Fundamental Analysis of BTC, is BTC overvalued?

[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-