This may be a dumb question, but whats the underlying value of regular money? From my understanding it used to be backed by gold but isnt anymore, and governments print more when they need it?
From what I understand, the US Dollar is backed by: The IRS requires taxes be paid in dollars. It's a federal offense to refuse payment in dollars for purchases under US jurisdiction. The US has negotiated other countries to require payment in dollars for oil and maybe other goods. The world generally has confidence in the dollar as a fairly stable currency that is unlikely to collapse.
What did I miss?
My understanding of what backs Bitcoin is: By mining Bitcoin, you are provably putting yourself into a financial loss and therefore are provably motivated to turn that around into a profit. Buying Bitcoin is also equivalent to mining in this regard. That means around the world, millions of people are motivated to the tune of nearly a trillion dollars to ensure that the system continues to not only keep working, but grow more valuable.
Well, the mining stuff has a role, but in reality, the thing that backs bitcoin is the same thing that backs gold. What backs gold? You might say, that's a silly question, gold is just gold. But why then is it valuable? The answer is it's scarcity. The same is true of bitcoin.
Gold mining is destructive and incurs an energy expenditure. Economically, it incurs a capital expenditure and a venture must demonstrate a risk profile, a probability of return justifying the venture. The two endeavors have similar profiles, with bitcoin though the amount you can mine is predetermined. In gold, it is soft predetermined in that it is known generally that it gets more difficult over time to extract and more expenditure is needed, more powerful techniques must be developed. In the bitcoin world this is straightforward, "more powerful techniques" are just more transistors per square inch configured to hash SHA256. The "more difficult over time" is just competition with people who have already developed more efficient machines. Capital expenditure is pure energy, not digging pits or pumping solvents or electrolytes into veins. And scarcity is absolute.
I think that is a fine description of the backing of the US Dollar.
For Bitcoin though, it sounds like you are defending Bitcoin as an investment, which I don't agree with. Unlike Bitcoin, the US Dollar is not considered an investment. It's just a currency, a medium of exchange. It loses some value over time, and we're ok with that. Bitcoin is pretty difficult to use as a currency, so people usually promote it as an investment instead.
Here is what I have to say about it as an investment: where is the money actually coming from for the returns? In order for the price to keep going up, people have to keep adding more money to the pool. This is pretty clearly a negative sum game, where the players on average must lose more than they win. Some people may win, but they are mathematically in the minority. Most people who appear to be winning are only winning on paper right now. If everyone who was currently holding tried to withdraw their money and cash out, who would be the ones buying them out? It's not clear. There is no utility to the thing that they own. It's essentially just a number in a spreadsheet.
> That means around the world, millions of people are motivated to the tune of nearly a trillion dollars to ensure that the system continues to not only keep working, but grow more valuable.
I guess I'm asking why this isnt valuable? It seems like a large portion of the world has agreed to trade assets in USD and assign various values of there assets to the value of USD, and much smaller portion of the world has agreed to do the same with BTC, so the differences is that you have to pay your taxes with one and you dont with the other?
You might also ask what is the underlying value of gold. You can do nice stuff with it and has some industrial applications, but it held value historically because of its scarcity. That's why countries changed it, because they realized their economies were more valuable that their gold stash (and it gave much more economic policy freedom)
An economist might give you a more intricate answer, but basically the underlying value of the (fiat) money today is basically the power of the issuing country's economy and government (who is the one guaranteeing the fiat validity)
Gold has scarcity, demand, and a certain use in electronics that puts in a price floor.
BTC has only demand, really. The number of circulating BTC doesn't affect demand for it. But given the number of failed crypto currencies out there, we do know that the True Price of crypto is 0. There is no use for it once demand has whittled away to nothing.
If I invented my own currency and no one wanted it, the true price of my currency would be 0, but that doesn't then mean that the true price of all other currencies is 0 does it? The demand for USD and the agreement of the population to use it to trade gives it its value, I dont really understand why the same cant be said for people agreeing to trade with BTC, other than that the supply is governed by an algorithm that everyone has agreed upon, whereas the supply of the USD is governed by the government, international politics, lobbying, etc.
Answering your questions here. Assuming you're not a crypto shill:
> If I invented my own currency and no one wanted it, the true price of my currency would be 0, but that doesn't then mean that the true price of all other currencies is 0 does it?
For crypto the true price is zero. There are an infinite number of possibility and cryptographically secure numbers. There are an infinite number of potential crypto currencies.
LUNC is pretty much zero. Why? Demand? Was demand the only thing propping up the price? Despite all the potential utility that LUNC gave users? Does the utility of bitcoin only depend upon demand?
USD has very high demand, and despite the Democratic president or Republican president, the volatility of the value has been much less than BTC.
> I dont really understand why the same cant be said for people agreeing to trade with BTC, other than that the supply is governed by an algorithm that everyone has agreed upon, whereas the supply of the USD is governed by the government, international politics, lobbying, etc.
I personally didn't agree to the algorithm. The US population didn't vote on it. Why does a minority of people get to affect the price of energy for the majority?
BTC is now at 2% of energy use in the US. So what value do I get other than paying higher prices for my energy when ethereum PoS seems to have worked just fine without issue and uses orders of magnitude less energy?
I'm not sure I understand why expending energy to mining more gold than we actually need, so that the excess can be used to represent money, is worse than expending engery to verify scarcity and transactions. If the argument is efficiency then there are so many other examples of society being inneficient, why is it an issue for bitcoin but not for other industries?
The world hasn't used the gold standard for 50 years, and arguably even the Bretton Woods arrangement itself is a pretty significant departure from the gold standard. It's not like the gold standard proved to be historically a very effective basis for economic activity, so trying to say that Bitcoin is exactly like the gold standard isn't a strong argument.
Historically, the main advantage of the gold standard is that it doesn't require a high degree of state capacity to function, and of course throughout most of human history, state capacity was pretty damn low. But we live in an era where states largely have high state capacity, which allows us to move to economic standards that require that capacity to function effectively. Trying to argue for a system that increases inefficiency so that it can eliminate the need for a high state capacity government feels like a step backwards to me.
In the case of BTC and gold, mining puts downward price pressure as new "resources" are "discovered". Miners need to sell the gold/BTC to recoup the cost associated with mining. In BTC it's energy, in gold it's equipment/labor.
In a free market, we would expect the inefficiencies to be removed from the economy over time. New competition, new ideas, etc.
In the case of BTC, removing PoW would remove the downward price pressure it sees today. The miners don't really want BTC, they want USD.
The gold actually exists. I have some in my computer and my phone, it can be used for jewelry, decoration, and has thousands of years of provenance to ensure its value is roughly stable.
Bitcoin is none of those things, it's a cryptographic exercise in waste, producing nothing of value.
Well, it can. The value is in the eye of the beholder. If there is demand for it, it has value.
But don't expect countries/societies to go back to anything resembling the Gold Standard (as leaning on bitcoin would be), as it was clearly a worse deal than issuing their own fiat currency.
Government tax collection, which in turn depends on the economic health of the nation. If a country’s economy collapses and/or the government is weak at collecting taxes then inflation becomes more likely.
One effect is that the government currency is the unit of value for tax accounting. For the US, you need to figure out what your income is in dollars in order to do your taxes. For assets in other currencies, you need to convert.
Another effect is taking tax payments in government currency. However, I suspect it would be much the same if the government did the currency exchange for you? Whoever does the exchange will drive up the demand for government currency.
One (of several) ways to think about this would be that money backed by the government treating it as the legal tender for settling any and all debts within that country. So the underlaying value is partially just trust in that governments ability to enforce laws related to the exchange of money and/or settling of debts between it's citizens/users of the money.
If a government issued money but never imposed/enforced penalties for failing to pay debts, that money would probably be pretty useless (less underlaying value), and some other form of money would emerge (probably one backed by actual value, like gold/scarce resources).
People don't want to barter so they agree to take money. It's useful because you don't want to take your salary in hens or goats or GPUs or whatever and trade them for things you need. That use provides the value.
History doesn't suggest that trading with papers that can be exchanged with gold works better, is my understanding. The U.S. was on a gold standard during the great depression.
Which means someone will agree to trade it with your for something you want, or something you can use to trade with something you want. You can take your USD and trade it for EUR to buy a coffee in france. You can also take BTC and trade it for EUR to buy coffee in france. In both instances the person selling you the EUR beleives that they can resell what you are giving them? So I'm struggling to see how they have different underlying values.
What did I miss?
My understanding of what backs Bitcoin is: By mining Bitcoin, you are provably putting yourself into a financial loss and therefore are provably motivated to turn that around into a profit. Buying Bitcoin is also equivalent to mining in this regard. That means around the world, millions of people are motivated to the tune of nearly a trillion dollars to ensure that the system continues to not only keep working, but grow more valuable.