Fundamental Analysis of BTC, is BTC overvalued?

[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.