important.

I think Palladium has even more utility in industry if I am using the term in the right context.

why is demand so much smaller as well?

I don't know precisely, no one does as Etlase2 pointed it out, but there are theories that you can speculate on based off of their utility and properties.

I think it is something else. I think it is marketing by bullion advertisers. It is fiat and purely psychological. People are generally too dumb to know anything other than what they are told.

[hazek]

They all have about equal utility.

Is this your opinion or do you have some facts to back that statement? Because if it is true it will be news to me. Besides you left out their properties that are equally important.

I think Palladium has even more utility in industry if I am using the term in the right context.

You are but you are wrong. You have to think about all the uses; actual and fictional that both metals have not just industrial use. Gold for instance is seen as money and the best store of value by a lot of people around the world where as arguably platinum isn't and now you need to figure out how that weighs in on the demand for either.

why is demand so much smaller as well?

I don't know precisely, no one does as Etlase2 pointed it out, but there are theories that you can speculate on based off of their utility and properties.

I think it is something else. I think it is marketing by bullion advertisers. It is fiat and purely psychological. People are generally too dumb to know anything other than what they are told.

It's not. You just lack the complete information about their utilities and properties as most everyone does and then your conclusions based on an incomplete picture don't match up with reality as they shouldn't.