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I was trying to think of what will stabilize the price, and the best I could come up with is that on a long timeline it should be approximately equal to the amo

I was trying to think of what will stabilize the price, and the best I could come up with is that on a long timeline it should be approximately equal to the amount of money it costs to mine a new one, or get one out of transaction fees. Anyone have a better idea?

darawk 9y ago
That is probably approximately correct. However, there's a bit of a feedback loop there. The difficulty changes in response to the hash rate. And the hash rate changes in response to the incentive to mine the coins. When the price goes up, the hash rate goes up, so the cost of mining goes up. So, while you are correct, the causality flows in both directions. It's really quite difficult to value any currency. Doubly so for a crypto currency.
wcoenen 9y ago
The causality goes in the other direction. The bitcoin price determines how much money a miner will spend on electricity to mine one bitcoin.
- 0xfeba 9y ago
  Well, the price with respect to the difficulty the overall number of miners.
jessedhillon 9y ago
Suppose there was someone who very badly needed to transact anonymously -- to that person, the value would be higher than the price of electricity. I think, therefore, that the price will always reflect the perceived value of the services enabled by BTC.
dr_win 9y ago
Who said that the price must stabilize? bitcoin is a digital commodity with a very unique property: the supply of newly minted coins is pre-determined and does not rely on market forces (because hash-rate retargets to achieve the plan regardless). In general the price of any commodity is determined by supply and demand. Aggregated supply is S0+S1, where S0 are newly mined coins (known) and S1 is market supply (unknown). Aggregated demand is generated by the market (unknown). So in the price equation you have two unknowns which are unlikely to be stable in the future. The cost of mining should not affect the price in the late game. Here is what Satoshi had to say about this: http://satoshi.nakamotoinstitute.org/posts/bitcointalk/65 http://satoshi.nakamotoinstitute.org/posts/bitcointalk/65
BenoitEssiambre 9y ago
It can never be stable unless bitcoins are designed to lose value over time (that's why normal currencies are designed that way). Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always be unstable and fluctuate increasingly wildly as they get more popular. This is a direct result of physical limits of production. As people hoard worthless tokens, their price increases which causes people to hoard them even more instead of investing in real businesses with real production capacity. This causes production capacity to eventually drop which means there is less things to buy with all the tokens. If people start buying real things with their stock of tokens, these tokens will be chasing fewer goods which means prices will rise (tokens will lose value). This might happen suddenly when people notice that token value is droping and that there are tons of tokens waiting on the sideline ready to make it drop even further. People will try to get rid of them all at the same time before they're worthless which will cause their worthlessness. This drop will bring them closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics. The 1920s and 1930s suffered from this type of cycle but with gold instead of cryptocoins. It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimise the amount of money that is stockpiled idly).
UweSchmidt 9y ago
Imagine it would cost 10$ to produce 10$ (imagine all money would have to be real paper bills and those would be really expensive to make). Certainly this does not work - all economic activity would be spent to make the money bills, and no activity was done to produce food or build the power plants that are busy producing energy to calculate the next "coin". So the price of Bitcoin may be related to mining costs in the short term, as miners quit when it gets too expensive. Ultimately the price would have to be much lower to be practical, or higher if it turns out Bitcoin becomes highly useful for something. Or Bitcoin takes over the world and replaces all other currencies - then the 21 million Bitcoins would equal the entire human wealth - if you believe this then you should buy right now.
- dr_win 9y ago
  > "So the price of Bitcoin may be related to mining costs in the short term, as miners quit when it gets too expensive." This is wrong. Supply does not decrease when mining gets too expensive and it does not increase when mining gets cheaper. This is the very special property of Bitcoin. See my other post. > "then the 21 million Bitcoins would equal the entire human wealth" Not necessarily. There are lost coins. And likely not all remaining coins will participate on the market. More precisely bitcoins supply offered on the market times velocity would be equal to the entire wealth offered on the market.

darawk 9y ago

That is probably approximately correct. However, there's a bit of a feedback loop there. The difficulty changes in response to the hash rate. And the hash rate changes in response to the incentive to mine the coins. When the price goes up, the hash rate goes up, so the cost of mining goes up. So, while you are correct, the causality flows in both directions. It's really quite difficult to value any currency. Doubly so for a crypto currency.

wcoenen 9y ago

The causality goes in the other direction. The bitcoin price determines how much money a miner will spend on electricity to mine one bitcoin.

0xfeba 9y ago
Well, the price with respect to the difficulty the overall number of miners.

jessedhillon 9y ago

Suppose there was someone who very badly needed to transact anonymously -- to that person, the value would be higher than the price of electricity. I think, therefore, that the price will always reflect the perceived value of the services enabled by BTC.

dr_win 9y ago

Who said that the price must stabilize? bitcoin is a digital commodity with a very unique property: the supply of newly minted coins is pre-determined and does not rely on market forces (because hash-rate retargets to achieve the plan regardless). In general the price of any commodity is determined by supply and demand. Aggregated supply is S0+S1, where S0 are newly mined coins (known) and S1 is market supply (unknown). Aggregated demand is generated by the market (unknown). So in the price equation you have two unknowns which are unlikely to be stable in the future. The cost of mining should not affect the price in the late game. Here is what Satoshi had to say about this: http://satoshi.nakamotoinstitute.org/posts/bitcointalk/65 http://satoshi.nakamotoinstitute.org/posts/bitcointalk/65

BenoitEssiambre 9y ago

It can never be stable unless bitcoins are designed to lose value over time (that's why normal currencies are designed that way). Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always be unstable and fluctuate increasingly wildly as they get more popular. This is a direct result of physical limits of production. As people hoard worthless tokens, their price increases which causes people to hoard them even more instead of investing in real businesses with real production capacity. This causes production capacity to eventually drop which means there is less things to buy with all the tokens. If people start buying real things with their stock of tokens, these tokens will be chasing fewer goods which means prices will rise (tokens will lose value). This might happen suddenly when people notice that token value is droping and that there are tons of tokens waiting on the sideline ready to make it drop even further. People will try to get rid of them all at the same time before they're worthless which will cause their worthlessness. This drop will bring them closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics. The 1920s and 1930s suffered from this type of cycle but with gold instead of cryptocoins. It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimise the amount of money that is stockpiled idly).

UweSchmidt 9y ago

Imagine it would cost 10$ to produce 10$ (imagine all money would have to be real paper bills and those would be really expensive to make). Certainly this does not work - all economic activity would be spent to make the money bills, and no activity was done to produce food or build the power plants that are busy producing energy to calculate the next "coin". So the price of Bitcoin may be related to mining costs in the short term, as miners quit when it gets too expensive. Ultimately the price would have to be much lower to be practical, or higher if it turns out Bitcoin becomes highly useful for something. Or Bitcoin takes over the world and replaces all other currencies - then the 21 million Bitcoins would equal the entire human wealth - if you believe this then you should buy right now.

dr_win 9y ago
> "So the price of Bitcoin may be related to mining costs in the short term, as miners quit when it gets too expensive." This is wrong. Supply does not decrease when mining gets too expensive and it does not increase when mining gets cheaper. This is the very special property of Bitcoin. See my other post. > "then the 21 million Bitcoins would equal the entire human wealth" Not necessarily. There are lost coins. And likely not all remaining coins will participate on the market. More precisely bitcoins supply offered on the market times velocity would be equal to the entire wealth offered on the market.