[tquai]

The market is capitalized at $2.5 billion, but what does that mean in an economy with no production?

Does the author define "production" as manufacturing where the exclusive currency used (for raw materials, wages, utility bills, etc.) is bitcoin? If so then I'm not sure of the relevance.

One could make all sorts of clever but offtopic points about a fiat paper currency when viewed through the lens of a P2P currency like bitcoin. "The Canadian dollar is supposedly worth more than the USD today, but what does that mean when the Canadian network has zero nodes?" The wrongness of such a statement leaps out since fiat currencies are familiar to us. In contrast, bitcoin doesn't need a manufacturing base, but this is less obvious since P2P currency is a new idea that people (myself included) don't well understand.

[el_senor_duerpo]

No, production is not exclusive to manufacturing. It means valued-added. For example, if you bought a dvd from amazon using bitcoin (I have no idea if this is possible), then very little of what you paid would count in bitcoin GDP. All of the costs of production (warehouses, delivery, labor, servers, etc.) are done in the US economy using dollars, so that basically doesn't register as bitcoin GDP.

On the other hand, let's suppose someone is buying a bag of... something. Well, everything that got that bag to the dealer was done in some other production economy. So the only value added, that would count as a service in bitcoin GDP, would be the dealer's profits, measured in bitcoins.

To my knowledge, there are no investment projects being financed in bitcoins. If there were, then they probably just defaulted on their loans, which increased tremendously under deflation. Therefore, it's best to think of the bitcoin economy almost entirely as pure exchange, with very little value added and very little wealth created.

As for fiat currencies, why is everyone so interested in the nominal exchange rate anyway? This was a peculiarity that I noticed a while ago. In college, I went on a study abroad program to Mexico. When we arrived, we all exchanged our dollars for pesos. Everyone was carrying on about how strong the dollar was, because one dollar could buy ten pesos. But then I noticed something. I went to McDonalds, and instead of a "dollar menu", they had a "10 peso menu". Who cares how many pesos you get for a dollar? It's about how much you can buy with that dollar worth of pesos, and that's measured by the real exchange rate. I realized at that moment that purchasing power was much closer to parity than most people think, because they put so much weight on nominal rates.