Calculating Bitcoin Value...

[Anonymous]

What is stopping anyone from minting gold and silver rounds and calling them "bitcoins"?.If they had a marking as authentic couldnt they be used as a real world token that represents the value of digital currency?You could then exchange these tokens in the physical world when you want to buy bitcoins in the virtual world.Im not sure if I this is a good idea or not.At the moment we have to use fiat money and credit to buy bitcoins.A minted coin of some description might help back bitcoins value.After all you cant send gold and silver by sms or email lol.This might work if you set up a physical storefront or meeting place.

If someone minted "bitcoins" through the american open currency exchange it would produce a standard that is accepted by existing merchants as well as bitcoin users and we wouldnt have to rely on fiat money to bitcoin transactions.

[Stone Man]

Well, after the slashdotting it seems blocks are being generated about 3x faster due to all the new nodes. This means my computer has to work 3x longer to generate coins.

It has been said that bitcoins do not have a commodity value tied to them like gold. I agree with this but there is an indirect value in the electricity, CPU depreciation, and ISP costs spent to make the coins.

In a previous post I estimated my costs at about $0.006/BC.

Now I would say since my cost of production has tripled the price I am willing to pay has at least tripled to $0.018/BC.

I say "at least" because for me, I want to accumulate enough BTC value that I can use it to send money securely as intended. Currently the value of the BTC is low and I have to keep buying coins to get enough value to send my money. As the value increases I won't need to buy as many coins to send the same money.

[sirius]

I added a new answer to the FAQ about the value of Bitcoin.

Bitcoin has value because it is accepted as payment by many. The initial market value was achieved when people speculated, that because of its properties, the currency would be accepted by others later on.

When we say that a currency is backed up by gold, we mean that there's a promise in place that you can exchange the currency for gold. In a sense, you could say that Bitcoin is "backed up" by the price tags of merchants and currency exchangers – a price tag is a promise to exchange goods for a specified amount of currency. Of course, price tags may or may not be as long-term promises as those made by central banks or governments.

It's a common misconception that Bitcoins gain their value from the cost of electricity required to generate them. Cost doesn't equal value – hiring 1,000 men to shovel a big hole in the ground may be costly, but not valuable. Also, even though scarcity is a critical requirement for a currency to be useful, it alone doesn't make anything valuable. Your fingerprints are scarce, but that doesn't mean they have any exchange value.

[Stone Man]

I added a new answer to the FAQ about the value of Bitcoin.

Bitcoin has value because it is accepted as payment by many. The initial market value was achieved when people speculated, that because of its properties, the currency would be accepted by others later on.

When we say that a currency is backed up by gold, we mean that there's a promise in place that you can exchange the currency for gold. In a sense, you could say that Bitcoin is "backed up" by the price tags of merchants and currency exchangers – a price tag is a promise to exchange goods for a specified amount of currency. Of course, price tags may or may not be as long-term promises as those made by central banks or governments.

It's a common misconception that Bitcoins gain their value from the cost of electricity required to generate them. Cost doesn't equal value – hiring 1,000 men to shovel a big hole in the ground may be costly, but not valuable. Also, even though scarcity is a critical requirement for a currency to be useful, it alone doesn't make anything valuable. Your fingerprints are scarce, but that doesn't mean they have any exchange value.

Would you say that like any fiat currency the bitcoin is generally worth at least what it cost to make it?
Even in times of massive inflation, paper money can still be burned. Obviously it is usually worth much more based on market demand but the lowest value it should command is that which was expended for its creation.

[Insti]

Would you say that like any fiat currency the bitcoin is generally worth at least what it cost to make it?
Even in times of massive inflation, paper money can still be burned. Obviously it is usually worth much more based on market demand but the lowest value it should command is that which was expended for its creation.

Why?

[db]

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.

If that was the case it would be terrible. Imagine a world economy running mainly on Bitcoin. Then resources equal to the value of all the money would be wasted on pointless computation. Happily, it is not the case. Think about the point where, for instance, the cost of generating the next bitcoin is twice the cost of the previous. To make it profitable to generate that coin the value of all other coins in existence would have to double. Those coins didn't cost at all that much to generate as the last one but they all have the same value.

[sirius]

Would you say that like any fiat currency the bitcoin is generally worth at least what it cost to make it?
Even in times of massive inflation, paper money can still be burned. Obviously it is usually worth much more based on market demand but the lowest value it should command is that which was expended for its creation.

Generating coins costs energy, but you can't turn them back to energy.

The energy you get when you burn paper money is in most situations worth less than its printing costs were.

[SirArthur]

Don't forget to add to the equation that "generate OR NOT" BitCoins is a sort of lottery.
Whereas sometime ago I use to generate at least 50 BC/day, now the last time I generated a 50 BC chunk was 7 days ago.

So, as it gets harder to generate, its value increases. Isn't like "cost more to produce" but rather "they're more rare". Like gold, the value of gold in the wild is 0, plays no important role on the Nature, yet it takes some work to dig out, so here it's value increases by production costs, but so does Iron, Copper, Tin and all other metals that have a way less value than gold. From it's physic attributes, gold, ain't nothing special either. Not resistent as iron or its leagues, not good for electronics as silver or copper, there isn't much to do with gold on practical life, other than jewellery... the only thing to notice is that it can't get waisted with time, doesn't corrode or erode (aluminium just doesn't corrode, but gets eroded with time).

But in the end what makes the final value of gold for our species is that you can't find gold anywhere. Isn't a sort of abundant metal.

[sirius]

The price of any good on the market simply emerges from supply and demand. The more difficult thing is to determine what things affect supply and especially demand. Demand is affected by what people want now, what people think they and others will want in the future, time preferences and expectations of the future supply. That's a more complex equation that you can only make rough estimations about, much like the weather. That's why centrally planned economy works as well as making daily weather forecasts 1 year ahead.

[Stone Man]

It has been said that the economy is more like an organism than a machine. I agree with this. An organism grows and adapts to its environment but does not do well in restricted environments. It is impossible to calculate what a few billion people will do next year. Each has free will and can complicate the picture.

Just to clarify, for me the value of bitcoins is at least what I have to pay to get them. This may not be true for someone else who does not really want to use them and is only trading for investment purposes. I am trading to get enough value to actually use the system as intended as an anonymous payment method. Most items I would want to buy, like digital gold, are expensive and I need a lot of money transferred to bitcoins to do it.

Just in case this is helpful to anyone else who is in my same position I would like to share what the current value is to me.

As of right now, the difficulty to generate has gone up 4x since my last entry where I listed the value at $0.018.
Therefore I am willing to pay $0.072 and have been doing just that on the exchange.
Apparently there are lots of other people who feel the same way because the ask price is now up to $0.084.

Edit:
I saw some new information on electricity consumption that looks quite a bit more accurate than what I had:
http://bitcointalk.org/index.php?topic=403.msg3574;topicseen#msg3574
I may need to revise my figures.

[Bitcoiner]

It has been said that the economy is more like an organism than a machine. I agree with this. An organism grows and adapts to its environment but does not do well in restricted environments. It is impossible to calculate what a few billion people will do next year. Each has free will and can complicate the picture.

Have you read this site before? http://mises.org

You might find it interesting. Mises was the first guy AFAIK to posit that it was impossible for central planning to fulfill people's desires better than a free market due to the calculation problem.

They approach economics with an axiomatic approach; humans act, humans value things differently, and it is impossible for a central planner to calculate what a few billion people will do because it does not know what those people think or what those people want; indeed, in order to truly centrally plan an economy successfully you'd have to be able to essentially simulate humans to find out their subjective preferences and desires, even if you had an extremely powerful AI. Otherwise, the most an AI could do is fulfill the role of an entrepreneur and try to please people as they tell it what they want

[Stone Man]

I have heard of Ludwig Von Mises as one of the founders of Austrian economics but only as other people have referenced his work. I should check out the site. It sounds like something I would agree with.

[Bitcoiner]

I have heard of Ludwig Von Mises as one of the founders of Austrian economics but only as other people have referenced his work. I should check out the site. It sounds like something I would agree with.

I have learned a lot myself, just from posting in the forums and commenting on the blog.