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I knew about Bitcoin quite early and always believed (absurdly incorrect with 20/20 hindsight) that the price ought to correlate to the "actual" utility of bitc

I knew about Bitcoin quite early and always believed (absurdly incorrect with 20/20 hindsight) that the price ought to correlate to the "actual" utility of bitcoins, i.e how many transactions were performed to purchase goods and services. I imagined a future where bitcoins would be used for micro transactions online, illegal purchases (drugs/≈Wikileaks/banned stuff in dictatorships) and by people in hyper inflationary economies. I speculated that if the price would reach multiple thousands of USD per BTC, we would have seen massive adoption for even mainstream uses. It's so strange, because I love the ideology behind it and the decentralised technology, and by many measurements bitcoin and other crypto initiatives would be considered a somewhat success if we didn't have the price to look at. That I can pseudo anonymously (or completely anonymous with stuff like zCash/Monero) transfer a token of wealth over the internet without a central party is so cool. But I'm afraid that almost all of the price increase is simply a hype/speculation/hold-cycle that inevitable never will survive.

bernardlunn 8y ago
You missed one use case which is digital gold, which accounts for most of the price.
- aedron 8y ago
  I used to dismiss this view, because it seems so impropable that an arbitrary digital asset would be able to fill a role like gold. But it does seem to be happening, and I am coming around to the idea. What is gold after all but a commonly agreed upon medium of value transfer, suitable because of scarcity and divisability, but other than that rather arbitrary too. If enough people decide that bitcoin is a good medium, then so it will be, and that momentum itself will keep it that way. And bitcoin does have a lot of attributes that make it suitable. There is a lot of money looking for a place to go and be safe (from loss and inflation). There are very few 'pure' ways to simply store that value, even gold is difficult to invest in, at least if you want actual ownership and not merely a promissory note. Bitcoin (or another cryptocurrency) could be one of these ways.
  - the_gastropod 8y ago
    > ...because of scarcity and ... I have a hard time understanding digital scarcity. Bitcoins are scarce with respect to "the" Bitcoin network, but there's nothing preventing someone from forking or starting their own clone of the entire system. While that new chain would be missing all the historic transactions of the original, is that meaningful in any important way with respect to scarcity? The number of cells in an Excel spreadsheet are also finite, but we don't tend to impart value on them. And it's trivial to create a new spreadsheet with a whole new set of cells. What am I missing?
    - panarky 8y ago
      > nothing preventing someone from forking ... Bitcoin code has been forked thousands of times. Only a few forks survive today, and those are worth a small fraction of the original. That's because Bitcoin, like all money, is a social construct. It's an idea and belief shared among many people. Bitcoin, like all money, has no intrinsic value, but derives value from the network of people who find it useful. It's much more difficult to fork a network of people and shared beliefs than it is to fork the code. And I'll preempt the inevitable argument that dollars and renminbi are backed by the military, or by taxes, or by central banks, etc. That's all hogwash. Money isn't backed by anything other than shared belief and the promises we make to each other.
      - the_gastropod 8y ago
        Hah! I think you'll be surprised to hear: I agree with you! But my question was about Bitcoin's comparison to gold, specifically with respect to its scarcity.
  - jfk13 8y ago
    So far, I'd say there's little evidence that bitcoin is a safe place to store large amounts of money.
- codebolt 8y ago
  The perceived value of gold as a store of value comes in part from the fact that humans have been using it as a means of trade/store of value across a vast span of cultures for many millenia. Bitcoin has been around for 8 years. With Bitcoin there is no guarantee that competing technologies won't spring up to replace it in the mid- to long-term. Gold will always be gold. Also, gold is shiny. Personally, I'd much rather have a gold bar in my safe, that I could take out and hold in my hands, than a memory stick with some Bitcoin on it.
  - nicky0 8y ago
    Bitcoin (small c)
    - codebolt 8y ago
      Fixed
  - deegles 8y ago
    This is a weakly held belief but I feel it’s risky to buy gold for long term holding because asteroid mining will render it cheap and abundant in my lifetime. :)
    - coldtea 8y ago
      Forget "asteroid mining" in our lifetime (and the next 2-3 as well).
      - coldtea 8y ago
        "But I want it to happen, so it must" --> downvote.
    - madshiva 8y ago
      It's like saying soon the gold will worth nothing because my alchemical guy will finally make the philosopher's stone. Asteroid mining will have a cost and therefore not will be render it totally cheap… or green. Bitcoin is neither green or worth anything, it's just in the head of people.
- Nasrudith 8y ago
  Reminds me of the snide economic distinction about gold. Unless you are doing work with gold as a raw material it isn't an investment but speculation. Even investing five hundred dollars for a day into Walmart is more investment as it enables short term production and utility creation of some sort - even if it is just getting a bag of potato chips at 3am. Gold or bitcoin in this case just sits there.
Sir_Substance 8y ago
>But I'm afraid that almost all of the price increase is simply a hype/speculation/hold-cycle that inevitable never will survive. People do get very fixated on the price. Anyone who bought into bitcoin at 16k or whatever is probably screwed at this point. If I were to guess on a long term settling price for bitcoin, I would place it somewhere between $400 and $4000 against the value of todays dollar. Interestingly, it doesn't really impact me at all. I have a modest mining rig that brings in about $30 a month in random altcoins that I swap to either bitcoin or litecoin depending on where transaction fees are at. I then use that to buy stuff off aliexpress. That $30 is going out at about the same speed it's coming in so it doesn't really matter to me what the current price is. If the price goes up, more miners join and I get numerically less crypto but about the same value, and it goes the other direction if the price goes down.
- jfk13 8y ago
  > somewhere between $400 and $4000 against the value of todays dollar Just curious, do you have any rational basis whatsoever for that range? Why not $4? Or $40000? Is the price entirely arbitrary, and if not, what is it based on?
  - Sir_Substance 8y ago
    It's not arbitrary but nor is it very scientific. It's an informed guess from an interested punter. The last time I heard figures, it cost around $3300 in electricity for a given mining farm to mine a bitcoin on average. That cost will go up and down based on the number of people mining but in my observation the cost of mining is usually pretty close to the value of a bitcoin. I can't prove that that isn't coincidence, but to me it makes sense. If the value of bitcoins goes up, people will online mining farms as it becomes profitable in areas with more expensive electricity, and the difficulty will go up. If the price drops, people offline their mining farms. On the other hand, the approximate cost of mining a bitcoin is public knowledge since the current block difficulty is public knowledge. Anyone buying large amounts of bitcoin can make very accurate estimates of a miners profit margins with nothing more than the miners IP address and the block difficulty, which puts miners on the back foot for negotiation. When it comes to the profit margin of miners, one component is the electricity price, but the other is amortizing the cost of the mining hardware. Graphics cards are relatively cheap ($200-800 depending), but ASICs can go for upwards of $12000-$15000. As the number of mining farms goes up, the pressure on mining hardware manufacturers to maintain a steady supply of mining hardware increases. If they cannot do so, the cost of replacement mining hardware increases and starts to eat into profits. If the supply gets too short, the cost of replacing the hardware can become so high that the real profit post-amortization is flagrantly not worth the effort, particularly in places with expensive electricity. Miners who are in it for the money usually want to see their profit completely amortize the cost of their hardware within three months of buying it. If it takes longer than that, you're straight up gambling that the current price won't drop before you can make a profit. GPU miners also often replace their cards on a 3 month cycle and sell the second hand ones on for gamers to use, which helps with the amortization situation. My spitball estimate is that if ASICs remain dominant, $4000/BTC is the equilibrium point of it being profitable in some places but not others and the number of miners balancing the supply and cost of ASICs such that ASICs can be replaced at a steady rate without supply problems and still pay for themselves before they burn out or become obsolete due to a new generation of ASICs being developed. $400 is the same spitball estimate, but assuming that ASICs fall out of favor, the difficulty drops, and all those etherium GPU rigs start moonlighting with bitcoin on the side.
Eliezer 8y ago
Assets being priced proportionally to their currently-generated use-value isn’t how efficient markets work even in principle. If that were so, you could make predictable profits just by buying anything whose current adoption was currently on a predictable upward trend. An asset’s present price is first and foremost an estimate of its future price. As Andrew Critch put it, the reason the stock market is hard to predict is that it’s a prediction.
- scraegg 8y ago
  Why would someone even say something like this? There are multiple models of how pricing works. Models at their core are incorrect because they simplify a complex thing to something that can be used for predictions. They are good models when they help your predict correctly and they are bad models if they can't help you make predictions. But all are "wrong" on purpose. Therefore there must be different models because people want to predict different things. And of course neither of them is how things really work. "this is not how X works" doesn't need to be said, because yes that's the idea of using models. Otherwise you wouldn't use models. "this is not how it works in principle" assumes that there is no model that would claim previously said statement. And since you can create unlimited amounts of models of course you can very often construct a model where the statement works. I suggest instead of claiming such a thing it might be more interesting to think about how such a model would help more or less to predict things. PS: I believe The Intelligent Investor or how that book was called and a social model called Communism are both promoting models that connect use-value to price-value. So it's not even far fetched. It's a very common thesis for discussing pricing of investments.
nemild 8y ago
People in early spaces dream about mainstream use cases (kill credit cards, fix online payments), but killer early use cases are often randomly found. They're the ones most poorly served by the current market. You need the extreme use cases like reducing the risk of hyper inflation early on, when the product is so raw, much like you might have with the first PC: > [In the early PC days], Steve Jobs initially pitched the personal computer as a way to store recipes. It took years for the first killer use case, spreadsheets in the guise of VisiCalc, to appear. https://www.nemil.com/crypto/rationally-irrational.html https://www.nemil.com/crypto/rationally-irrational.html
- notahacker 8y ago
  The obvious difference with Jobs' pitch or the breezy nineties hype about the world wide web ("information superhighway" was essentially: "a really big, fast library") is that they undersold the potential, even on the hardware of the time. VisiCalc launched the year after Sequoia invested in Apple... By contrast, we've been assured that blockchain is going to fix transactions, financial asset storage, security, contract law, corporate governance, fundraising, logistics, bad government and hyperinflations that haven't actually happened and what we've actually got to show for the last decade is speculative assets some people use to make money off other speculators via means which sometimes look suspiciously like hyperinflation and a much smaller number of people to circumvent money transmission laws. (And the problem certainly isn't that we haven't got the hardware to support it or any means for blockchain enthusiasts to connect with other blockchain enthusiasts)
  - nemild 8y ago
    I spend so much of my time on media literacy issues, and one thing I'd be careful of: most of these prognostications you cite should really be considered marketing. They are not thoughtful views of cryptocurrency. If you're a software developer, I'd really dismiss lots of what you read about new technology, whether it be crypto or MongoDB. Here's my media literacy guide for software engineers: https://github.com/nemild/hack-the-media/blob/master/software-engineers-media-guide.md https://github.com/nemild/hack-the-media/blob/master/softwar... (It's kinda fun to realize that by getting excited about cryptocurrency, I also got excited about the financial incentives behind the media ecosystem) Also, be careful about throwing the baby (unfounded hype and speculation and charlatanism) with the bathwater (programmable money, open financial systems, digital scarcity).

bernardlunn 8y ago

You missed one use case which is digital gold, which accounts for most of the price.

aedron 8y ago
I used to dismiss this view, because it seems so impropable that an arbitrary digital asset would be able to fill a role like gold. But it does seem to be happening, and I am coming around to the idea. What is gold after all but a commonly agreed upon medium of value transfer, suitable because of scarcity and divisability, but other than that rather arbitrary too. If enough people decide that bitcoin is a good medium, then so it will be, and that momentum itself will keep it that way. And bitcoin does have a lot of attributes that make it suitable. There is a lot of money looking for a place to go and be safe (from loss and inflation). There are very few 'pure' ways to simply store that value, even gold is difficult to invest in, at least if you want actual ownership and not merely a promissory note. Bitcoin (or another cryptocurrency) could be one of these ways.
- the_gastropod 8y ago
  > ...because of scarcity and ... I have a hard time understanding digital scarcity. Bitcoins are scarce with respect to "the" Bitcoin network, but there's nothing preventing someone from forking or starting their own clone of the entire system. While that new chain would be missing all the historic transactions of the original, is that meaningful in any important way with respect to scarcity? The number of cells in an Excel spreadsheet are also finite, but we don't tend to impart value on them. And it's trivial to create a new spreadsheet with a whole new set of cells. What am I missing?
  - panarky 8y ago
    > nothing preventing someone from forking ... Bitcoin code has been forked thousands of times. Only a few forks survive today, and those are worth a small fraction of the original. That's because Bitcoin, like all money, is a social construct. It's an idea and belief shared among many people. Bitcoin, like all money, has no intrinsic value, but derives value from the network of people who find it useful. It's much more difficult to fork a network of people and shared beliefs than it is to fork the code. And I'll preempt the inevitable argument that dollars and renminbi are backed by the military, or by taxes, or by central banks, etc. That's all hogwash. Money isn't backed by anything other than shared belief and the promises we make to each other.
    - the_gastropod 8y ago
      Hah! I think you'll be surprised to hear: I agree with you! But my question was about Bitcoin's comparison to gold, specifically with respect to its scarcity.
- jfk13 8y ago
  So far, I'd say there's little evidence that bitcoin is a safe place to store large amounts of money.
codebolt 8y ago
The perceived value of gold as a store of value comes in part from the fact that humans have been using it as a means of trade/store of value across a vast span of cultures for many millenia. Bitcoin has been around for 8 years. With Bitcoin there is no guarantee that competing technologies won't spring up to replace it in the mid- to long-term. Gold will always be gold. Also, gold is shiny. Personally, I'd much rather have a gold bar in my safe, that I could take out and hold in my hands, than a memory stick with some Bitcoin on it.
- nicky0 8y ago
  Bitcoin (small c)
  - codebolt 8y ago
    Fixed
- deegles 8y ago
  This is a weakly held belief but I feel it’s risky to buy gold for long term holding because asteroid mining will render it cheap and abundant in my lifetime. :)
  - coldtea 8y ago
    Forget "asteroid mining" in our lifetime (and the next 2-3 as well).
    - coldtea 8y ago
      "But I want it to happen, so it must" --> downvote.
  - madshiva 8y ago
    It's like saying soon the gold will worth nothing because my alchemical guy will finally make the philosopher's stone. Asteroid mining will have a cost and therefore not will be render it totally cheap… or green. Bitcoin is neither green or worth anything, it's just in the head of people.
Nasrudith 8y ago
Reminds me of the snide economic distinction about gold. Unless you are doing work with gold as a raw material it isn't an investment but speculation. Even investing five hundred dollars for a day into Walmart is more investment as it enables short term production and utility creation of some sort - even if it is just getting a bag of potato chips at 3am. Gold or bitcoin in this case just sits there.

Sir_Substance 8y ago

>But I'm afraid that almost all of the price increase is simply a hype/speculation/hold-cycle that inevitable never will survive. People do get very fixated on the price. Anyone who bought into bitcoin at 16k or whatever is probably screwed at this point. If I were to guess on a long term settling price for bitcoin, I would place it somewhere between $400 and $4000 against the value of todays dollar. Interestingly, it doesn't really impact me at all. I have a modest mining rig that brings in about $30 a month in random altcoins that I swap to either bitcoin or litecoin depending on where transaction fees are at. I then use that to buy stuff off aliexpress. That $30 is going out at about the same speed it's coming in so it doesn't really matter to me what the current price is. If the price goes up, more miners join and I get numerically less crypto but about the same value, and it goes the other direction if the price goes down.

jfk13 8y ago
> somewhere between $400 and $4000 against the value of todays dollar Just curious, do you have any rational basis whatsoever for that range? Why not $4? Or $40000? Is the price entirely arbitrary, and if not, what is it based on?
- Sir_Substance 8y ago
  It's not arbitrary but nor is it very scientific. It's an informed guess from an interested punter. The last time I heard figures, it cost around $3300 in electricity for a given mining farm to mine a bitcoin on average. That cost will go up and down based on the number of people mining but in my observation the cost of mining is usually pretty close to the value of a bitcoin. I can't prove that that isn't coincidence, but to me it makes sense. If the value of bitcoins goes up, people will online mining farms as it becomes profitable in areas with more expensive electricity, and the difficulty will go up. If the price drops, people offline their mining farms. On the other hand, the approximate cost of mining a bitcoin is public knowledge since the current block difficulty is public knowledge. Anyone buying large amounts of bitcoin can make very accurate estimates of a miners profit margins with nothing more than the miners IP address and the block difficulty, which puts miners on the back foot for negotiation. When it comes to the profit margin of miners, one component is the electricity price, but the other is amortizing the cost of the mining hardware. Graphics cards are relatively cheap ($200-800 depending), but ASICs can go for upwards of $12000-$15000. As the number of mining farms goes up, the pressure on mining hardware manufacturers to maintain a steady supply of mining hardware increases. If they cannot do so, the cost of replacement mining hardware increases and starts to eat into profits. If the supply gets too short, the cost of replacing the hardware can become so high that the real profit post-amortization is flagrantly not worth the effort, particularly in places with expensive electricity. Miners who are in it for the money usually want to see their profit completely amortize the cost of their hardware within three months of buying it. If it takes longer than that, you're straight up gambling that the current price won't drop before you can make a profit. GPU miners also often replace their cards on a 3 month cycle and sell the second hand ones on for gamers to use, which helps with the amortization situation. My spitball estimate is that if ASICs remain dominant, $4000/BTC is the equilibrium point of it being profitable in some places but not others and the number of miners balancing the supply and cost of ASICs such that ASICs can be replaced at a steady rate without supply problems and still pay for themselves before they burn out or become obsolete due to a new generation of ASICs being developed. $400 is the same spitball estimate, but assuming that ASICs fall out of favor, the difficulty drops, and all those etherium GPU rigs start moonlighting with bitcoin on the side.

Eliezer 8y ago

Assets being priced proportionally to their currently-generated use-value isn’t how efficient markets work even in principle. If that were so, you could make predictable profits just by buying anything whose current adoption was currently on a predictable upward trend. An asset’s present price is first and foremost an estimate of its future price. As Andrew Critch put it, the reason the stock market is hard to predict is that it’s a prediction.

scraegg 8y ago
Why would someone even say something like this? There are multiple models of how pricing works. Models at their core are incorrect because they simplify a complex thing to something that can be used for predictions. They are good models when they help your predict correctly and they are bad models if they can't help you make predictions. But all are "wrong" on purpose. Therefore there must be different models because people want to predict different things. And of course neither of them is how things really work. "this is not how X works" doesn't need to be said, because yes that's the idea of using models. Otherwise you wouldn't use models. "this is not how it works in principle" assumes that there is no model that would claim previously said statement. And since you can create unlimited amounts of models of course you can very often construct a model where the statement works. I suggest instead of claiming such a thing it might be more interesting to think about how such a model would help more or less to predict things. PS: I believe The Intelligent Investor or how that book was called and a social model called Communism are both promoting models that connect use-value to price-value. So it's not even far fetched. It's a very common thesis for discussing pricing of investments.

nemild 8y ago

People in early spaces dream about mainstream use cases (kill credit cards, fix online payments), but killer early use cases are often randomly found. They're the ones most poorly served by the current market. You need the extreme use cases like reducing the risk of hyper inflation early on, when the product is so raw, much like you might have with the first PC: > [In the early PC days], Steve Jobs initially pitched the personal computer as a way to store recipes. It took years for the first killer use case, spreadsheets in the guise of VisiCalc, to appear. https://www.nemil.com/crypto/rationally-irrational.html https://www.nemil.com/crypto/rationally-irrational.html

notahacker 8y ago
The obvious difference with Jobs' pitch or the breezy nineties hype about the world wide web ("information superhighway" was essentially: "a really big, fast library") is that they undersold the potential, even on the hardware of the time. VisiCalc launched the year after Sequoia invested in Apple... By contrast, we've been assured that blockchain is going to fix transactions, financial asset storage, security, contract law, corporate governance, fundraising, logistics, bad government and hyperinflations that haven't actually happened and what we've actually got to show for the last decade is speculative assets some people use to make money off other speculators via means which sometimes look suspiciously like hyperinflation and a much smaller number of people to circumvent money transmission laws. (And the problem certainly isn't that we haven't got the hardware to support it or any means for blockchain enthusiasts to connect with other blockchain enthusiasts)
- nemild 8y ago
  I spend so much of my time on media literacy issues, and one thing I'd be careful of: most of these prognostications you cite should really be considered marketing. They are not thoughtful views of cryptocurrency. If you're a software developer, I'd really dismiss lots of what you read about new technology, whether it be crypto or MongoDB. Here's my media literacy guide for software engineers: https://github.com/nemild/hack-the-media/blob/master/software-engineers-media-guide.md https://github.com/nemild/hack-the-media/blob/master/softwar... (It's kinda fun to realize that by getting excited about cryptocurrency, I also got excited about the financial incentives behind the media ecosystem) Also, be careful about throwing the baby (unfounded hype and speculation and charlatanism) with the bathwater (programmable money, open financial systems, digital scarcity).