[unix-dude]

I think bitcoin is an extremely interesting concept, and the economics around it are equally interesting. I bought a tiny amount when the prices were around the $11 mark, and its insane to think of the price-shift. I made a couple bucks off the price shift, but now I'm honestly thinking that the price will fall back down. Despite serving the needs of many SR/SatoshiDice people, I dont think they're quite at the point of being honestly valued at $21 each.

I think the fact that the price jump happened in (basically) a 12 hour period, coupled with the fact that bitcoin is traded as an investment very often makes me believe this is an artificial price jump. I'm no economics guru, but it just seems like common sense to me. Tons of people see a short burst and panic buy, this allows the sellers to ask consistently higher prices as many people panic buy (Lets face it, many, maybe the majority, including myself, in the bitcoin game, are amateurs when it comes to currency trading).

Anyway, it'll be interesting to see where this goes, and I'll almost definetly be buying when/if the price falls to ~$12/$15, which really seems much more appropriate in my opinion.

[Jd]

The problem with all fiat currencies is they have no inherent value; it is all in the eye of the beholder. So what is an "appropriate" price is quite difficult to determine. Most currencies are driven by being effective monopolies wherever they are issued, so the market price remains somewhat stable. Even so, many professional economists have opined that the exchange rates even between major currencies are way too volatile.

This is, among other things, because there is a whole lot of loose money floating around that can easily jump between currencies. We are probably going to see a lot more of this in the Bitcoin world, which I expect has a lot more volatility ahead of it -- somewhat ironically in this case, as the increased liquidity promotes volatility, since it becomes an instrument of pure speculation that was previously too difficult for professional traders to deal in.

In any case, I also had the intuition around the $11-12 mark that bitcoin was a good investment, since the major hurdles around the security issues were probably ironed out, but didn't invest anything -- probably because deep down I'm a value investor and don't see a lot of value in driving speculation in something that doesn't have inherent value (despite the many interesting technical aspects to Bitcoin).

[jswinghammer]

Well Bitcoin is not a fiat currency since it being defined as money is not dictated by fiat. It isn't attached to a physical good which is interesting. I'm guessing that its' value is being helped by the increasing amount of inflation in fiat currencies around the world and that the newly created money doesn't have a better home. Many people are scared of stocks and real estate so other assets become more attractive. I'm not sure I have any use for Bitcoin in my life and in this financial environment I wouldn't be involved in Bitcoin at this or any price.

[pixie_]

Exactly. People take note - Bitcoin is NOT fiat currency. Fiat is latin for 'let it be done.' As in governments can create new money at will. New bitcoins can't be created on demand by anyone.

[nullc]

You've misunderstood that defintion.

Economically speaking fiat is a currency that exists by rulemaking instead of having an inherent value— it's constructed. The definition doesn't say who does the constructing or how.

Bitcoin is a fiat currency— the fiat is embedded in the software that runs on and is enforced by all the Bitcoin nodes, it's the rules that make the currency exist and work. It's largely immutable, participated with by consent, transparent, and cryptographically strong in the way no government fiat is— bit it is technically a fiat currency.

This is no big deal unless you make the Internet-liberitarian/goldbug mistake of thinking fiat is a dirty word.

[pixie_]

Fiat does not imply constructed. The notion that gold (or tulips) are valuable are equally constructed ideas by humans. Nothing has 'inherent' value apart from the value humans perceive these things to have. No, the only thing fiat implies is manipulation - the ability for a government or person to mess with the value of a currency by 'willing it to be.' Bitcoin is not fiat.

[teebs]

Just based on the Wikipedia article, I don't think you're right that fiat implies manipulation: http://en.wikipedia.org/wiki/Fiat_currency

So, based on that definition, it is true that Bitcoin is not a fiat currency because it is not given value by law or government. However, although it technically does not have a centralized issuing authority that can arbitrarily create Bitcoins, Satoshi Nakamoto did hard code a creation rate for Bitcoin. In a sense, he is the original issuing authority. The only difference between Bitcoin and fiat currencies, when it comes to currency manipulation, is that Nakamoto committed early on to a specific plan for issuing currency. The government (or the Fed) not only does not make that commitment, but it is unable to make such a strong, unbreakable commitment, although it verbally makes similar commitments all the time.

[tedunangst]

You have made the Internet-libertarian/goldbug mistake of thinking fiat is a dirty word.

[smosher]

I still don't buy it.

I disagree on many points, but the easiest to argue is that it does, in fact, have inherent value. At its most general, that value is in allowing people to make exchanges they wouldn't otherwise be able to make. In particular, that sadly seems to be centered on drug trade. The fact that someone designed the mechanics has little to do with it.

Back when BTC was close to USD$30, I was wondering how much meat there was to it. I had enough that if the market was going to vanish it would be a damn shame if I didn't cash out (so to speak) before that happened. After a bit of thought I decided to hold on to the BTC. I made a comment to a skeptical friend that "bitcoin can't fail." Then came the compromises and the price of BTC dropped like a stone.

I was disappointed, but I didn't feel like I'd lost my tiny fortune. When I made the statement to my friend, I knew what people were using it for. I was confident they would continue to find value in it and the price would rise once again. My prediction has been satisfied. I don't feel like my confidence was ill-placed, or that I got lucky to see the rebound and no edict has repaired the shaken confidence of BTC traders.

[Jd]

>> that value is in allowing people to make exchanges they wouldn't otherwise be able to make.

Well, you could say the exact same about every currency. If you are a chicken farmer, it is easier to buy a pound of pork for $5 than trying to trade your chickens for a slab of a pig (i.e. barter). All currencies provide value, since they are a lot easier than barter. The question is not that, it is whether or not they are based on something of inherent value.

[Symmetry]

Well, in general the price level of bitcoins, how much individual bitcoins are worth compared to other goods, is going to end up being governed by

  MV = PQ

Where M is the quantity of bitcoins, V is how fast they criculate, P is the price things in bitcoins, and Q is the size of the economy that bitcoins are used for. Since the bitcoin design prevents M from increasing that much, and since V tends to fluctuate a lot but remain stable in the long run, you should find that the value of each bitcoin mirrors the size of the economy that uses bitcoins in the long run. So buying bitcoins is essentially a bet that people will use them for more and more things.

With US dollars the government (or central bank). tries keep M at a level where Q doesn't move around too much, but bitcoin doesn't and can't have an institution like that.

[conroe64]

I think you need to include speculators in your equation. If S is the number of bitcoins being horded, we would get (M - S)V = PQ. Since the perception seems to be shifting where more and more people believe that Q is going to continue to increase, S becomes larger (and in extreme cases, a bubble).

[Judson]

No need for "S". Hoarding is accounted for by a drop in V.

[SkyMarshal]

>you should find that the value of each bitcoin mirrors the size of the economy that uses bitcoins in the long run.

Your equation is actually saying the opposite, that the value (P) of each bitcoin is inversely proportional to the size of the bitcoin economy (Q):

MV = PQ => (refactored) =>

(MV)/Q = P

Hence P ~ 1/Q.

Thinking about it more, I think you may have Q and M mixed up. From a supply/demand point of view, the greater supply of bitcoin (M), relative to demand at least, the lower the value (P).

If we assume aggregate demand can be approximated by overall size of the economy that uses bitcoin (Q), then

P ~ Q

and

P ~ 1/M

so

(QV)/M = P

hence

QV = MP

Right?

[Jd]

I think Q is closer to the size of the market rather than the size of the "economy." "Economy" implies both tangible goods and buyers and sellers for those goods. The problem with Q in the Bitcoin sense is that it can move around a lot, since it is an obvious target for speculators with no interest in tangible goods.

[Retric]

The dollar has a huge inherent demand in that you need to pay US taxes in dollars. Bit-coins lack that demand but there total value is so tiny just about any perceived long term use creates a huge speculation opportunity.

PS: For comparison WoW gold is a much larger currency.

[jerguismi]

Is it possible to calculate market cap for WoW gold? Is there way to know how much is in circulation?

[jstalin]

Nothing has inherent value. All value is relative. The difference between fiat (paper) currencies and currencies that are composed of a physical good, like gold, is solely the ability to control quantity. Fiat currency can be (and often is) produced in unlimited quantities, which leads to inflation. So-called hard currencies, backed by a precious metal, are limited in their expansion by production of that metal.

This is why so many are coming out in favor of metal-backed currencies, because it restrains governments in what they can print to pay their own bills and their ability to devalue the savings of the populace (as Venezuela just did minutes ago, devaluing the savings of its citizens by 47% in one fell swoop).

[Jd]

If all value is relative then there is no such thing as value at all. Of course the converse statement, that "inherent value" is a construct is true, since people rarely agree on the value of any given object, and generally the only way we can speak meaningfully about value is to take something that people agree has value. That said, there are certain types of objects that have been considered by most people to have value at most points in history. Gold, a fungible, maleable, shiny metal has been considered to be this for most of human history. There are other things of course, water being a very good example. The problem for currencies has historically been that alternative valuable objects either are not especially limited or not fungible, making them a bad base for a currency.

There may also be things that have "inherent value" insofar as they are necessary to the continued existence of humanity, whether or not we perceive them as so. Damaging our environment beyond a certain degree would certainly be this. Unfortunately international governance has not risen to this particular challenge and fully utilized available technology (e.g. carbon credits).

[anigbrowl]

The problem with all fiat currencies is they have no inherent value; it is all in the eye of the beholder.

Apart from the claim on a country's treasury which is implicitly backed by a country's resources. Sure, this isn't always reliable, as in the case of countries like Zimbabwe, but they're very much the exception rather than the rule. Bitcoin's fiat value is posited on the artificial scarcity of something that doesn't have any particular utility in the first place. Gold at least has the virtue of looking nice and having useful physical properties (malleability, non-reactivity, high conductivity).

[betterunix]

"The problem with all fiat currencies is they have no inherent value; it is all in the eye of the beholder"

We'll see if you really believe that is true if you ever find yourself having to pay taxes but lacking the money needed to do so. Fiat currencies do have value: their value is in their ability to cancel debts (like taxes).

[thefreeman]

To say Bitcoin has no inherent value is not quite accurate. The inherent value of the Bitcoin comes from the electricity required to power the computational cycles to "create" it.

[nullc]

That is confused.

If I smash the hope diamond and then get the pope and four world leaders to urinate on it— then surely the resulting mush would be the most rare and costly constructed substance on earth. It would also be worthless.

[jlgreco]

Film it and it would be some pretty great performance art. ;)

[stcredzero]

You'd get 5 figures for that on eBay, easy. Likely much more.

[Spooky23]

That's the printing/minting cost of conventional currency.

To have "inherent" or "intrinsic" value means that the actual material has marketable value. For a US dollar coin, if you melted it down, the copper, maganese, nickel and zinc is worth about $0.06. The value of the paper of a US dollar is a fraction of a penny for recycling purposes.

A bitcoin is more like paper currency -- it has no intrinsic value. But because of the predetermined control of new coin production, it will display characteristics similar to silver or gold coinage.

Those characteristics include something that nobody talks about -- the "discovery" of new coins. There are likely large dark pools of bitcoin that the initial adopters generated very cheaply. Dumping those pools on the market will have similar effects that gold rushes had.

[Dylan16807]

Cost does not equal value.

And it goes the other way around anyway. Higher prices lead to more people mining.

[jswinghammer]

Correct. The problem being the use of the word inherent to describe value. There is no such thing as inherent value unless you are describing a use and not the price someone would be willing to pay for something. For example, wood can be used to fuel a fire but that doesn't tell us anything about its' inherent value in exchange. That it has inherent value on these terms is obvious enough. For me it has almost none because I don't have a stove to safely burn it. Others feel differently.

[Dylan16807]

You have to take a more general sort of view to things. To the median person making use of the value, how much are they getting out? How many people would find value?

For example not everyone likes shiny things but gold is also compact, protective, conducting, nonreacting, testable, etc.

Wood has a thousand and one uses but it's a bad currency because in addition to being bulky it's easy to make more wood. But in certain circumstances it would work fine.

There is barely any use people can get out of bags of sand, so it wouldn't work as a currency. Salt looks similar but used to be hard to get and is important to food and living, made a great currency.

Bitcoins by themselves don't have value. You could make a hundred knockoff block chains and they wouldn't do you any good. The bitcoin network as an entity that you can trust is where anything useful is actually derived from.

[conroe64]

Just because some things have intrinsic value and have been used as a currency doesn't imply that something that doesn't have intrinsic value and is a currency can't be trusted.

You have to take a look at society's motivations, situation and psychological makeup, and from there you can make a prediction as to whether a currency can be trusted or not.

[thefreeman]

And more people mining leads to higher difficulty rating which leads to longer block times.

[ARolek]

I use to think this was true too, but it was clarified for me on at https://en.bitcoin.it/wiki/FAQ#Where_does_the_value_of_Bitco...:

"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."

[mrb]

The price jumped from $13 to $22 over 1 month, not 12 hours. http://bitcoincharts.com/charts/mtgoxUSD#rg60ztgSzm1g10zm2g2...

[unix-dude]

Youre actually right. It jumped from around 15.50 to a bit above 20 in one day.

The point stands though, very short term, massive spikes.

[mrb]

You misremember.

On Jan 23-24, there is a 36 hour period where it jumped from $16.8 to $19.2. http://bitcoincharts.com/charts/mtgoxUSD#rg30zczsg2013-01-24... That's the closest scenario I can find. Certaintly not "$15.5 to $20+ in 12 hours".

[nextstep]

On what day? Can you link to a graph showing this? I see a more steady progression from 13-15 to 21 over the last 30 days.

[eitland]

The fact that there are fewer possible bitcoins than inhabitants on this planet should tell us that bitcoin should be a good investment at the current excange rate...

...given that bitcoin is still around when all blocks are exhausted, legal to most of the worlds population by then and not outcompeted by something better (better marketed?) by then.

Warning: I am no economist, I still don't know what a fiat currency is although I might have an idea after reading this thread.

[betterunix]

"I still don't know what a fiat currency is although I might have an idea after reading this thread."

Fiat currencies are currencies whose demand is created by a legal system. The US Dollar, for example, has demand that is created by law: tax laws, bankruptcy laws, etc. Like anything else, the value of money is determined by supply and demand.