Fundamental Analysis of BTC, is BTC overvalued?

[picollo7]

As a casual economics thinker, I thought, what is the BTC really worth?

Forget all the bubble crap, forget the deflationary stuff, and forget all the nonsense about governments and whatever.  Forget about what everybody says, and just look at the fundamentals.

I realize that many people have an opinion one way or the other, but I am trying to be as objective as possible.  Full disclosure, I own some BTC.

How is a BTC generated? Work, from electricity, nothing more fundamentally.  Sure, you can get into the whole crypto stuff, but at the end of the day, BTC represents electricity spent.  You can also consider the initial sunk cost of the equipment, but in the long run, that cost becomes irrelevant.
 
The only thing that matters in the long run is the marginal cost.  As long as the barriers to entry are low, which they are VERY low, many people can enter the market to compete the profits away.

BTC is in its infancy, has very little widespread acceptance, is somewhat price "sticky," has low volume and is moderately easy to convert to other currency.

What does this mean?  It is great for the early adopter.  Let's look at how much a BTC costs.

Some assumptions that make sense in the long term and short term, possibly not the midterm:

1.  The cost of electricity is the ONLY relevant cost.  Why?  In the short term, your equipment has a high resale value; the money lost is negligible, and can be summed up as simple transaction fees.  In the long term, the cost of the equipment is spread out over such a long period of time that it is also irrelevant.  Especially after you consider the price of electronics approximately halves every 18 months, it is not a significant factor in determining the cost of a BTC.  (Even still, I will add a 20 percent rate of return so that miners can recoup some of the costs for purposes of the calulation.)  Additionally, after mining become unprofitable for some, they still have a perfectly functional computer that still has utility.

2.  The average cost of electricity will be assumed to be $.1 per kwh.  Some places more, some less, but if you don't like this assumption, take your own number and replace it, just multiply my final result by whatever factor.

3.  Using the latest growth rate of 8 percent a day, I assume linear growth.  I do NOT believe this to be a legitimate assumption, but it works for purposes of this exercise.

4.  I assume the highest efficiency of 2.5 hashes per joule.  Not realistic, but it gives a conservative estimate.  Also, assuming that the majority of the computing power is done by the most efficient computers is pretty valid assumption, especially considering the recent surge of computing power is most likely due to new miners seeking to capitalize on the insane profits, so it’s probably up there.

So currently, at a difficulty of about 244000, the electricity cost per BTC is about $.28.

28 cents! Are you kidding me?  As of right now, the price is 8.77.  You input .28, and you get out 8.77, nearly 32 times your input!  That’s insanity.  But is it?

The wonderful thing about this is difficulty increases.  The next difficult increase will nearly be double, and will happen sometime tomorrow (16 hours or less by my calculations as I’m typing this).  At an 8 percent growth rate, that is also growing itself, the computational power will double every 9 days, and the difficulty will lag behind.  This means the difficulty will ALWAYS be less than it should be, until the price of the BTC sticks at a certain price.

SOOOOOOO. . .

If we extrapolate out 2 months, assuming linear growth (which is conservative, personally I think it will be more exponential), and a lag in difficulty, then difficulty will increase approximately 1.75 times every round. (Personally, I believe it to be more, but I’m being conservative here).

Therefore, in 64 days, instead of the 28 cents of electricity per BTC, the price will be $25 per BTC.  So, it is not unreasonable to pay 8.77 NOW for something you think will be worth at LEAST $20 in two months.  That’s a whopping 768% annual IRR!

Now, I believe all these assumptions to be reasonable, but I cannot tell the future.  Currently, speculation is driving the price.  Although, I have to admit, the speculation is not completely unreasonable.

Conversely, there is nothing supporting the BTC.  It is ALL speculation.  I very much doubt the majority of BTC are being spent toward any form of economy.  It would be foolish, given the insane recent price increases.

As for now, it is clear that price drives the difficulty.  The price spike attracts people who enter the market and compete away profits.  This will continue to happen as long as a BTC is worth more than the electricity it costs to make.  It also attracts speculators, which also drive up the price.  As long as people keep demanding, the price will keep rising, because supply can only decrease.

The thing we have to worry about however, is a panic.  There will be a price ceiling that people will not be able to resist selling at.  It’s mass psychology, and it happens in every (dare I say it?) bubble.  In order for BTC to survive, it needs to gain significant economic traction: people need to USE BTC, SPEND it on goods and services.  There needs to be a fundamental utility to the BTC outside of speculation.  And in order for that to happen, the price spikes need to stop, but if that stops the majority price driver for the BTC will stop, the BTC will plummet, people will lose faith and not accept the BTC, further driving down the price etc.

It’s a catch-22.  The only way out is moderation.  If we moderately control the price, we can reach equilibrium, and the BTC will have a steady price, thus allowing people to SPEND BTC and for BTC to gain economic traction.  Fortunately, we have difficulty increases!  It is a very robust and smart system.  However, I believe the difficulty changes should happen on a shorter period, but that will all take care of itself in the LONG run.

I do know this: there WILL be an end to the speculation, and ultimately the BTC will stabilize and be priced at the marginal electricity cost, in the LONG run.  As to when that will happen?  I don’t know.  But I do know that the valuing the BTC at 32 times its marginal cost is NOT sustainable, is driven by speculation, and if it continues will only lead to a crash, dooming the short-term market to a crisis of confidence and slow growth.  However, given the robust nature of the system, worldwide spread, and huge available market, I believe in the LONG term the BTC is a viable currency, at a price slightly above marginal electricity cost (a price that would allow a 10 - 20% annual IRR on equipment).

TL;DR

The marginal cost of a BTC is only $.28.  The current price is $8.77.  If growth trends continue, in 64 days the marginal cost of a BTC will be about $23.  Will the market continue to value the BTC at 32 times marginal cost?  Doubtful.

[1714926139]

1714926139

[Sweft]

What is fiat worth?  What is fractional reserve money printing worth?

You can't have your cake and eat it too.  

By your definition the dollar is worth nothing.  Absolutely nothing.  Too bad it's not true.  

The argument is dubious.

[silversurfer]

Your economics professors must LOVE you. 

Sell your Bitcoins if you believe what you say.

[nosacky]

You are right. People will be reluctant to spend a bitcoin if tomorrow it will be worth more. Yet, this is how bitcoins ALWAYS will be. Their supply is limited at 21 million, so we are doing a test for that period in the future right now.

[kjj]

Thank you so much for this wonderful analysis.

I was just thinking that we really need someone that knows neither bitcoins nor economics to start yet another thread about how wrong we all are for letting them get started too late to get a bunch of free coins by mining.

[smooth]

People will be reluctant to spend a bitcoin if tomorrow it will be worth more. Yet, this is how bitcoins ALWAYS will be.

People claim this a lot, but it's dead wrong.

The only five reasons BTC goes up in value from a fundamental perspective are:

1. It becomes more useful
2. Expectation that it will become more useful
3. It gains some kind of non-utilitarian subjective value, such as being a prestigious collectable.
4. Fiat goes down in value so the exchange rate for BTC goes up (not really increasing in value but appears to be).
5. It becomes more expensive to replace (i.e. difficulty goes up, electricity goes up, etc.)  I don't really agree with the argument that difficulty doesn't influence price (only the reverse) and I believe I could show that formally, but I don't have time to write it down.

Just because there is a fixed or declining supply of something doesn't make it go up in value.  There is a fixed or declining supply of one year old dog shit, but no one is going to pay more for it, ever.

[smooth]

I guess I could add a #6, although it's somewhat included in #5.

6. Competing crypto-currencies are seen to fail.  If it turns out that Bitcoin has too great of a first mover advantage (or less likely that it is indeed the ideal design for a crypto-currency) and other crypto-currencies are unable to compete successfully against it, then the threat of something replacing Bitcoin and making BTC worthless or near-worthless is reduced.

[picollo7]

 

By your definition the dollar is worth nothing.  Absolutely nothing.  Too bad it's not true. 

The argument is dubious.

*sigh*

No, a dollar is worth exactly the amount of work you put in to earn it, it is also worth the amount of goods you can trade it for.  The underlying value of the dollar, and any currency, is the amount of work you will spend to earn it.  Currently, the work for a BTC is the electricity input.  You don't do anything to mine BTC, your GPU does.

You totally missed the point of the post.  I am trying to arrive at an objective fundamental value for a BTC.  Even Satoshi Nakamoto, the CREATOR of bitcoin says that ultimately the value to converge toward the marginal electricity cost.

A price at 32 times the cost is pure speculation pure and simple.  I'm not trying to argue any opinion here, I'm seeking truth.  Everyone has an agenda when it comes to BTC.  If you read carefully, you see I have no agenda, other than to arrive at a fundamental price for the BTC.  I own some BTC.  I believe the price will go up, but I do not think it is accurately priced right now.

I am not dooming BTC.  I want it to survive.  I am warning against rampant speculation, which brought down the financial market, the housing market and every other market that crashed.

Let's be objective please and analyze what is really going on, instead of getting defensive.

Your economics professors must LOVE you. 

Sell your Bitcoins if you believe what you say.

Obviously did not read or understand what I said.  I said I am looking at the long run.  The price of a BTC is worth the amount of input work, which is the electricity.  The creator of the system himself said that, I'm not making this up.  If you look at my projections, and what I say, I don't think the BTC is overvalued, esp given the IRR.  What I'm saying is that the current price to cost ratio is out of whack.  Of course this will all change in 2 months, and in the long term, the situation will correct itself because of competition.

I was just thinking that we really need someone that knows neither bitcoins nor economics to start yet another thread about how wrong we all are for letting them get started too late to get a bunch of free coins by mining.

Uh what? That’s not even relevant.

Anyway, thank you smooth, finally a relevant answer.  What I’m attempting to do is arrive at a mathematical formula for BTC pricing.

[smooth]

A price at 32 times the cost is pure speculation pure and simple.

Well, sure.  The price of any liquid asset is based on a speculative assessment of its future value.  A less loaded word would be  "expectations." 

It's a bit like looking at a stock in terms of book value.  That's one measure of fundamental value.  But future earnings (or dividends) are another measure, and the two often diverge. 

[picollo7]

Ok, so what is a legitimate expectation of future value?  I posited a reasonable expectation in 2 months to be about 25 bucks for cost.  If the multiplier of 32 remains the same, this means in 2 months BTC will be 800 dollars? I don't think so.  I mean, I'd love it to be. I'm long on BTC, but I just don't see it happening.

[error]

Ok, so what is a legitimate expectation of future value?  I posited a reasonable expectation in 2 months to be about 25 bucks for cost.  If the multiplier of 32 remains the same, this means in 2 months BTC will be 800 dollars? I don't think so.  I mean, I'd love it to be. I'm long on BTC, but I just don't see it happening.

[kjj]

By your definition the dollar is worth nothing.  Absolutely nothing.  Too bad it's not true. 

The argument is dubious.

*sigh*

No, a dollar is worth exactly the amount of work you put in to earn it, it is also worth the amount of goods you can trade it for.  The underlying value of the dollar, and any currency, is the amount of work you will spend to earn it.  Currently, the work for a BTC is the electricity input.  You don't do anything to mine BTC, your GPU does.

So, a bitcoin that I mine is worth the cost of the electricity used to find it (production cost).  But, a dollar isn't worth the cost of the paper it is printed on (production cost), it is worth the amount of effort that I put into getting it from someone else (exchange cost).

Why is a bitcoin valued at the cost of production, while the dollar is valued at the exchange cost?

[smooth]

Ok, so what is a legitimate expectation of future value?  I posited a reasonable expectation in 2 months to be about 25 bucks for cost.  If the multiplier of 32 remains the same, this means in 2 months BTC will be 800 dollars? I don't think so.  I mean, I'd love it to be. I'm long on BTC, but I just don't see it happening.

It depends what expectations are going to be in two months.  I don't want to be too circular about it, but unless you base your analysis on value going all the way out, you can't really remove future expectations from the equation.

Some have made the argument that there is a potentially long growth curve ahead for Bitcoin in terms of usefulness.  If it captures even a small portion of funds transfers, or even just a good share of the underground economy that could be a lot of value compared to now when it's all pizzas and alpaca socks.

[picollo7]

By your definition the dollar is worth nothing.  Absolutely nothing.  Too bad it's not true. 

The argument is dubious.

*sigh*

No, a dollar is worth exactly the amount of work you put in to earn it, it is also worth the amount of goods you can trade it for.  The underlying value of the dollar, and any currency, is the amount of work you will spend to earn it.  Currently, the work for a BTC is the electricity input.  You don't do anything to mine BTC, your GPU does.

So, a bitcoin that I mine is worth the cost of the electricity used to find it (production cost).  But, a dollar isn't worth the cost of the paper it is printed on (production cost), it is worth the amount of effort that I put into getting it from someone else (exchange cost).

Why is a bitcoin valued at the cost of production, while the dollar is valued at the exchange cost?

A dollar IS valued at the cost of production.  How do you produce a dollar? You work for it.  How do you produce a BTC?  You work for it (mine it).  The difference is that with a dollar, you personally spend your time and effort, and with a BTC, you spend electricity.  They both SHOULD be valued on production, but BTC clearly is not.

[smooth]

Why is a bitcoin valued at the cost of production, while the dollar is valued at the exchange cost?

Production cost doesn't mean anything, but replacement cost does.

You can't take a piece of paper and turn it into a dollar, but you can take electricity (and computers) and turn it into BTC.  But even then, you can't do it right now (assuming you want BTC now) and you can't do it in unlimited quantity, so it's only an imperfect replacement.

[kjj]

By your definition the dollar is worth nothing.  Absolutely nothing.  Too bad it's not true. 

The argument is dubious.

*sigh*

No, a dollar is worth exactly the amount of work you put in to earn it, it is also worth the amount of goods you can trade it for.  The underlying value of the dollar, and any currency, is the amount of work you will spend to earn it.  Currently, the work for a BTC is the electricity input.  You don't do anything to mine BTC, your GPU does.

So, a bitcoin that I mine is worth the cost of the electricity used to find it (production cost).  But, a dollar isn't worth the cost of the paper it is printed on (production cost), it is worth the amount of effort that I put into getting it from someone else (exchange cost).

Why is a bitcoin valued at the cost of production, while the dollar is valued at the exchange cost?

A dollar IS valued at the cost of production.  How do you produce a dollar? You work for it.  How do you produce a BTC?  You work for it (mine it).  The difference is that with a dollar, you personally spend your time and effort, and with a BTC, you spend electricity.  They both SHOULD be valued on production, but BTC clearly is not.

My work creates dollars?  Well shit, does that mean the Secret Service is going to come after me?  Because I'm pretty sure they think that dollars are printed by the Bureau of Printing and Engraving.

Or, if you expand the notion of "dollar" to include checkbook money (accounts in a database) then a little research will easily demonstrate to you that electronic dollars are created out of thin air by bankers.

[MoonShadow]

Ok, so what is a legitimate expectation of future value?  I posited a reasonable expectation in 2 months to be about 25 bucks for cost.  If the multiplier of 32 remains the same, this means in 2 months BTC will be 800 dollars? I don't think so.  I mean, I'd love it to be. I'm long on BTC, but I just don't see it happening.

I don't either, but nor did I see a 100 fold increase in value in eight months when I bought in at 6.5 cents.

[picollo7]

Ok, so what is a legitimate expectation of future value?  I posited a reasonable expectation in 2 months to be about 25 bucks for cost.  If the multiplier of 32 remains the same, this means in 2 months BTC will be 800 dollars? I don't think so.  I mean, I'd love it to be. I'm long on BTC, but I just don't see it happening.

It depends what expectations are going to be in two months.  I don't want to be too circular about it, but unless you base your analysis on value going all the way out, you can't really remove future expectations from the equation.

Some have made the argument that there is a potentially long growth curve ahead for Bitcoin in terms of usefulness.  If it captures even a small portion of funds transfers, or even just a good share of the underground economy that could be a lot of value compared to now when it's all pizzas and alpaca socks.

We can all agree that it's based on expectations.  I think it's anybody's guess about the long term future.  The short term? I'm going to make a guess in two months: 50 USD.  I would not be surprised if it was 100, but conservatively, I say 50, based on an extrapolated growth rate, and a multiplier of cost to price ratio of 2.  Once the difficulty starts getting too crazy people will not mine as much, but it will still continue to grow, because difficulty increases lag behind growth rate.

Anyone else?

[smooth]

Once the difficulty starts getting too crazy people will not mine as much

People are going to continue to mine at much higher difficulty levels, even if that means botnets.

[abyssobenthonic]

Fundamental analysis of any monetized good will show that it is overvalued.

As a bubble in an asset of little-or-no elasticity of supply goes on without popping, that asset becomes the standard trade against which others are judged and thus becomes what is called money.

Bitcoin is a bubble.  By any analysis that doesn't, in effect, posit that there is a greater fool out there, the value of bitcoin is for all intents and purposes zero.

Gold is a bubble.  The demand level in the absence of greater fools is that of industrial demand.  The industrial price of gold is about an order of magnitude lower than the current gold price.  It's probably more overvalued, fundamentally, then most subprime mortgage securities were at the peak of that bubble (consider the returns earned by entities (mostly hedge funds) that backed up the truck to buy distressed subprime MBS...).

USD is a bubble.  The demand level in the absence of greater fools is taxation by the USG (thus zero if USG doesn't exist).  The value as a means of settling tax claims is well below the current market value of USD.

[abyssobenthonic]

Once the difficulty starts getting too crazy people will not mine as much

People are going to continue to mine at much higher difficulty levels, even if that means botnets.

And as long as mining doesn't stop completely (a total stop to hashing will prevent a difficulty adjustment), the difficulty will adjust downwards to a level that the marginal miner is eking out a small profit.

[picollo7]

By your definition the dollar is worth nothing.  Absolutely nothing.  Too bad it's not true. 

The argument is dubious.

*sigh*

No, a dollar is worth exactly the amount of work you put in to earn it, it is also worth the amount of goods you can trade it for.  The underlying value of the dollar, and any currency, is the amount of work you will spend to earn it.  Currently, the work for a BTC is the electricity input.  You don't do anything to mine BTC, your GPU does.

So, a bitcoin that I mine is worth the cost of the electricity used to find it (production cost).  But, a dollar isn't worth the cost of the paper it is printed on (production cost), it is worth the amount of effort that I put into getting it from someone else (exchange cost).

Why is a bitcoin valued at the cost of production, while the dollar is valued at the exchange cost?

A dollar IS valued at the cost of production.  How do you produce a dollar? You work for it.  How do you produce a BTC?  You work for it (mine it).  The difference is that with a dollar, you personally spend your time and effort, and with a BTC, you spend electricity.  They both SHOULD be valued on production, but BTC clearly is not.

My work creates dollars?  Well shit, does that mean the Secret Service is going to come after me?  Because I'm pretty sure they think that dollars are printed by the Bureau of Printing and Engraving.

Or, if you expand the notion of "dollar" to include checkbook money (accounts in a database) then a little research will easily demonstrate to you that electronic dollars are created out of thin air by bankers.

Ok, if you want to get into monetary policy, then sure, the Fed is responsible for the amount of circulation.  They increase or decrease the amount based on a number of factors, but ultimately the GDP, i.e. the collective work of the US.  So yeah, your work creates dollars.

[smooth]

Once the difficulty starts getting too crazy people will not mine as much

People are going to continue to mine at much higher difficulty levels, even if that means botnets.

And as long as mining doesn't stop completely (a total stop to hashing will prevent a difficulty adjustment), the difficulty will adjust downwards to a level that the marginal miner is eking out a small profit.

Right, but I'm saying that level is much higher. 

[fadisaaida]

picollo7: i do agree with you. i hope some of the early coming people to btc have enough coins that he can try to do some control now cause if not now later it will be catasrophic!

[MoonShadow]

Ok, if you want to get into monetary policy, then sure, the Fed is responsible for the amount of circulation.  They increase or decrease the amount based on a number of factors, but ultimately the GDP, i.e. the collective work of the US.  So yeah, your work creates dollars.

No, that work creates value that gives the dollars meaning.

[bitcoinBull]

5. It becomes more expensive to replace (i.e. difficulty goes up, electricity goes up, etc.)  I don't really agree with the argument that difficulty doesn't influence price (only the reverse) and I believe I could show that formally, but I don't have time to write it down.

I don't agree with that argument either.

It seems perfectly reasonable to me that an increase in difficulty drives an increase in price.  After the difficulty doubles, bitcoins are twice as hard to get by mining.  The nominal price should double, for the "real" price to stay the same.

Furthermore, higher difficulty indicates greater network strength/security, and like a price increase, also represent more investment.

[picollo7]

Ok, if you want to get into monetary policy, then sure, the Fed is responsible for the amount of circulation.  They increase or decrease the amount based on a number of factors, but ultimately the GDP, i.e. the collective work of the US.  So yeah, your work creates dollars.

No, that work creates value that gives the dollars meaning.

Which is exactly what i'm saying for BTC.  The value in BTC is the work input: the electricity.  That is the only fundamental value for BTC, atm, because nobody is using BTC for actual goods or services.  When people do, then we can assess some value.  But right now, the price is completely speculation/expectation driven.

I don't want this to degenerate into an argument of semantics.  We can all agree that the value of a currency is what you will trade it for, and over a wide enough population, that value becomes more accurate.  It is also possible for the few to drive up prices unrealistically via speculation by ignoring fundamentals.  Look at the housing bust, the dotcom bust, ANY bust.

I'm trying to get at the underlying fundamentals of BTC, which nobody seems to want to approach b/c they feel it's an attack on BTC, which it is not, I think we can all benefit from fundamentals.

[smooth]

I'm trying to get at the underlying fundamentals of BTC, which nobody seems to want to approach b/c they feel it's an attack on BTC, which it is not, I think we can all benefit from fundamentals.

I don't think it's an attack on Bitcoin.

I'm not sure I agree difficulty is going to increase by 100x in two months.  I do think it's going to increase a lot though.

[picollo7]

5. It becomes more expensive to replace (i.e. difficulty goes up, electricity goes up, etc.)  I don't really agree with the argument that difficulty doesn't influence price (only the reverse) and I believe I could show that formally, but I don't have time to write it down.

I don't agree with that argument either.

It seems perfectly reasonable to me that an increase in difficulty drives an increase in price.  After the difficulty doubles, bitcoins are twice as hard to get by mining.  The nominal price should double, for the "real" price to stay the same.

Furthermore, higher difficulty indicates greater network strength/security, and like a price increase, also represent more investment.

So is difficulty the only price driver or one of many drivers?  Deconstructively, what does difficulty represent? Time to get a block, which is what? Electricity.  What other price drivers are there?  Demand for bitcoins.  Which is based on what?  Right now I think the demand is based on investment speculation/expectation.  Am I missing anything?

[picollo7]

I'm trying to get at the underlying fundamentals of BTC, which nobody seems to want to approach b/c they feel it's an attack on BTC, which it is not, I think we can all benefit from fundamentals.

I don't think it's an attack on Bitcoin.

I'm not sure I agree difficulty is going to increase by 100x in two months.  I do think it's going to increase a lot though.

I dunno.  Look at the current growth rate of computing power, last I checked it went from 4 percent growth rate per day to 8 percent per day.  PER DAY!  And as profit margins increase due to price increase, more people are going to join.  I assume a LINEAR growth rate for my calcs.  I think 87x in 2 months is conservative.  BTC is blowing up.  It was on NPR yesterday or the day before.  Once it hits CNBC . . . XD who knows? I mean what's the pop of BTC users now?  Who knows? 6.34mil BTC in the econ.  What's the average wallet size?  Any stats on that?  I'll guess 50 BTC, maybe? So we have about 100k users of BTC.  I mean, this growth rate can easily keep going, and even accelerate for a while, which means a difficulty increase of at least 75 percent every round.

Those are the assumptions I used in my calcs when getting there.  I know it's not perfect, but I think it's a good conservative estimate.

[smooth]

So is difficulty the only price driver or one of many drivers?

Most certainly not the only price driver.

Deconstructively, what does difficulty represent?

How much computation is required (on average) to solve one block.

Time to get a block, which is what? Electricity.  What other price drivers are there?  Demand for bitcoins.  Which is based on what?  Right now I think the demand is based on investment speculation/expectation.  Am I missing anything?

Well you can't eat them so sure it's (almost) all investment.  There is some trade going on too, and even a bit that is increasingly closed loop.  There are people doing services for BTC and then using those BTC to buy stuff, etc.  Of course this is still fairly small in absolute terms, but I would guess the rate of growth is really high. Some people are probably using it for near-costless money transfers instead of checks, bank transfers or cash, especially if the recipient wants BTC anyway.  

Over time international transfers should be big.  Doing those with banks can be really inefficient.  

[Syke]

because nobody is using BTC for actual goods or services.

Huh? Of course people are using it for goods and services.

[Bit_Happy]

because nobody is using BTC for actual goods or services.

Huh? Of course people are using it for goods and services.

Yes, the list is growing rapidly. 

[picollo7]

It just doesn't make sense economically to spend BTC today when you know tomorrow it will be worth 15+ percent more.  I'm sure people HAVE used them for goods and services, but not in this current environment where we're seeing at least a dollar a day increase in value.

[abyssobenthonic]

Over time international transfers should be big.  Doing those with banks can be really inefficient.  

Not to mention that the FBI has largely managed to shut down the online gambling (poker and sports) payment processing infrastructure this side of WU and direct bank wires (and even then sending enough WUs to the tropics can get one blacklisted...).

(IMO, there's still a reluctance on the part of the Caribbean/Costa Rican sportsbooks that basically depend on the US market to jump to bitcoin, perhaps because most player accounts are USD denominated etc. and they don't want the hassle of managing bitcoin trading ... there may be a business opportunity for someone who wants to move to the tropics and set up a payment processor to aggregate and manage the trading of BTC for USD and vice versa for the books).

[picollo7]

Over time international transfers should be big.  Doing those with banks can be really inefficient.  

Not to mention that the FBI has largely managed to shut down the online gambling (poker and sports) payment processing infrastructure this side of WU and direct bank wires (and even then sending enough WUs to the tropics can get one blacklisted...).

(IMO, there's still a reluctance on the part of the Caribbean/Costa Rican sportsbooks that basically depend on the US market to jump to bitcoin, perhaps because most player accounts are USD denominated etc. and they don't want the hassle of managing bitcoin trading ... there may be a business opportunity for someone who wants to move to the tropics and set up a payment processor to aggregate and manage the trading of BTC for USD and vice versa for the books).

I'm down. 

[Syke]

It just doesn't make sense economically to spend BTC today when you know tomorrow it will be worth 15+ percent more.  I'm sure people HAVE used them for goods and services, but not in this current environment where we're seeing at least a dollar a day increase in value.

Sorry, nobody "knows" it will be +15% tomorrow. What everybody does know is the value can go up and down. With that uncertainty, trading bitcoins for cash/services/goods/etc. does make sense.

I don't see any shortage of threads in the Marketplace forum. So even in today's environment, it is happening all over the world.

[kjj]

Ok, if you want to get into monetary policy, then sure, the Fed is responsible for the amount of circulation.  They increase or decrease the amount based on a number of factors, but ultimately the GDP, i.e. the collective work of the US.  So yeah, your work creates dollars.

You are completely 100% wrong on all points.

The Federal Reserve Bank has nothing to do with the amount in circulation.  (Go here if you'd like to know what they really do)
GDP has nothing to do with work.  (It measures spending ONLY)
Work has nothing to do with dollar creation.

And while I'm at it, this is wrong too:

It just doesn't make sense economically to spend BTC today when you know tomorrow it will be worth 15+ percent more.  I'm sure people HAVE used them for goods and services, but not in this current environment where we're seeing at least a dollar a day increase in value.

First, no one knows what anything will be worth tomorrow.  And second, people do things all the time that don't make sense economically.

By the way, I would really like to get back to your insane (and I mean that clinically) notion that one currency is worth its production value, while another is worth its exchange value.  In particular, I'd really love to hear how exchanging my work for dollars creates dollars (or at least gives them value, somehow) while exchanging my work for bitcoins does not.

[edit:  fixed misplaced quote tag]

[cloud9]

Assuming all else stays proportionally the same as the status quo the following is an attempt at an evaluation of BTC value:

- Total current network hash:  3.913 Thash/s  (Source: http://bitcoincharts.com/ )
- Assume typical economical miner's hash :  300 Mhash/s (Source:  http://bitcointalk.org mining forums) - Stand to be corrected
- Assumed estimate of total economically mining machines:  13 000 approximately
- Assume $1000 capital cost per economically mining machine, gives a total network capital cost of $13 million
- Depreciating asset capital cost depreciated over a five year term, gives $2,6 million capital cost depreciation per year.
- Expected Return on capital investment per year (assume 20% - high risk investment), gives $2,6 million return on investment cost.
- Running cost:  electricity, assume 0.5kWh power consumption per machine, at $0.15/kWh assumed average worldwide cost, gives 13 000 x 24 x 365 x 0.5 x 0.15 = $8,5 million total yearly electricity running cost
- Running cost:  rent, salaries, etc, assume just 100% (reimbursing the average miner on a machine only $1000!!! per year!!!! in salaries and rental space) yearly on capital cost, gives $13 million
- Maintenance cost, assume 2% yearly on capital, gives $0,25 million.
- Bringing us to an assumed total yearly cost to business for the Bitcoin network of $26,95 million.  The network generates a total of 50BTC roughly every 10 minutes at present, thus 10 x 6 x 24 x 365 = approximately 525 600 BTC per year.  The total cost per BTC generated securely and maintaining the network at present will thus be approximately $26,95 million divided by 525 600 = approximately $51.27!!!!  Is it a small price to pay for the owner's rights to secure entries in a global digital cryptographic key accounting system - which subsequently allows the owner of the rights to transfer some/all of those rights securely?

Now this cost of $51.27 per BTC is for maintaining a network difficulty of 244139.48158254 ( http://blockexplorer.com/q/getdifficulty ) at present.  When more BTC mining machines are added making the network more secure and difficulty increases ( http://bitcoin.sipa.be/ ) but the bitcoin generation rate remains unchanged - this will result in an increase of BTC securing/generating cost.  Maximum difficulty never to be reached is 2^224 ( https://en.bitcoin.it/wiki/Difficulty#What_is_the_maximum_difficulty? )

[markm]

Unless I actually want anonymity, paying for it might be an un-needed expense for me.

If my prospective customer(s) want anonymity and I do not, who should be paying its cost, them or me?

If a customer thinks a bitcoin is worth more than a MyRetailGoodsToken(TM) or whatever else I set my prices in, they are welcome to prove it by converting it.

I am just as happy to accept Martian Botcoins and can even get some warm fuzzies from knowing Martian Botcoins are not burning up vast amounts of fossil fuel in hashing arms-races. Ditto for BitNickels, Canadian Digital Notes, United Kingdom Britcoins and various other such digital currencies. Admittedly I have not set up to accept BeerTokens yet though.

So fundamentally is it worth my while to contribute toward bitcoin's vast usage of electricity, or even its vast funding of GPU manufacturers, instead of sticking to digital currencies that do not (yet) require such large expenditures of such things?

Until bitcoiners actually buy something from me using bitcoins, bitcoins are as valuable to me as any other currency no one has actually bought anything from me with. Currencies whose users have actually bought things from me seem so much more "my customers" than people who do not seem inclined to actually buy my products or services.

Since mining a whole new currency of your own is cheaper than mining bitcoins AND people who already bought your own new currency alreeady bouht something from you thus seem more like "your customers" than people using other currencies, maybe the fundamentals of coins you create yourself and provide to your customers so that you can peg your prices to them could look better than the fundamentals of bitcoins?

-MarkM-

[cloud9]

Pseudonymity, the interest of a select few for various reasons, is just one of Bitcoin's benevolent properties.

The others include, amongst other, the following:  

- Instant
- Vast distances or small distances
- Simple (no client needed when using mybitcoin.com , for example)
- Mobile (mybitcoin.com for example, can be accessed from a mobile smart phone / internet enabled phone or device)
- Secure
- Universal
- Scarcity
- Novelty rewarding early adopters
- Owned and managed by adopters

and most importantly maybe,

- Mercantibility (% of total quantity in existence exchangeable for others over certain period of time) :  

Compared with Gold (~165,000 tonnes/metric tons ever mined, http://didyouknow.org/gold/ ) of which 772,908 open interest 100 troy ounce contracts on the major exchanges for the current month are reported ( http://www.cftc.gov/dea/options/other_sof.htm ) amounting to 772,908 x 0.003110348 = 2,404.01 mtons (metric tons) in current month trade.  This equates to about 2,404.01 / 165,000 x 100% = 1.457% monthly of total Gold in existence.  

Bitcoins presently in existence is 6.347 million ( http://bitcoincharts.com/markets/ ), and a year ago it would have been 365 x 24 x 6 x 50 = 2.628 million less - giving an average of bitcoins in existence for the year of 4.487 million.  For the past 12 months 5,235,547.17 Bitcoins have been traded on the major BTC exchange ( http://bitcoincharts.com/markets/mtgoxUSD_trades.html under Recent Trade Volume 1y ).  This is an average of 436,295.60 BTC per month.  This equates to about 436,295.6 / 4,487,000 x 100% = 9.724% monthly of total BTC in existence.

If the volatile market and exponential growth (maybe attributable to wholesale distribution from existing to new adopters) of BTC is troublesome to a merchant, he may elect to reduce his exposure to BTC by immediately (maybe programmatically) exchanging the received BTC for something else after his transaction with a BTC giving customer has been completed.

[cloud9]

Since mining a whole new currency of your own is cheaper than mining bitcoins AND people who already bought your own new currency alreeady bouht something from you thus seem more like "your customers" than people using other currencies, maybe the fundamentals of coins you create yourself and provide to your customers so that you can peg your prices to them could look better than the fundamentals of bitcoins?

-MarkM-

Actually with the Bitcoin algorithm - it seems that there can only be ONE most economically viable implementation - because as soon as another currency (of higher perceived market value) can be mined at a lower difficulty - miners in the network will point their resource power to the more economically mineable currency - so DIFFICULTY and NETWORK hash size are interrelated to the price of BTC (or one of its forks for that matter).

[ron]

This has been a good thread. Thanks 

[ene]

Which is exactly what i'm saying for BTC.  The value in BTC is the work input: the electricity.  That is the only fundamental value for BTC, atm, because nobody is using BTC for actual goods or services.  When people do, then we can assess some value.  But right now, the price is completely speculation/expectation driven.

I don't want this to degenerate into an argument of semantics.  We can all agree that the value of a currency is what you will trade it for, and over a wide enough population, that value becomes more accurate.  It is also possible for the few to drive up prices unrealistically via speculation by ignoring fundamentals.  Look at the housing bust, the dotcom bust, ANY bust.

I'm trying to get at the underlying fundamentals of BTC, which nobody seems to want to approach b/c they feel it's an attack on BTC, which it is not, I think we can all benefit from fundamentals.

You are completely wrong.

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 useful currency, it alone doesn't make anything valuable. For example, your fingerprints are scarce, but that doesn't mean they have any exchange value.

If you don't even understand this there isn't any point in talking further.

[dacoinminster]

It's all about supply and demand. We all know the upper-limit on supply (21 million bitcoins, most of which aren't for sale). That just leaves demand.

I've given it a lot of thought, and I believe that demand is going to be insane, for reasons that are rarely discussed on this forum. You can check out my reasoning in the thread in my signature: Bitcoin price increases are just getting started

[markm]

Since mining a whole new currency of your own is cheaper than mining bitcoins AND people who already bought your own new currency alreeady bouht something from you thus seem more like "your customers" than people using other currencies, maybe the fundamentals of coins you create yourself and provide to your customers so that you can peg your prices to them could look better than the fundamentals of bitcoins?

-MarkM-

Actually with the Bitcoin algorithm - it seems that there can only be ONE most economically viable implementation - because as soon as another currency (of higher perceived market value) can be mined at a lower difficulty - miners in the network will point their resource power to the more economically mineable currency - so DIFFICULTY and NETWORK hash size are interrelated to the price of BTC (or one of its forks for that matter).

Hmm that makes it sound as if miners will keep jumping to the lowest difficulty blockchain, helping bring it into line with the others.

Add speculation, which might at least prompt some miners to quickly scoop up at least a few of each really easy chain just because it is so darn easy and might some day turn out to appreciate a lot in value, and maybe new blockchains are not such a bad proposition afterall.

I am not even assuming all blockchains will mint coins for miners. Some might already have their coins in one central account or group of accounts from the start and only ever offer transaction fees to miners. Maybe they will find they need to offer high fees, depending on the value miners think the coins are worth to them.

Notice that "to them". If a few pop stars decided to auction off their autographs or used underwear or sperm or eggs or whatever their fans would go crazy for in some new blockchain currency, maybe TsunamiReliefCoin or whatever, then regardless of whether the fans think they can resell the coins or the [whatever] that is rare and maybe not even of any value at all to other than some weird market such as "fans of this that or the other person" some folk might choose to mine the new currency instead of straight out buying it.

(Heh, imagine "you cannot bid unless you actually have the number of coins you are bidding", a whole lot of coins could get bought just to compete for that one pair of so and so's used socks or whatever...)

-MarkM-

(Hmm, TsunamiReliefCoin eh? All 21,000,000 coins in genesis block with private key sent to red cross or somesuch, hmm, an idea?)

(Hmm, maybe the whoever, red cross etc, gives us the public address so we don't even know private key only they do?)

[Andris]

I don't think bitcoin will have another period of explosive growth until it moves a decimal place or two to the right. The size of most people's rewards is probably limiting its value at the moment.

But as everyone else says, a currency is worth the trust society places in it.

[zef]

Really interesting break down from both cloud9 and picollo7.  The only problem is I am not so sure you can assume that the cost of generating coin and maintaining the network has anything to do with it's ultimate value.  If anything, I think cause and effect are reversed.  Based on the current price of coin(determined by other means) this would effect the size of the network and number of miners, as they either drop out or expand due to loss or profit.

[picollo7]

Which is exactly what i'm saying for BTC.  The value in BTC is the work input: the electricity.  That is the only fundamental value for BTC, atm, because nobody is using BTC for actual goods or services.  When people do, then we can assess some value.  But right now, the price is completely speculation/expectation driven.

I don't want this to degenerate into an argument of semantics.  We can all agree that the value of a currency is what you will trade it for, and over a wide enough population, that value becomes more accurate.  It is also possible for the few to drive up prices unrealistically via speculation by ignoring fundamentals.  Look at the housing bust, the dotcom bust, ANY bust.

I'm trying to get at the underlying fundamentals of BTC, which nobody seems to want to approach b/c they feel it's an attack on BTC, which it is not, I think we can all benefit from fundamentals.

You are completely wrong.

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 useful currency, it alone doesn't make anything valuable. For example, your fingerprints are scarce, but that doesn't mean they have any exchange value.

If you don't even understand this there isn't any point in talking further.

Ugh, you BTC flag wavers are TOUCHY!  It’s simple economics.  If you can make a BTC worth 9 bucks for 25 cents, and the barriers to entry are very little, then other producers will keep entering the marketplace until the price equals cost, ie perfect competition. If you don't even understand this there isn't any point in talking further.

Ok, if you want to get into monetary policy, then sure, the Fed is responsible for the amount of circulation.  They increase or decrease the amount based on a number of factors, but ultimately the GDP, i.e. the collective work of the US.  So yeah, your work creates dollars.

You are completely 100% wrong on all points.

The Federal Reserve Bank has nothing to do with the amount in circulation.  (Go here if you'd like to know what they really do)
GDP has nothing to do with work.  (It measures spending ONLY)
Work has nothing to do with dollar creation.

And while I'm at it, this is wrong too:

It just doesn't make sense economically to spend BTC today when you know tomorrow it will be worth 15+ percent more.  I'm sure people HAVE used them for goods and services, but not in this current environment where we're seeing at least a dollar a day increase in value.

First, no one knows what anything will be worth tomorrow.  And second, people do things all the time that don't make sense economically.

By the way, I would really like to get back to your insane (and I mean that clinically) notion that one currency is worth its production value, while another is worth its exchange value.  In particular, I'd really love to hear how exchanging my work for dollars creates dollars (or at least gives them value, somehow) while exchanging my work for bitcoins does not.

[edit:  fixed misplaced quote tag]

You just made a fool of yourself.  It’s called monetary policy. http://www.federalreserve.gov/monetarypolicy/default.htm
Also, you are dead wrong about GDP, here’s a direct quote from the Bureau of Economic Analysis:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States. Source http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm the opening line.

I’m tired of trying to educate you.  You obviously have your mind made up and wish to stay ignorant.  Do some research and learn about economics before you spout misinformation.

[picollo7]

Assuming all else stays proportionally the same as the status quo the following is an attempt at an evaluation of BTC value:

- Total current network hash:  3.913 Thash/s  (Source: http://bitcoincharts.com/ )
- Assume typical economical miner's hash :  300 Mhash/s (Source:  http://bitcointalk.org mining forums) - Stand to be corrected
- Assumed estimate of total economically mining machines:  13 000 approximately
- Assume $1000 capital cost per economically mining machine, gives a total network capital cost of $13 million
- Depreciating asset capital cost depreciated over a five year term, gives $2,6 million capital cost depreciation per year.
- Expected Return on capital investment per year (assume 20% - high risk investment), gives $2,6 million return on investment cost.
- Running cost:  electricity, assume 0.5kWh power consumption per machine, at $0.15/kWh assumed average worldwide cost, gives 13 000 x 24 x 365 x 0.5 x 0.15 = $8,5 million total yearly electricity running cost
- Running cost:  rent, salaries, etc, assume just 100% (reimbursing the average miner on a machine only $1000!!! per year!!!! in salaries and rental space) yearly on capital cost, gives $13 million
- Maintenance cost, assume 2% yearly on capital, gives $0,25 million.
- Bringing us to an assumed total yearly cost to business for the Bitcoin network of $26,95 million.  The network generates a total of 50BTC roughly every 10 minutes at present, thus 10 x 6 x 24 x 365 = approximately 525 600 BTC per year.  The total cost per BTC generated securely and maintaining the network at present will thus be approximately $26,95 million divided by 525 600 = approximately $51.27!!!!  Is it a small price to pay for the owner's rights to secure entries in a global digital cryptographic key accounting system - which subsequently allows the owner of the rights to transfer some/all of those rights securely?

Now this cost of $51.27 per BTC is for maintaining a network difficulty of 244139.48158254 ( http://blockexplorer.com/q/getdifficulty ) at present.  When more BTC mining machines are added making the network more secure and difficulty increases ( http://bitcoin.sipa.be/ ) but the bitcoin generation rate remains unchanged - this will result in an increase of BTC securing/generating cost.  Maximum difficulty never to be reached is 2^224 ( https://en.bitcoin.it/wiki/Difficulty#What_is_the_maximum_difficulty? )

EXCELLENT!  I like your way, I took this and changed some of the assumptions, and got a value of $9.08 per BTC.  (You made a calculation error with yearly BTC, 50 BTC generated 6 times an hour 24 hours a day 365 days a year is 2,628,000 BTC per year.  That 10 in the formula should be a 50, so your analysis would give about $5.13).
Anyhow, this does not take into account growth rates.  So obviously this will change.  But it’s a great start.

[kjj]

You just made a fool of yourself.  It’s called monetary policy. http://www.federalreserve.gov/monetarypolicy/default.htm
Also, you are dead wrong about GDP, here’s a direct quote from the Bureau of Economic Analysis:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States. Source http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm the opening line.

I’m tired of trying to educate you.  You obviously have your mind made up and wish to stay ignorant.  Do some research and learn about economics before you spout misinformation.

Monetary policy is how they manipulate interest rates, which is not the money supply.  You'd know that if you'd ever read the minutes of the FOMC meetings.  Go find out why Bernake is called "Helicopter Ben".

You might want to look into how GDP is actually calculated.  I'll give you a hint, production is not part of it, but spending is.  They could say that GDP is found by counting unicorns, but that doesn't change the math.  What they actually do is much more important than what they say they do.

Once again, you've done an excellent job dodging my direct challenge, so I'll issue it a third time.  Tell me how exchanging my work for dollars creates dollars (or at least gives them value, somehow) while exchanging my work for bitcoins does not.

[stic.man]

wait producing a BTC costs only 28 cents a day?

I keep seeing a lot of miners talking about 1 BTC per day on average from the pools.  right now thats like 250 bucks a month with today's pricing.  their electric bills are only being affected $9/month in order to mine?

[picollo7]

You just made a fool of yourself.  It’s called monetary policy. http://www.federalreserve.gov/monetarypolicy/default.htm
Also, you are dead wrong about GDP, here’s a direct quote from the Bureau of Economic Analysis:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States. Source http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm the opening line.

I’m tired of trying to educate you.  You obviously have your mind made up and wish to stay ignorant.  Do some research and learn about economics before you spout misinformation.

Monetary policy is how they manipulate interest rates, which is not the money supply.  You'd know that if you'd ever read the minutes of the FOMC meetings.  Go find out why Bernake is called "Helicopter Ben".

You might want to look into how GDP is actually calculated.  I'll give you a hint, production is not part of it, but spending is.  They could say that GDP is found by counting unicorns, but that doesn't change the math.  What they actually do is much more important than what they say they do.

Once again, you've done an excellent job dodging my direct challenge, so I'll issue it a third time.  Tell me how exchanging my work for dollars creates dollars (or at least gives them value, somehow) while exchanging my work for bitcoins does not.

The Federal Reserve does more than just “manipulate interest rates.”  If you think that’s all they do, you’re just demonstrating your ignorance about the subject.
http://en.wikipedia.org/wiki/Gross_domestic_product
Determining GDP
GDP can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach.
The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total.
. . .
You have a serious misunderstanding of economics and have repeatedly demonstrated your ignorance.  If you can not understand the basics, you disagree with reputable, verifiable facts, then there is no point in me explaining this to you.
There’s so many things wrong with your “challenge”.    “Tell me how exchanging my work for dollars creates dollars (or at least gives them value, somehow) while exchanging my work for bitcoins does not.” Is the complete OPPOSITE of what I said.  They both are the same thing, your value for a dollar is what you input to earn it, just like your value for a BTC is what you input to earn it.  SIMPLE.  What is so hard to understand about that?  Your “challenge” is easily explainable, but obviously you aren’t interested in understanding, only arguing.

[picollo7]

wait producing a BTC costs only 28 cents a day?

I keep seeing a lot of miners talking about 1 BTC per day on average from the pools.  right now thats like 250 bucks a month with today's pricing.  their electric bills are only being affected $9/month in order to mine?

Right.  I made the assumption that most of the hashing is done by the most efficient computers, assuming mining farms with 6990s produce a majority of the work.  The factor is 2.5 megahashes per joule from the mining rig hardware comparison guide.  So, if you want to downplay that factor, and say it's only 1.5, then multiply 28 cents by 1.66, so, about 47 cents.  Even at 20 percent efficiency of what I estimate, that's about 1.50 per BTC, so the gains are at LEAST 6 bucks per BTC, or at LEAST 400 percent, per DAY. Which is insane, nothing gives you that return, ever, anywhere, which is why the gold rush to mine will continue to skyrocket and drive up the difficulty, AND/OR, there will be a price crash.

[stic.man]

there are dudes talking about some pretty big electric bills which is why I was wondering about the cost to produce each one.

It makes no sense that everyone on this board doesn't have like 10 rigs each mining the shit out of everything if each one is adding only $9/month to their bill.

I'm also wondering why something like this would happen http://techland.time.com/2011/05/23/report-police-confuse-bitcoin-miners-power-use-for-weed-grow-op/

[picollo7]

Well the issue with having 10 mining rigs is the cost of capital.  That would be like 8 grand.  Few people have that kind of scratch lying around.  Also, you'd probably make more money directly investing that 8gs than mining.

Also, another thing to consider is the difficulty increases, which means that 8 grand of computing power will be worth less every 10 days or so.

But yeah, that's exactly my point.  The price makes no sense.  Please go through the calculations yourself.  The whole point of this thread is to arrive at a fundamental value, which very few people seem to want to do, they get offended.

To me, that's signs of irrationality.

[stic.man]

the thing is why are dudes flipping their shit about $9 a month in electricity?

[fadisaaida]

Well the issue with having 10 mining rigs is the cost of capital.  That would be like 8 grand.  Few people have that kind of scratch lying around.  Also, you'd probably make more money directly investing that 8gs than mining.

But yeah, that's exactly my point.  The price makes no sense.  Please go through the calculations yourself.  The whole point of this thread is to arrive at a fundamental value, which very few people seem to want to do, they get offended.

To me, that's signs of irrationality.

while i do agree with you on most of the things, i don't think we can just agree on a value!, unless some of real founders (the very 1st miners) make a stand and try to stabilize the prices with their stock coins, speculations,hoarding will keep happening, and even more , and as long as people at mtgox can place bids/ask without actualy having the order it can still fool new comers ! Ofcourse i assume that the very 1st miners care about the bitcoin itself more than the profit like most of the late coming miners who just waiting for prices to go up and up and up, and they will crash the market once any sign of crash will show up.

[picollo7]

the thing is why are dudes flipping their shit about $9 a month in electricity?

Like I said, my calcs were based on the most efficient computers and at a rate of $.1 per kwh.  So if they have more expensive electricity, and less efficient pcs, then that rate can easily go up by a factor of 10.  Also, bear in mind, that's only for 1 BTC a day, so for people with farms and stuff, that will go up by however many BTC they're generating.

I made the efficiency assumption because the most efficient miners will reap the most profits, so there is a huge incentive for market entrants to be efficient, esp as difficulty increases.

The whole point is that in perfect competition, price equals marginal cost for the most efficient producer.  The BTC mining market is converging toward a perfectly competitive market due to its size and low barrier to entry.  So with all that in mind, the inefficiencies will be competed away.  This is all in the long term, in the short term, who knows?

[Insti]

Tell me how exchanging my work for dollars creates dollars (or at least gives them value, somehow) while exchanging my work for bitcoins does not.

... Your “challenge” is easily explainable if you understand the facts,

I'm also interested in the answer to this question, could you please list the facts that explain your answer?
Thanks.

[ene]

Ugh, you BTC flag wavers are TOUCHY!  It’s simple economics.  If you can make a BTC worth 9 bucks for 25 cents, and the barriers to entry are very little, then other producers will keep entering the marketplace until the price equals cost, ie perfect competition. If you don't even understand this there isn't any point in talking further.

It doesn't matter how many "producers" are in the marketplace because whether there's one or one thousand, bitcoins are added to the supply at the same rate. 50 BTC/block, 6 blocks/hour.

[picollo7]

Tell me how exchanging my work for dollars creates dollars (or at least gives them value, somehow) while exchanging my work for bitcoins does not.

... Your “challenge” is easily explainable if you understand the facts,

I'm also interested in the answer to this question, could you please list the facts that explain your answer?
Thanks.

This is the complete OPPOSITE of what I said.  Again, they both are the same thing, your value for a dollar is what you input to earn it, just like your value for a BTC is what you input to earn it.  He is making an argument for argument's sake, not out of an attempt to understand.

[picollo7]

Ugh, you BTC flag wavers are TOUCHY!  It’s simple economics.  If you can make a BTC worth 9 bucks for 25 cents, and the barriers to entry are very little, then other producers will keep entering the marketplace until the price equals cost, ie perfect competition. If you don't even understand this there isn't any point in talking further.

It doesn't matter how many "producers" are in the marketplace because whether there's one or one thousand, bitcoins are added to the supply at the same rate. 50 BTC/block, 6 blocks/hour.

This is not true in the short run.  If you understand how the system works, the difficulty is ALWAYS lagging growth.  Currently, we produce about 13.33 blocks per hour.  bitcoinwatch.com Besides, you are missing the point.  Please go back and read if you wish to usefully contribute.

[kjj]

Tell me how exchanging my work for dollars creates dollars (or at least gives them value, somehow) while exchanging my work for bitcoins does not.

... Your “challenge” is easily explainable if you understand the facts,

I'm also interested in the answer to this question, could you please list the facts that explain your answer?
Thanks.

This is the complete OPPOSITE of what I said.  Again, they both are the same thing, your value for a dollar is what you input to earn it, just like your value for a BTC is what you input to earn it.  He is making an argument for argument's sake, not out of an attempt to understand.

Why isn't the value of the dollar the value that the Bureau of Printing and Engraving puts into it?  Why is it valued by the user instead of the creator?  Now tell me why the exact opposite is true for bitcoins?  Why is one currency valued at production cost while the other is valued at exchange cost?

[picollo7]

It's not.  You just apparently have no capability to understand a simple concept.

[kjj]

What's not what?

[ene]

Ugh, you BTC flag wavers are TOUCHY!  It’s simple economics.  If you can make a BTC worth 9 bucks for 25 cents, and the barriers to entry are very little, then other producers will keep entering the marketplace until the price equals cost, ie perfect competition. If you don't even understand this there isn't any point in talking further.

It doesn't matter how many "producers" are in the marketplace because whether there's one or one thousand, bitcoins are added to the supply at the same rate. 50 BTC/block, 6 blocks/hour.

This is not true in the short run.  If you understand how the system works, the difficulty is ALWAYS lagging growth.  Currently, we produce about 13.33 blocks per hour.  bitcoinwatch.com Besides, you are missing the point.  Please go back and read if you wish to usefully contribute.

It's funny that you mention the short run where in your very first post you said you wanted to look at the long run. It's you who is missing the point.

Could you explain this?

It’s simple economics.  If you can make a BTC worth 9 bucks for 25 cents, and the barriers to entry are very little, then other producers will keep entering the marketplace until the price equals cost, ie perfect competition.

You say that other producers entering the marketplace will cause the price to go down. Either you mean it will decrease the demand or you mean it will increase the supply. But regardless of how many producers are in the marketplace, bitcoins will be created at the same rate. Adding more producers does not cause the supply to increase and price to lower!

[picollo7]

Just thought I'd say, the difficulty jumped 78 percent.  I predicted 75 percent.  Not bad eh? XD

Ugh, you BTC flag wavers are TOUCHY!  It’s simple economics.  If you can make a BTC worth 9 bucks for 25 cents, and the barriers to entry are very little, then other producers will keep entering the marketplace until the price equals cost, ie perfect competition. If you don't even understand this there isn't any point in talking further.

It doesn't matter how many "producers" are in the marketplace because whether there's one or one thousand, bitcoins are added to the supply at the same rate. 50 BTC/block, 6 blocks/hour.

This is not true in the short run.  If you understand how the system works, the difficulty is ALWAYS lagging growth.  Currently, we produce about 13.33 blocks per hour.  bitcoinwatch.com Besides, you are missing the point.  Please go back and read if you wish to usefully contribute.

It's funny that you mention the short run where in your very first post you said you wanted to look at the long run. It's you who is missing the point.

Could you explain this?

It’s simple economics.  If you can make a BTC worth 9 bucks for 25 cents, and the barriers to entry are very little, then other producers will keep entering the marketplace until the price equals cost, ie perfect competition.

You say that other producers entering the marketplace will cause the price to go down. Either you mean it will decrease the demand or you mean it will increase the supply. But regardless of how many producers are in the marketplace, bitcoins will be created at the same rate. Adding more producers does not cause the supply to increase and price to lower!

Nope, I’m looking at the next two months.  That’s short run.  I don’t say other producers entering the market place will cause it to go down.  Again, missed the point, go back and read.

[smooth]

You say that other producers entering the marketplace will cause the price to go down. Either you mean it will decrease the demand or you mean it will increase the supply. But regardless of how many producers are in the marketplace, bitcoins will be created at the same rate. Adding more producers does not cause the supply to increase and price to lower!

Bitcoin is more like a trading market where there is no fixed set of "suppliers" and "customers."  There are buyers and sellers, and any given trader can move from one side to the other at various times without needing to build a factory or something.  Cheap mining does not increase supply much in the traditional sense, but it does decrease demand, because would-be buyers can mine instead (substitution).  

Cheap mining does increase supply somewhat, because difficulty increases as mining increases.  But difficulty is calculated in hindsight, so with increasing mining the block rate goes up.  Of course there is a fixed total supply of BTC so any increase in the block rate now means a decrease in the block rate at some point in the future.

[kjj]

Just thought I'd say, the difficulty jumped 78 percent.  I predicted 75 percent.  Not bad eh? XD

Ugh, you BTC flag wavers are TOUCHY!  It’s simple economics.  If you can make a BTC worth 9 bucks for 25 cents, and the barriers to entry are very little, then other producers will keep entering the marketplace until the price equals cost, ie perfect competition. If you don't even understand this there isn't any point in talking further.

It doesn't matter how many "producers" are in the marketplace because whether there's one or one thousand, bitcoins are added to the supply at the same rate. 50 BTC/block, 6 blocks/hour.

This is not true in the short run.  If you understand how the system works, the difficulty is ALWAYS lagging growth.  Currently, we produce about 13.33 blocks per hour.  bitcoinwatch.com Besides, you are missing the point.  Please go back and read if you wish to usefully contribute.

It's funny that you mention the short run where in your very first post you said you wanted to look at the long run. It's you who is missing the point.

Could you explain this?

It’s simple economics.  If you can make a BTC worth 9 bucks for 25 cents, and the barriers to entry are very little, then other producers will keep entering the marketplace until the price equals cost, ie perfect competition.

You say that other producers entering the marketplace will cause the price to go down. Either you mean it will decrease the demand or you mean it will increase the supply. But regardless of how many producers are in the marketplace, bitcoins will be created at the same rate. Adding more producers does not cause the supply to increase and price to lower!

Nope, I’m looking at the next two months.  That’s short run.  I don’t say other producers entering the market place will cause it to go down.  Again, missed the point, go back and read.

 

[TheKoziTwo]

kjj:
I think he is saying that if you can buy 1 btc for $0.25 from A and sell 1 btc for $9 to B, people will buy like crazy from A until A has raised the price to $9.

[BitterTea]

kjj:
I think he is saying that if you can buy 1 btc for $0.25 from A and sell 1 btc for $9 to B, people will buy like crazy from A until A has raised the price to $9.

No, he said that more miners = lower bitcoin exchange rate.

Unless he was saying that more miners = higher difficulty = higher costs, in a very difficult to understand way?

[kjj]

kjj:
I think he is saying that if you can buy 1 btc for $0.25 from A and sell 1 btc for $9 to B, people will buy like crazy from A until A has raised the price to $9.

No, he said that more miners = lower bitcoin exchange rate.

Unless he was saying that more miners = higher difficulty = higher costs, in a very difficult to understand way?

The two are more or less equivalent.  It doesn't matter much if the cost of production rises or the value of exchange falls.  Over time, the spreads will tend to fall.  The only time spreads don't fall is when production is limited in some way.  Dollars are limited, in a way, so they maintain value above the cost of production.  What picollo7 refuses to acknowledge is that BTC production is also limited, and so they can maintain a value above their cost of production.

I've been trying to lead him by the nose to this understanding, but he's refused my efforts.

[TheKoziTwo]

kjj:
I think he is saying that if you can buy 1 btc for $0.25 from A and sell 1 btc for $9 to B, people will buy like crazy from A until A has raised the price to $9.

Unless he was saying that more miners = higher difficulty = higher costs, in a very difficult to understand way?

That's basically what he is saying, he claims that 32 times marginal electricity cost is unsustainable.

For instance:
Today: $0.25 * 32 = $8 each bitcoin (unsustainable)
In 64 days: $25 * 32 = $800 each bitcoin (unsustainable)
In 64 days: $25 * 1 = $25 each bitcoin (fair)

If this is true, $8 today is a steal.

He is arguing that the price in the long term will equal costs to produce a bitcoin, which is obvious. As long as it's crazy low price sale on bitcoins (mining) more people will continue to mine until the marginal electricity costs equals price.

That said, I think the conclusion is false. He is assuming that difficulty will continue to increase, but that's not necessary the case. And if it is people might end up losing money. It's not set in stone that price will follow the costs of producing bitcoins, in fact it's quite the opposite! Difficulty follows price. Hence we might see the price of bitcoin falling below price of producing. At that point I think it's fair to assume the difficulty trend will change and possibly reverse until price and costs reach equal.

Price determines costs, NOT the other way around. But he is right that they should eventually be equal.

[smooth]

Hence we might see the price of bitcoin falling below price of producing.

It is at least possible this never happens (or at least not for a long time) because there are ways of producing BTC at essentially zero cost, such as botnets.

[kjj]

kjj:
I think he is saying that if you can buy 1 btc for $0.25 from A and sell 1 btc for $9 to B, people will buy like crazy from A until A has raised the price to $9.

Unless he was saying that more miners = higher difficulty = higher costs, in a very difficult to understand way?

That's basically what he is saying, he claims that 32 times marginal electricity cost is unsustainable.

For instance:
Today: $0.25 * 32 = $8 each bitcoin (unsustainable)
In 64 days: $25 * 32 = $800 each bitcoin (unsustainable)
In 64 days: $25 * 1 = $25 each bitcoin (fair)

If this is true, $8 today is a steal.

He is arguing that the price in the long term will equal costs to produce a bitcoin, which is obvious. As long as it's crazy low price sale on bitcoins (mining) more people will continue to mine until the marginal electricity costs equals price.

That said, I think the conclusion is false. He is assuming that difficulty will continue to increase, but that's not necessary the case. And if it is people might end up losing money. It's not set in stone that price will follow the costs of producing bitcoins, in fact it's quite the opposite! Difficulty follows price. Hence we might see the price of bitcoin falling below price of producing. At that point I think it's fair to assume the difficulty trend will change and possibly reverse until price and costs reach equal.

Price determines costs, NOT the other way around. But he is right that they should eventually be equal.

Difficulty and price chase after each other.  It isn't a system with one free variable and one bound; the two form a feedback system.  Google "lotka volterra".

[realnowhereman]

I don't think difficulty feeds back to price.

As price increases, mining becomes more profitable, so more miners will enter the game until difficulty increasing makes mining zero profit.

As price decreases, mining becomes less profitable, so miners will leave the game until difficulty decreasing makes mining zero profit.

You might argue that while demand for coins exist then the miners will only supply at prices that keep their profit hight; the problem with that is that it ignores that price is already set by supply and demand between buyers and sellers separate (or rather in addition to) miners.  Miners don't have full control of price, therefore there is not a feedback from difficulty to price.

It's pretty much a given that miners do not control the price.  If they did then miners entering the game would drive difficulty up, which would drive price up to match their costs which would make it more attractive for more miners to enter the game which would drive difficulty up, which would drive price up ...

This would be positive feedback, which isn't stable, and would by now already have kicked in and wrecked bitcoin.

[BitterTea]

One thing I'm not sure is taken into account in these calculations... Miner's aren't necessarily selling all the coins they generate. Does that significantly change the scenario at all?

[dacoinminster]

If you guys have opinions on where the bitcoin prices are going, put your money where your mouth is!: http://forum.bitcoin.org/index.php?topic=10008.0

[cloud9]

Assuming all else stays proportionally the same as the status quo the following is an attempt at an evaluation of BTC value:

- Total current network hash:  3.913 Thash/s  (Source: http://bitcoincharts.com/ )
- Assume typical economical miner's hash :  300 Mhash/s (Source:  http://bitcointalk.org mining forums) - Stand to be corrected
- Assumed estimate of total economically mining machines:  13 000 approximately
- Assume $1000 capital cost per economically mining machine, gives a total network capital cost of $13 million
- Depreciating asset capital cost depreciated over a five year term, gives $2,6 million capital cost depreciation per year.
- Expected Return on capital investment per year (assume 20% - high risk investment), gives $2,6 million return on investment cost.
- Running cost:  electricity, assume 0.5kWh power consumption per machine, at $0.15/kWh assumed average worldwide cost, gives 13 000 x 24 x 365 x 0.5 x 0.15 = $8,5 million total yearly electricity running cost
- Running cost:  rent, salaries, etc, assume just 100% (reimbursing the average miner on a machine only $1000!!! per year!!!! in salaries and rental space) yearly on capital cost, gives $13 million
- Maintenance cost, assume 2% yearly on capital, gives $0,25 million.
- Bringing us to an assumed total yearly cost to business for the Bitcoin network of $26,95 million.  The network generates a total of 50BTC roughly every 10 minutes at present, thus 10 x 6 x 24 x 365 = approximately 525 600 BTC per year.  The total cost per BTC generated securely and maintaining the network at present will thus be approximately $26,95 million divided by 525 600 = approximately $51.27!!!!  Is it a small price to pay for the owner's rights to secure entries in a global digital cryptographic key accounting system - which subsequently allows the owner of the rights to transfer some/all of those rights securely?

Now this cost of $51.27 per BTC is for maintaining a network difficulty of 244139.48158254 ( http://blockexplorer.com/q/getdifficulty ) at present.  When more BTC mining machines are added making the network more secure and difficulty increases ( http://bitcoin.sipa.be/ ) but the bitcoin generation rate remains unchanged - this will result in an increase of BTC securing/generating cost.  Maximum difficulty never to be reached is 2^224 ( https://en.bitcoin.it/wiki/Difficulty#What_is_the_maximum_difficulty? )

EXCELLENT!  I like your way, I took this and changed some of the assumptions, and got a value of $9.08 per BTC.  (You made a calculation error with yearly BTC, 50 BTC generated 6 times an hour 24 hours a day 365 days a year is 2,628,000 BTC per year.  That 10 in the formula should be a 50, so your analysis would give about $5.13).
Anyhow, this does not take into account growth rates.  So obviously this will change.  But it’s a great start.

Thanks picollo7 for pointing out my oversight, I will post the correction.

[cloud9]

Assuming all else stays proportionally the same as the status quo the following is an attempt at an evaluation of BTC value:

- Total current network hash:  3.913 Thash/s  (Source: http://bitcoincharts.com/ )
- Assume typical economical miner's hash :  300 Mhash/s (Source:  http://bitcointalk.org mining forums) - Stand to be corrected
- Assumed estimate of total economically mining machines:  3.913 Thash/s / 300 Mhash/s = 13 000 approximately
- Assume $1000 capital cost per economically mining machine, gives a total network capital cost of $13 million
- Depreciating asset capital cost depreciated over a five year term, gives $2,6 million capital cost depreciation per year.
- Expected Return on capital investment per year (assume 20% - high risk investment), gives $2,6 million return on investment cost.
- Running cost:  electricity, assume 0.5kWh power consumption per machine, at $0.15/kWh assumed average worldwide cost, gives 13 000 x 24 x 365 x 0.5 x 0.15 = $8,5 million total yearly electricity running cost
- Running cost:  rent, salaries, etc, assume just 100% (reimbursing the average miner on a machine only $1000!!! per year!!!! in salaries and rental space) yearly on capital cost, gives $13 million
- Maintenance cost, assume 2% yearly on capital, gives $0,25 million.
- Bringing us to an assumed total yearly cost to business for the Bitcoin network of $26,95 million.  The network generates a total of 50BTC roughly every 10 minutes at present, thus 50 x 6 x 24 x 365 = approximately 2,628,000 BTC per year.  The total cost per BTC generated securely and maintaining the network at present will thus be approximately $26,95 million divided by 2,628,000 = approximately $10.25!!!!  Is it a small price to pay for the owner's rights to secure entries in a global digital cryptographic key accounting system - which subsequently allows the owner of the rights to transfer some/all of those rights securely?

Now this cost of $10.25 per BTC is for maintaining a network difficulty of 244139.48158254 ( http://blockexplorer.com/q/getdifficulty ) at present.  When more BTC mining machines are added making the network more secure and difficulty increases ( http://bitcoin.sipa.be/ ) but the bitcoin generation rate remains unchanged - this will result in an increase of BTC securing/generating cost.  Maximum difficulty never to be reached is 2^224 ( https://en.bitcoin.it/wiki/Difficulty#What_is_the_maximum_difficulty? )  
 

[error]

Except that difficulty is 434882.7217497.

[tomcollins]

Except that difficulty is 434882.7217497.

Also, if it's too difficulty and not profitable, then miners will drop out and the difficulty will get lower.

[DarkLinkXXXX]

DESU DESU DESU DESU DESU DESU DESU DESU

[cloud9]

Except that difficulty is 434882.7217497.

Difficulty  and  network  hash  will  change  all  the  time,  if  you  want  an  updated  valuation,  you  will  need  to  recalculate  with  this  variable's  latest  value.  You  will  find  that  the  Bitcoin  fundamental  value  based  on  network  cost,  will  increase  as  difficulty  or  network  hash  increases.

[cloud9]

Except that difficulty is 434882.7217497.

Also, if it's too difficulty and not profitable, then miners will drop out and the difficulty will get lower.

Mining  is  sort  of  a  one-way  street.  Once  you  have  more  miners  committing  capitally  at  a  more  profitable  price  level,  a  downward  future  price  level  in  the  short  term  will  not  be  a  deterrent.  As  it  will  be  more  profitable  to  find  those  Bitcoins  and  hold  onto  them  until  prices  increase,  than  let  your  long  term  capital  investment  go  idle.

[cloud9]

Looks like the one-way street mining statement is afterall not true - network hash has decreased!!! - maybe some miners felt that they will rather use their capital equipment for other activities until the market reaches fair value for the network's efforts.  (Or maybe that teacher using his school's equipment got caught  ) Or maybe because deepbit mining pool might experience technical difficulties (not showing up on bitcoinwatch.com network hash pie chart at present?!?)

With the previous mentioned valuation calculation assumptions, the current decreased network hash of 3.459 Thas/sec translates to $9.06 / BTC, with market prices currently at $8.78.  The point where miners will start firing up their engines again, might indicate where the average miner feel fair value lie for there effort of maintaining the network.

[Dobrodav]

I am choose options - "No, it should be where it is,
becose, well, it is where it should be -
on open market.

[LathaSerevi]

I haven't seen the words "upper bound" used yet in this discussion, but the costs of coin mining can only place an upper bound on the value of BTC.  Not a strict upper bound, either, since speculation can go where it wants; more of a strong hint at one of many possible upper bounds.

If we're trying to pin down a fundamental value for BTC, we'd better develop a lower bound too. 

Smooth (post #6) mentioned some reasons for BTC to have value, primarily based on perceived value of the currency system as a whole.  That's a start.  However, I'm concerned with how weak our lower bound is right now.   

Question:  why shouldn't BTC be worth USD0.01 ?   Even if the currency system as a whole is valuable, maybe the system is just as valuable with a low price on the BTC.

One attempt at an answer:  at a price of USD0.01, all the coins that will ever exist would only cost 210k USD.  If that imposes undue risks to a highly valuable payment network, then its participants will likely put a floor on its value that is higher than USD0.01.  I'm a little vague on what those risks might be, though, and why they couldn't be reduced to zero in a way that doesn't require a lower bound on the BTC price.

I wish my lower bound were a lot better than this.

Cheers
Professor Latha Serevi

[smooth]

There is no lower bound.  

It all depends on how useful (or alternately desirable for non-utilitarian reasons) it is.

Thought exercise:  If the sun went out, how much would BTC be worth?  Answer = zero.  

Thought exercise #2: Some strictly-better crypto currency comes along and no one cares about BTC even as a collectable.  How much is BTC worth?  Answer = zero.

No lower bound.

[billyjoeallen]

the cost of mining does not determine the value of a bitcoin. The value of a bitcoin indirectly determines the cost of mining one bitcoin. Miners devote resources based on expected returns. Jesus, why isn't this obvious?

[LathaSerevi]

I'm looking for useful constraints from below, not guarantees against supernovas.

In one type of lower bound that I would find useful, some major stakeholders could publicly commit to placing a floor on the BTC.  Say, the EFF holds a small fund-raising drive and then uses the proceeds of 21k USD to place a floor on the BTC price in a sustained way via a set of bids and a public 20-year commitment.  Now we have a floor of USD0.001 or so.  Yay!

I was also thinking that an analysis of the constraints of the bitcoin system might shed some light.   Perhaps a certain market capitalization is required for the system to function for transactions of size X and rate Y, based on how quickly transactions can plausibly be processed?

If we can discover (or describe a way to create, at a reasonable cost) a plausible lower bound that's within a constant factor of a plausible upper bound, then we'd be getting someplace pretty good:  a degree of assurance that the system will continue to function as a medium of exchange.


Latha

[Insti]

If we can discover (or describe a way to create, at a reasonable cost) a plausible lower bound that's within a constant factor of a plausible upper bound, then we'd be getting someplace pretty good:  a degree of assurance that the system will continue to function as a medium of exchange.

Perhaps you might prefer one of the many different "Fiat currencies" which are assured by the Governments that issue them.
There are many to choose from.