Calculating Bitcoin Value...

[Goldstein]

One thing that concerns me is how people are calculating how much it costs to generate a Bitcoin. For instance, NewLibertyStandard has determined the value by  "the yearly average of the bitcoins generated per day divided by the yearly average of the amount of dollars spent per day on Internet and electricity or (bitcoins generated)/(cost of bitcoins)."

Well, you see there is a few problems with this:

1. When you determine the bandwidth required to generate a Bitcoin, it is very little. The monthly cost of paying for internet service inflates the value especially when not all of the bandwidth is dedicated to making coins. One should determine the average cost of an American kilobyte plus how many kilobytes it takes to generate a Bitcoin.

2. You can't judge the electricity used to generate a Bitcoin based on how much power the whole computer using since it's doing other things besides making coins. The computer is only using a bit of the CPU power and basic system components to generate Bitcoins. Additional hardware such as optical drives and powerful graphics cards will skew this if their power is counted as well. There should be a definite number of how much CPU/Mobo/Memory (ALONE) power is used to generate a Bitcoin. A separate minimalistic machine should be used for calculating exchange rates.

I don't know if NewLibertyStandard is considering these factors but it's just a heads up. I might start my own exchange and base it on the minimum resources required to generate a bitcoin, for the sake of accuracy.

Just my 2 cents. Your thoughts? Am I wrong?

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[NewLibertyStandard]

Thanks for thinking critically about my exchange rate calculation. When I first started my exchange service in 2009, I didn't add the cost of Internet access to my exchange rate calculation. There is certainly nothing wrong with going that route and I encourage you to run an exchange service however you feel is best. There were many reasons I decided to start using the price of Internet. One of the biggest reasons that I decided to change my exchange rate calculation was that as the first exchange service, I had to decide whether there would be plenty of dollars and too few bitcoins or plenty of bitcoins and too few dollars and I decided it was better to have plenty of bitcoins available for people to spend and then let everyone fight for the dollars which I inject everyday. Another reason was to promote growth and becase the people using Bitcoin don't have sever farms. Also I had unreliable Internet for a short time which was very detrimental to my Bitcoin production and that made an impression on me of the impotance of quality bandwidtdth which many people don't take for granted.

[Goldstein]

Yeah, after reading through this forum I have learned the value of a Bitcoin is completely subjective. It's worth whatever you want it to be.  

This project is very interesting and I find it odd it isn't bigger. Liberty, I really have to congratulate you on maintaining the greatest Bitcoin exchange. Keep it up but you may see competition from me in the future.

[NewLibertyStandard]

The more options, the better! Please do run an exchange service. I wish you the best of luck.

[SirArthur]

I believe that you're also looking to BC in a linear mode, as if it was always generating bitcoins chunk after chunk when instead it runs more like a sort of "lottery". You can generate 50 bc/day, 200 bc/day or... none, and as the network grows this last thing is the most likely to happen.
Also as the network grows the "proof-of-work" grows along, bc generators may start to run up to the next year or next 2 years, or rather not run them at all, taken they would take 1 month to update and process the existing nodes.

What the network seams also to miss is a way to generate high input of transactions, services, games, stuff to spend and earn BC's and make it flow.

[laszlo]

I think the idea is that if NLS is using a tooth pick to go mining and he's valuing the bitcoins based on his time/materials invested, you can just get a bulldozer and mine faster than him and compete, which would encourage him to find a more efficient method or invest in cheaper internet or something.  The value of it, as always, is what someone is willing to trade for it, not what any one individual claims it is.

[Stone Man]

One thing that concerns me is how people are calculating how much it costs to generate a Bitcoin. For instance, NewLibertyStandard has determined the value by  "the yearly average of the bitcoins generated per day divided by the yearly average of the amount of dollars spent per day on Internet and electricity or (bitcoins generated)/(cost of bitcoins)."

This is a good point.
I was just trying to come up with a number for how much it costs to produce bitcoins.
Here is my data on electrical use, depreciation of CPU, and internet connection:

Electricity
CPU running at 100% when no other tasks (most of the time) gives about 800 khash/s
Time to generate avg block - 27 hrs
Power required to run whole computer - 0.4 amp, 44 W (say CPU takes 80% of this, 35.2 W)
Electricity used - 27hrs * 35.2 W = 0.246 kWh
Electricity cost for me is about $0.08/kwh
Cost for 50 bc is 10.246*0.08= $0.1968
cost per coin is $0.0003936

CPU depreciation
Life of my average computer is about 5 yrs
Since I usually don't average above 50% cpu for the time it is on.
I predict the extra time at 100% will take the life down to 3-4 yrs
When I bought it last year the machine was $700
When I replace it it will likely cost $350
Cost per year originally was $350/5years = $70.00/yr
Cost per year with reduced life is $350/4yrs = $87.50/yr
Cost 1yr = $17.50
Cost per block at 27hrs = $0.0539
Cost per coin = $0.001078

Internet connection
My bitcoin nodes each use about 2kbps
My total practical bandwidth is 100kbps
This connection costs me $25/month or $0.90/block
% of bandwidth used is 2% so cost/block is $0.018
Cost per coin is $0.00036

Totals
Electric         - $0.0003936
Depreciation  - $0.0010780
Internet        - $0.0003600

Cost/coin      - $0.0018316


I would appreciate feedback to improve this model since it may be helpful to new bitcoin users.

[Stone Man]

I'm not sure about your math on the electricity used. Formula I found to find kWh used is (Watts * Hours Used) / 1000. Someone else chime in, but your usage I think may be 3-4 times too low.

Mine would be (100*27) / 1000 = 2.7 Kwh for 50 BC's
At my $0.11/Kwh that is $0.297 per 50 bc's.

$0.00594 per BC just for electricity. (Interestingly enough, the approximate going rate for BC's on the bitcoin market)

I think you are right. My figures for electricity are low.
My power supply says 1.6a but it powers a laptop so some of the power goes into charging not just running.
I figure it must be charging at least 2x faster than it is draining because the battery can be almost gone and when I plug in the power it will charge while still running bitcoin at 100% CPU. Originally I had thought that it was 4x greater charge rate than drain rate since it will recharge while in use. However, after your post I am rethinking this. It takes about 3 hrs to charge while in use and about the same time to drain a fully charged battery while watching movies. I am sure bitcoin does not take as much power as a movie with intensive graphics use but for the sake of argument lets drop the charging factor to 2x the drain factor. This means that the laptop is fairly energy efficient compared to my old desktops and only uses 0.8a or 88W to run. I believe most of this power goes to the CPU since I have an lcd screen and nothing else like video or hard drive being used most of the time.

Also I think your electric costs are closer to avg given this chart from DOE:
http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_b.html

Therefore your formula would give (88*27) / 1000 = 2.376 kWh for 50 coins
At your rate of $0.11/kWh that is $0.26136 / block or $0.00523/coin

There was a mistake in my math. I agree with your formula and don't know how I got what I did. Thanks for the catch.
Even with my old numbers the cost/bc should have been about $0.0019 instead of $0.0003

So adding in the other costs

Electric         - $0.0052300
Depreciation  - $0.0010780
Internet        - $0.0003600

Cost/coin      - $0.0066680

[laszlo]

I'm not sure if it's correct to assign cost to bitcoin 'production' in that way.. Your rate of production will decrease over time by design anyway and the whole thing with proof-of-work being required is just to limit the supply.  If bitcoins continue to grow in popularity it will not really be feasible to generate coins on a regular personal computer and trading for them will be the best way to acquire them.

[Bitcoiner]

Economists with decades of experience and fancy degrees could argue this single subject I'm sure for years.

Argue the costs of generation, perhaps, but as others have said, its value is entirely subjective. The value of a Bitcoin is whatever you trade for it! It could be much higher than costs (and probably will be once production slows down and demand rises while supply remains fixed), or it could even conceivably be zero, regardless of what costs have gone into it.

[lachesis]

I'm not sure of the implications or even validity of this, but here's what high school economics tells me:

Look at Bitcoins as a good instead of a medium of exchange for a moment. The characteristics are similar enough that I think it will work.

The current Bitcoin generation market is perfectly competitive, meaning that it is easy for people to come and go as they choose. If I can't make a profit generating Bitcoins, then I just turn generation off for a while until my calculations indicate that I can make a profit. If people _are_ making a profit, then others will see the market and be attracted. They will download Bitcoin and start generating.

Because of this, in a perfectly competitive market no one makes a profit. It's important to realize this means zero ECONOMIC profit, not zero accounting profit. Economic profit includes opportunity cost - i.e. what else could you do with your time?

Sooo, the upshot is that the TOTAL value of generated Bitcoins should be equal to the TOTAL amount spent upon generating them. If the Bitcoins are valued less than it costs to generate them, some generators will shut down, decreasing the total amount of money spent on generation. If they're valued more, more generators will come in.

That's as far as I know how to go with that starting point. Anybody else want to help out?

[dwdollar]

As a society, we aren't taught about currency.  We accept it without question.  Whether that's deliberate or not, I don't know.  But I think a lot of the confusion stems from this fact.  We have to learn what we should have been taught.  It should have been passed down through the generations, like every other science.

[llama]

Sooo, the upshot is that the TOTAL value of generated Bitcoins should be equal to the TOTAL amount spent upon generating them.

I agree with this statement, however it's important to realize that computing costs do not determine the value of bitcoins. Rather, it's the other way around (due to difficulty factor).

The computing costs of generating a bitcoin at the average node's efficiency is a great way to learn its value, but does not determine its value.

The value of the bitcoin is quite simply determined by what people are willing to trade for it.  This is sort of a catch 22, since people will only determine how much to trade for it based on how much stuff other people are willing to trade for it.  In a perfect market, I believe that a perfect currency would continue to increase in value until the total value of that currency market equals all of the wealth owned in the world.  This is because people will always trade "up" for it relative to other currencies, since the new currency is more convenient/secure/etc (remember, it's the perfect currency).  The exchange rate would then adjust to value the perfect currency higher, since people were trading "up" for it.  The cycle would then repeat, with people trading "up" for the currency again, relative to the new exchange rate. The cycle would repeat until the market for the perfect currency is worth the sum of all wealth.

Similarly, even a better currency (bitcoin) in only a close-to-perfect market (our market) will still experience a gradual increase in value until its total market is worth a substantial amount of the world's wealth.  It will only be limited by the necessity of other currencies (such as USD's necessary for paying the government, etc), as well as it's limitations (the threat of a security breach, government shutdown, etc).  And this last part would be so difficult to approximate that I'm not even going to attempt it     The silver lining though is that at the very least, the market will price the entire currency market at the ideal spot, based on its insecurities, etc.

[llama]

Here is something else you could consider. It costs $400 an ounce to mine gold. Yet, it is trading for 1200+ per ounce... the costs to currently generate do not necessarily translate to their value.

This is only because of barriers-to-entry and other implicit costs (such as availability of mineable land).  If I were able to mine gold for $400 an ounce, of course I would do it! 

To extend the analogy to Bitcoin, it might cost a bit less than the value of a bitcoin to generate one, but this is because it costs $1,000 just to get the computer to generate them on.

[joechip]

I'm not sure of the implications or even validity of this, but here's what high school economics tells me:

Look at Bitcoins as a good instead of a medium of exchange for a moment. The characteristics are similar enough that I think it will work.

Hello all, 

Complete noob to Bitcoin, but not to economics.  Just started up yesterday from a link at the daily paul.  Monetary theory is a serious hobby. 

Lachesis, you're closer to the truth than you might think.  As Rothbard points out in 'What Has Gov't Done to our Money' all money started as a commodity first, with all the attendant uses of said commodity, and due to its universal demand took on medium of exchange characteristics over time.  The commodity value of the 'currency' in question is the lowest that the price for it could go... ie. cost of generation.  So, this discussion is valuable from that perspective.

The question I have, though, is where the demand for the commodity that is a bitcoin going to come from other than as an academic exercise?  In other words, what other use can it have to fall back on as a commodity rather than a medium of exchange?  Gold can be used as jewelry, electrical connectors, etc.

Am I missing something?  If I am, good, b/c this looks like the beginnings of a really great idea that I would love to embrace.

[agaumoney]

The question I have, though, is where the demand for the commodity that is a bitcoin going to come from other than as an academic exercise?  In other words, what other use can it have to fall back on as a commodity rather than a medium of exchange?

Your question appears based on the assumption that bitcoin fits the austrian definition of money.

It doesn't.

bitcoin is (at least presently) nothing more than a medium of exchange.  (And it is still very limited in its acceptance for even that purpose.)

bitcoin is not a store of value (the energy or work needed to recreate each unit cannot be recovered).  It might be considered a speculation of future value, but that is not part of the definition of money.

bitcoin is not a measure or a standard of value (if it were there would not be so much speculation as to how to calculate its value).

With that said, in the future it might evolve and gain more of the other attributes.  No way to know at present.

[joechip]

The question I have, though, is where the demand for the commodity that is a bitcoin going to come from other than as an academic exercise?  In other words, what other use can it have to fall back on as a commodity rather than a medium of exchange?

Your question appears based on the assumption that bitcoin fits the austrian definition of money.

It doesn't.

Which is precisely my problem.  Not what it is but how you expect to propagate it as a medium of exchange if it has no other use?  Rothbard's examination of how human chose one medium of exchange over another is a powerful portion of the argument when trying to introduce a new one.  Origins matter. 

bitcoin is (at least presently) nothing more than a medium of exchange.  (And it is still very limited in its acceptance for even that purpose.)

Agreed and as you point out, not a very good one (there's certainly hope, though, not to misunderstand)  That's the inherent problem.  Money is the most liquid of commodities, no?

bitcoin is not a store of value (the energy or work needed to recreate each unit cannot be recovered).  It might be considered a speculation of future value, but that is not part of the definition of money.

Nothing is a 'store of value.'  That fallacy is promulgated through hard money circles daily and it will bankrupt many people.  It is the energy expended to mine an ounce of gold, the scarcity of its creation borne of opportunity cost, that is the source of its perceived value along with its other uses.  In that way bitcoin does share some commonality with gold, but possibly not enough.

bitcoin is not a measure or a standard of value (if it were there would not be so much speculation as to how to calculate its value).

No money is a standard of value, only a medium of exchange at an agreed upon rate.  The confidence of a currency is inherent in its ability to both be exchanged and maintain its value through time.  Value is purely subjective based on the individual's time preference at the moment of the exchange.

With that said, in the future it might evolve and gain more of the other attributes.  No way to know at present.

Bitcoin has going for it a number of attributes I find attractive in a currency.  But, you have not answered my question.  The commodity cost of producing (and maintaining, not a trivial cost btw for those calculating) a bitcoin is of importance.  The uniqueness of each coin and it's transaction history is also a source of value.  Is it enough to attract something greater than academic interest is the real question?

I would like to believe it is.

[Bitcoiner]

The question I have, though, is where the demand for the commodity that is a bitcoin going to come from other than as an academic exercise?  In other words, what other use can it have to fall back on as a commodity rather than a medium of exchange?

Your question appears based on the assumption that bitcoin fits the austrian definition of money.

It doesn't.

Which is precisely my problem.  Not what it is but how you expect to propagate it as a medium of exchange if it has no other use?  Rothbard's examination of how human chose one medium of exchange over another is a powerful portion of the argument when trying to introduce a new one.  Origins matter. 

bitcoin is (at least presently) nothing more than a medium of exchange.  (And it is still very limited in its acceptance for even that purpose.)

Agreed and as you point out, not a very good one (there's certainly hope, though, not to misunderstand)  That's the inherent problem.  Money is the most liquid of commodities, no?

bitcoin is not a store of value (the energy or work needed to recreate each unit cannot be recovered).  It might be considered a speculation of future value, but that is not part of the definition of money.

Nothing is a 'store of value.'  That fallacy is promulgated through hard money circles daily and it will bankrupt many people.  It is the energy expended to mine an ounce of gold, the scarcity of its creation borne of opportunity cost, that is the source of its perceived value along with its other uses.  In that way bitcoin does share some commonality with gold, but possibly not enough.

bitcoin is not a measure or a standard of value (if it were there would not be so much speculation as to how to calculate its value).

No money is a standard of value, only a medium of exchange at an agreed upon rate.  The confidence of a currency is inherent in its ability to both be exchanged and maintain its value through time.  Value is purely subjective based on the individual's time preference at the moment of the exchange.

With that said, in the future it might evolve and gain more of the other attributes.  No way to know at present.

Bitcoin has going for it a number of attributes I find attractive in a currency.  But, you have not answered my question.  The commodity cost of producing (and maintaining, not a trivial cost btw for those calculating) a bitcoin is of importance.  The uniqueness of each coin and it's transaction history is also a source of value.  Is it enough to attract something greater than academic interest is the real question?

I would like to believe it is.

Do you see value in a distributed currency without a single point of failure?
Do you see value in a more anonymous way of transmitting and receiving value?
Do you like the idea of being able to transmit value without having to pay an expensive transaction fee?

If you answer yes to any of these questions, then I think you answered your own questions.

[joechip]

Do you see value in a distributed currency without a single point of failure?
Do you see value in a more anonymous way of transmitting and receiving value?
Do you like the idea of being able to transmit value without having to pay an expensive transaction fee?

If you answer yes to any of these questions, then I think you answered your own questions.

Of course I see the value in those things, if I didn't I wouldn't have given this a second thought.  The question I'm asking is can those things overcome the inherent lack of commodity uses which undergirds something like gold?  Does the lack of a third-party clearinghouse overcome the purely digital nature of the 'currency?'

[Bitcoiner]

Do you see value in a distributed currency without a single point of failure?
Do you see value in a more anonymous way of transmitting and receiving value?
Do you like the idea of being able to transmit value without having to pay an expensive transaction fee?

If you answer yes to any of these questions, then I think you answered your own questions.

Of course I see the value in those things, if I didn't I wouldn't have given this a second thought.  The question I'm asking is can those things overcome the inherent lack of commodity uses which undergirds something like gold?  Does the lack of a third-party clearinghouse overcome the purely digital nature of the 'currency?'

There you go, then. So long as people see value in those things, the currency will have a demand. Market exchangers will act to bring liquidity in and out of the currency. Consider those things the "commodity uses". Will Bitcoin be ultimately successsful? An open question, to be sure. It certainly isn't off to a bad start. I think that Bitcoin is simply the next step on the path to our digital future.