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> In that respect, it is more like gold, in that its value is driven to some extent by its desirability and potential uses, but mostly by its cost of mining T

> In that respect, it is more like gold, in that its value is driven to some extent by its desirability and potential uses, but mostly by its cost of mining This is not how prices work: https://en.wikipedia.org/wiki/Labor_theory_of_value https://en.wikipedia.org/wiki/Labor_theory_of_value What matters is how much somebody will pay for an asset (supply and demand) not how much it cost to produce that asset to begin with.

wongarsu 8y ago
Even more so in the case of Bitcoin, where the cost of mining is always slowly converging towards the market price (if cost of mining is higher than market price some people stop, difficulty drops and mining becomes cheaper; if cost of mining is lower than market price more people start mining).
- kingo55 8y ago
  And if mining slows too much where there's not enough block space for transactions, the fee market will pep up and make it profitable eventually too.
atq2119 8y ago
It's actually not that simple, and strangely one of those areas where economics has had a blind spot for a long time. Lots of businesses use cost-plus pricing, which contradicts the econ 101 assumption that you're repeating. Now, one might naively argue that even with cost-plus pricing, the outcome is still the same because businesses who set their price too high will be either outcompeted or just find no demand either way and disappear from the market. However, this assumes that the buyer-side utility functions and price expectations are somehow exogenous, and come from outside the entire market system. But that's obviously not true: people form their expectations of how much things are supposed to cost, and even what the value of goods are (see Giffen goods for an extreme case) by looking at the de facto prices of goods -- and those are usually set by the suppliers, using cost-plus pricing. The bottom line is that utility functions and price expectations are really endogenous, which radically breaks the econ 101 model of supply and demand. I've heard of economists making various attempts to fix their models to account for this, but I'm not aware that a consensus on how to fix this has emerged.
- ForHackernews 8y ago
  You're talking about products, not commodities. What's the consumer utility function look like for gold ore or bitcoin?
  - atq2119 8y ago
    That's specifically why I mentioned price expectations.

wongarsu 8y ago

Even more so in the case of Bitcoin, where the cost of mining is always slowly converging towards the market price (if cost of mining is higher than market price some people stop, difficulty drops and mining becomes cheaper; if cost of mining is lower than market price more people start mining).

kingo55 8y ago
And if mining slows too much where there's not enough block space for transactions, the fee market will pep up and make it profitable eventually too.

atq2119 8y ago

It's actually not that simple, and strangely one of those areas where economics has had a blind spot for a long time. Lots of businesses use cost-plus pricing, which contradicts the econ 101 assumption that you're repeating. Now, one might naively argue that even with cost-plus pricing, the outcome is still the same because businesses who set their price too high will be either outcompeted or just find no demand either way and disappear from the market. However, this assumes that the buyer-side utility functions and price expectations are somehow exogenous, and come from outside the entire market system. But that's obviously not true: people form their expectations of how much things are supposed to cost, and even what the value of goods are (see Giffen goods for an extreme case) by looking at the de facto prices of goods -- and those are usually set by the suppliers, using cost-plus pricing. The bottom line is that utility functions and price expectations are really endogenous, which radically breaks the econ 101 model of supply and demand. I've heard of economists making various attempts to fix their models to account for this, but I'm not aware that a consensus on how to fix this has emerged.

ForHackernews 8y ago
You're talking about products, not commodities. What's the consumer utility function look like for gold ore or bitcoin?
- atq2119 8y ago
  That's specifically why I mentioned price expectations.