An easy way to make bitcoin worth millions of dollars

[johnyj]

Imagine such a use case:

Bob is a bitcoiner, he spend $300 to buy 1 bitcoin from exchange A, then he pays a merchant in another city to buy some car parts, and that merchant sell the bitcoin to exchange B to get dollar back

Looking at the whole process, the action has no net effect for the market: The bitcoins on exchange first decreased by 1 bitcoin and then increased by exactly 1 bitcoin. However, the details are more interesting

After Bob bought his coin, he need to transfer it to his wallet, this will take an hour. Then it takes another hour before his coin reach the merchant's wallet, and another hour before the merchant could send coin to exchange and sell it. So this trade makes one bitcoin disappear from the exchange for 3 hours. If Bob make one trade every 3 hours, one bitcoin will permanently disappear from the market, not available for purchase at any moment

If there are millions of users doing one such purchase every 3 hours, then there will be millions of bitcoins disappear from the market, thus make the coin extremely difficult to get, and its value will skyrocket

This process does not cost anything, and it does not hurt anyone:
- Bob does not take any risk since he immediately spend his coins and he might even get some discount
- Merchant get increased income due to lower fees and more customer
- Exchanges earn commission both ways
- Bitcoin become more scarce and more valuable
- Dollar is not affected since same amount of fiat money are still needed to initialize and finalize the transaction

It is an all-win situation

From Bob's point of view, he has motivation to make all his daily consumption pass through bitcoin, since that will make his coin more valuable. Some other people might choose to purchase in batch, and spend after a long time, from weeks to years, that will generate the same effect. Holding a bitcoin indefinitely is the same as using it every day, it just make this coin occupied and not available on market forever

So, increased usage will make bitcoin more scarce and raise its value, and raised value will increase its usage, a positive feedback loop. This could be the trend for the coming years



We all know that MV=PQ is a formula for quantitative theory of money. But what is the effect of above case on this formula, e.g. by converting dollar first into and then out of bitcoin during a trade?

It seems nothing changed for dollar: You still need same amount of dollar to do the trade, and the speed that dollar flows is the same (Dollar settlements between banks are done once a day)

This means, if we could make all the economy activity pass through bitcoin, it will make bitcoin economy exactly the same size as existing economy without affecting the original one, just like duplicating the whole economy into bitcoin monetary system


(Edit: 2015-03-17, added some calculations)

Suppose that 2 million bitcoin users, average monthly spending is $3000, they buy $3000 worth of bitcoin (10 bitcoin at today's price) when they receive their salary, and spend them during a month. But this means that they would have to buy 20 million bitcoins, which is impossible: The coins in circulation is around 1 million maximum. So, bitcoin's price will have to increase at least 20 times to reach $6000 to make that happen

This purchase happens during the beginning of the month, and later the price will fall back due to more and more coins flowing back to market. Average holding time for these coins can be regarded as 15 days, if people don't all buy at the same time, it will cut the coin demand by half, so a price of $3000 is more likely

If the user base increase to 2 billion, then price will be at 3 million per coin. Notice that no matter how high the coin price is, most of the coins would still be held as long term storage, the coins in circulation will never be above 2 million

And this is all very rational calculation, in reality the market can be more crazy than people can imagine when the shortage of coins are overwhelm, I'm not surprised to see a price of 1 million with much smaller amount of users

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[OpenOcean]

I'm sure there are collieries that go with this thought, but it is extremely creative nonetheless and I encourage more thinking of the sort. Efforts like these breed ingenuity.

[ranlo]

Imagine such a use case:

Bob is a bitcoiner, he spend $300 to buy 1 bitcoin from exchange, then he pays a merchant in another city to buy some car parts, and that merchant sell the bitcoin to exchange to get dollar back

Looking at the whole process, the action has no net effect for the market: The bitcoins on exchange first decreased by 1 bitcoin and then increased by exactly 1 bitcoin. However, the details are more interesting

After Bob bought his coin, he need to transfer it to his wallet, this will take an hour. Then it takes another hour before his coin reach the merchant's wallet, and another hour before the merchant could send coin to exchange and sell it. So this trade makes one bitcoin disappear from the exchange for 3 hours. If Bob make one trade every 3 hours, one bitcoin will permanently disappear from the market, not available for purchase at any moment

If there are millions of users doing one such purchase every 3 hours, then there will be millions of bitcoins disappear from the market, thus make the coin extremely difficult to get, and its value will skyrocket

This process does not cost anything, and it does not hurt anyone:
- Bob does not take any risk since he immediately spend his coins and he might even get some discount
- Merchant get increased income due to lower fees and more customer
- Exchanges earn commission both ways
- Bitcoin become more scarce and more valuable
- Dollar is not affected since same amount of fiat money are still needed to initialize and finalize the transaction

It is an all-win situation

From Bob's point of view, he has motivation to make all his daily consumption pass through bitcoin, since that will make his coin more valuable. Some other people might choose to purchase in batch, and spend after a long time, from weeks to years, that will generate the same effect. Holding a bitcoin indefinitely is the same as using it every day, it just make this coin occupied and not available on market forever

So, increased usage will make bitcoin more scarce and raise its value, and raised value will increase its usage, a positive feedback loop. This could be the trend for the coming years



We all know that MV=PQ is a formula for quantitative theory of money. But what is the effect of above case on this formula, e.g. by converting dollar first into and then out of bitcoin during a trade?

It seems nothing changed for dollar: You still need same amount of dollar to do the trade, and the speed that dollar flows is the same (Dollar settlements between banks are done once a day)

This means, if we could make all the economy activity pass through bitcoin, it will make bitcoin economy exactly the same size as existing economy without affecting the original one, just like duplicating the whole economy into bitcoin monetary system

This just shows how absurd it is to use the formula MV=PQ to decide money's value and supply. But anyway, if you use this theory, then bitcoin's value will inevitably go to millions by this practice

In this case, unlike dollar, the demand for transaction with bitcoin does not mainly come from the absolute need for payment medium, but from an intention to make bitcoin more valuable, strange motivation but have logic reason

The issue is that while theoretically this would work, in reality it wouldn't. People would speculate. They would dump. They would manipulate to boost their values, then drop them back down to re-buy (like we already see).

Bitcoin is likely not to become a true currency. Think of it as being more like gold, an investment vehicle. Does it have value? Yes. But you won't take gold to the store to buy things. You'll convert to cash first. Same with Bitcoin. It's simply not feasible for me to stand at a gas pump for over an hour waiting on confirmations.

[NRF]

What you are suggesting is reducing the velocity of bitcoin (that is the v part in the MV=PQ equation).

In theory, it would do exactly what you say, because there is less bitcoins available to be transact3ed at any particular point in time the equation rebalanced itself to make each unit 'cost' more.

Unfortunately, all the applications that take advantage of the extremely fast velocity of bitcoin compared to other mediums (FIAT) get tanked.  Not a present side effect reducing the usefulness of bitcoin.  

[johnyj]

The issue is that while theoretically this would work, in reality it wouldn't. People would speculate. They would dump. They would manipulate to boost their values, then drop them back down to re-buy (like we already see).

Bitcoin is likely not to become a true currency. Think of it as being more like gold, an investment vehicle. Does it have value? Yes. But you won't take gold to the store to buy things. You'll convert to cash first. Same with Bitcoin. It's simply not feasible for me to stand at a gas pump for over an hour waiting on confirmations.

For small consumptions like gas pump you might not need confirmation, and I suppose that you have already stored your bitcoin before you go to gas station, so average holding time is already longer than 3 hours, mission completed

Holding it long term like gold works the same as spending it around all the time. but the weakness of holding method is that eventually you must spend it, and that will cause an excessive supply on market, but when you spend it all the time, it just never become available on market

Speculation just add another layer of volatility above fundamentals, the fundamental is increased consumption will decrease supply, thus create long term appreciation tendency

[ranlo]

The issue is that while theoretically this would work, in reality it wouldn't. People would speculate. They would dump. They would manipulate to boost their values, then drop them back down to re-buy (like we already see).

Bitcoin is likely not to become a true currency. Think of it as being more like gold, an investment vehicle. Does it have value? Yes. But you won't take gold to the store to buy things. You'll convert to cash first. Same with Bitcoin. It's simply not feasible for me to stand at a gas pump for over an hour waiting on confirmations.

For small consumptions like gas pump you might not need confirmation, and I suppose that you have already stored your bitcoin before you go to gas station, so average holding time is already longer than 3 hours, mission completed

Holding it long term like gold works the same as spending it around all the time. but the weakness of holding method is that eventually you must spend it, and that will cause an excessive supply on market, but when you spend it all the time, it just never become available on market

Speculation just add another layer of volatility above fundamentals, the fundamental is increased consumption will decrease supply, thus create long term appreciation tendency

True, unless the price gets to where people don't feel comfortable buying in again. One of Bitcoin's biggest flaws, IMO, is the number system. People don't like the idea of spending $1000 for a single coin. But they may do $10 for a coin (if there were 100x as many coins it would work out to be the same, but we psychologically infer the values differently). I think this is one of the big hurdles.

[johnyj]

What you are suggesting is reducing the velocity of bitcoin (that is the v part in the MV=PQ equation).

In theory, it would do exactly what you say, because there is less bitcoins available to be transact3ed at any particular point in time the equation rebalanced itself to make each unit 'cost' more.

Unfortunately, all the applications that take advantage of the extremely fast velocity of bitcoin compared to other mediums (FIAT) get tanked.  Not a present side effect reducing the usefulness of bitcoin.  

Actually in my use case, the v is already at its highest, other usage like hoarding for weeks or years have much lower velocity. But 3 hours turn around time is still much higher than fiat money, which is days or weeks depends on where you are. Off-chain transactions can finish the trade in seconds like VISA or paypal, but there is no real money moving just numbers exchanging hands inside the same platform, and that will not affect the money supply

And you are right, the purpose of letting consumptions passing through bitcoin is not to make extremely fast deals, but make bitcoin worth millions of dollars, is there any problem for this motivation  

[homeless hacker]

As one member stated prior, bitcoin is more of an investment vehicle as of now. It will establish itself as a currency in the future.

[Possum577]

The curiosity is great but the process doesn't work as you described. The coin never disappears or shortens supply.

As soon as the coin is bought its ownership changes hands, instantly. Likewise, if you pay me for services the coin becomes one as soon as you tell you wallet to send me the coin. The length of the transaction is akin to the time it takes for me to mail you a gold coin or for you to accept a Venmo payment. The coin or money doesn't "disappear". So the supply doesn't decrease, therefor price can't be moated for this reason.

It's great thinking though.

[ranlo]

As one member stated prior, bitcoin is more of an investment vehicle as of now. It will establish itself as a currency in the future.

I don't think it will be a currency, though. Despite its name, it's just not viable without changes to the underlying code. I think an altcoin will take over and be the true currency, with Bitcoin being for larger transfers or just remaining an investment vehicle. A currency relies on ease of use and speed. Bitcoin lacks the latter.

[johnyj]

True, unless the price gets to where people don't feel comfortable buying in again. One of Bitcoin's biggest flaws, IMO, is the number system. People don't like the idea of spending $1000 for a single coin. But they may do $10 for a coin (if there were 100x as many coins it would work out to be the same, but we psychologically infer the values differently). I think this is one of the big hurdles.

Price depends on the unit you are using, you could also use satoshi, anyone with a calculator will be fine. A kilogram of gold cost 36K dollar, one share of berkshire hathaway cost 0.2 millions, no one has a problem with those

[johnyj]

The curiosity is great but the process doesn't work as you described. The coin never disappears or shortens supply. As soon as the coin is bought its ownership changes hands, instantly. Likewise, if you pay me for services the coin becomes one as soon as you tell you wallet to send me the coin. The length of the transaction is akin to the time it takes for me to mail you a check or for you to accept a Venmo payment. It has zero influence on the ownership or supply. So the supply doesn't decrease, therefor price can't be moated for this reason.

It's great thinking though.

If you read my use case carefully, you will see that during the whole phase of this trade, Bob's one bitcoin is not available on market, that is the decrease of supply. This is nothing new for those who knows quantitative theory of money, I just analyzed it in a more detailed way

However, in fiat monetary system, many transactions are done inside the same banking network, banks using daily settlements to hedge the real move of the money during a day and then mail a check does not change the money supply since it never touches the real money, only changes banks account numbers, just like when you trade bitcoins in an exchange, only numbers in your account changes, bitcoin never moves until you withdraw

You can look at an extreme case: I want to transfer 1 billion dollar from US to China, and I bought 1 billion dollar worth of bitcoin on exchanges, at current market price it will be 3 million bitcoins, and I might end up bought most of the coins available on market. And during the time those coins were under transition, the exchanges around the world will have much less coin, say 1000 coins available for sell. If another user comes after me and want to transfer 1 billion dollar, he has to pay a price of 1 million per coin to achieve his goal

[NRF]

Actually in my use case, the v is already at its highest

Actually, it is not.

What if my application need to transact the same satochis multiple times in one block?  In effect, you proposal will kill my application.

[johnyj]

Actually in my use case, the v is already at its highest

Actually, it is not.

What if my application need to transact the same satochis multiple times in one block?  In effect, you proposal will kill my application.

How is that possible?

[NRF]

How is that possible?

How?  The normal way, create a transaction and submit it.  There is not a limit as long as they are valid transactions and any output's corresponding input is included in that or a previous block.

The applications of that are huge, it is what will enable shares to be traded in real time on the blockchain for example.

[OROBTC]

...

johnyj

Getting millions of users to spend BTC all within three hours does not sound easy to me!

On the other hand, I just did my part a little ago while spending some BTC.  When my purchase arrives, I will post my experience in whatever relevant thread at that time.

But, I will HODL most of my BTC, at least for now.

[johnyj]

How is that possible?

How?  The normal way, create a transaction and submit it.  There is not a limit as long as they are valid transactions and any output's corresponding input is included in that or a previous block.

The applications of that are huge, it is what will enable shares to be traded in real time on the blockchain for example.

Ok I understand, you are combining multiple transactions, then you might need an extra database to track the balance of each clients. I suppose that those movements will not reduce the money supply

[johnyj]

...

johnyj

Getting millions of users to spend BTC all within three hours does not sound easy to me!

On the other hand, I just did my part a little ago while spending some BTC.  When my purchase arrives, I will post my experience in whatever relevant thread at that time.

But, I will HODL most of my BTC, at least for now.

Indeed. If I want to reduce the money supply in circulation, the easiest way is to buy large amount of bitcoins and hoard them, thus this part of bitcoin is removed from circulation

However, that requires large amount of capital, not every one have that amount of extra reserve. But it is possible to use your daily consumption to achieve the same goal

As explained in the use case, holding one bitcoin indefinitely has the same effect as spending it again and again so that it is constantly in use. Suppose that you have a monthly spending bill of $2000, if you let all these spending go through bitcoin, then it will achieve almost the same effect as you just bought $2000 worth of bitcoin and hold them indefinitely

[NRF]

then you might need an extra database to track the balance of each clients.

What if I don't want to?  You are the one wanting to decrease the already existing utility!!!!!!!!!!!!!!. 

I am not really upset about it, I am just pointing out what you propose may sound good "in theory" but the repercussions will effect a lot of things that you may not have thought of. 

[johnyj]

then you might need an extra database to track the balance of each clients.

What if I don't want to?  You are the one wanting to decrease the already existing utility!!!!!!!!!!!!!!.  

I am not really upset about it, I am just pointing out what you propose may sound good "in theory" but the repercussions will effect a lot of things that you may not have thought of.  

I still don't understand how removing some coins from exchanges will decrease the already existing utility? what utility?

What I propose is not something new, some bitcoiners have been advocating this for years, I just got it more clearly recently. What do you think made up those large sales number that reported by those merchants? I suppose a large part of those sales consists of this kind of "pass through" transactions, and it indeed have some positive effect on increasing merchant adoption and stabilizing the exchange rate