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Looked at in another way, think of Bitcoin as something more like MMORPG loot. If people are willing to spend vast amounts of "real money" on items for their Wo

Looked at in another way, think of Bitcoin as something more like MMORPG loot. If people are willing to spend vast amounts of "real money" on items for their WoW character, spending that money on Bitcoins instead makes it seem like a sane investment rather than just flushing it away. What is the intrinsic value of Bitcoins, then? That people are willing to spend money on Bitcoins? As an investment vehicle these are terrible. Commodities (diamonds, zinc, gold, wheat, oil, etc.) will always be demanded as factors of industrial production or farming. Equities generate real-world wealth for investors in the form of dividends. Both are demanded because they generate real value for investors. Bitcoins have no intrinsic value. If you're in to make a quick buck, that's fine--this is a big arbitrage opportunity. But for any decently-sized time T, Bitcoins --> $0 as t --> T.

mcantelon 15y ago
>Bitcoins have no intrinsic value. Part of the value is in their utility as an anonymous currency: try taxing the guy that's paid in Bitcoins. Another part is the integrity of the currency: the currency is backed by math, rather than men, and not subject to hyperinflation resulting from corruption (i.e. the US Fed can create money out of thin air, but there is no authority that can create Bitcoins out of thin air: they must be mined).
- achompas 15y ago
  I didn't downvote you, (I don't think I'm allowed to!) but the "US Fed" (the Federal Reserve) does not simply add $X million to the money supply--it actually purchases Treasury bills on the open market. The net transaction is $0 (an exchange of currency for T-bills of equal value), but the market now contains more paper money. Meanwhile, I've already discussed Bitcoin's potential as an alternative currency (or lack thereof) in other comments. If people demand Bitcoins as a "tax haven" from the government, then Bitcoins aren't long for this world.
  - mcantelon 15y ago
    >The net transaction is $0 (an exchange of currency for T-bills of equal value), but the market now contains more paper money. Whatever the mechanism, fiat currencies are subject to inflation through the pressure of an ever-increasing money supply. >If people demand Bitcoins as a "tax haven" from the government, then Bitcoins aren't long for this world. It'll be interesting to see how the state tackles this. It'll be easy to drive it underground, but preventing its use will be another matter. Bitcoin transactions through a VPN seem hard to prevent.
    - achompas 15y ago
      Whatever the mechanism, fiat currencies are subject to inflation through the pressure of an ever-increasing money supply. As they should be, given that populations increase. Anyway, even if Bitcoins go underground, they'd have to be priced such that they'd be cheaper than other money laundering channels. Due to their finite supply, though, money laundering through Bitcoins will get very expensive. So their utility re: taxes will be squashed by either the government or the black market.
      - nkassis 15y ago
        I think this is a very important thing that people don't understand. Static money supply in a world where as you point it out population increases means deflation. And increasing popluation is only one example of the need for inflation. We create wealth all the time, people in other countries are buying their first car etc... the more goods are purchases and sold the more money you need. At least that's what I understand from my couple Economics classes.
        mobileman 15y ago
        Bitcoins are divisible, so everyone's share gets smaller
      - sigil 15y ago
        > As they should be, given that populations increase. Is the U.S. Population increasing like this? [1] That's what the U.S. monetary supply looks like. More correctly, fiat money supply should ideally match total economic output, not population. But the GDP graph also doesn't look anything like that monetary supply graph. Given this, the BitCoin phenomenon is understandable: savers are looking for a currency that's not subject to manipulation and is most of all predictable in terms of supply. Whether or not it succeeds, I'm glad there's the pressure of a competing, not-centrally-manipulated currency. [1] http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=AMBNS http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D...
  - beagle3 15y ago
    > The net transaction is $0 (an exchange of currency for T-bills of equal value) That is only true if T-bills are generated slower than the rise of other money instruments. In the last few years, that has not been the case (and evidence for that is seen in the tanking dollar value compared to any other currency, including gold).
- anamax 15y ago
  > Part of the value is in their utility as an anonymous currency: try taxing the guy that's paid in Bitcoins. Easy - I collect taxes at the point where physical goods are exchanged for bitcoins or are used to deliver products. If you can't use bitcoins for food, housing, netaccess, or energy....
  - cube13 15y ago
    >Easy - I collect taxes at the point where physical goods are exchanged for bitcoins or are used to deliver products. Or just collect the taxes at the point where it's converted from BTC to a real, government-backed currency. It's simpler, because there needs to be a paper trail there.
  - mcantelon 15y ago
    >Easy - I collect taxes at the point where physical goods are exchanged for bitcoins or are used to deliver products. The state does this, but people already get around this by conducting cash transactions. Bitcoin creates another option for this.
    - anamax 15y ago
      > The state does this, but people already get around this by conducting cash transactions. Bitcoin creates another option for this. Govts tolerate a certain amount of black market because it costs too much to reduce the black market to 0. However, that toleration goes away when govts are seriously hurting for revenue.
- rmc 15y ago
  Easy. Lock the guy in prison till be pays you what you think you are owed.
- rprasad 15y ago
  The taxation of non-cash income has been a settled issue for decades (in the US). They would tax Bitcoin receipts the same way they tax service-for-service or service-for-property exchanges. The government will calculate the fair market value of the services/property received at $X dollars (based on facts and circumstances such as the amount exchanged in similar cash-based transactions), deem the taxpayer to have received $X in income, and impose a tax of $Y on that deemed income.
  - _arturh 15y ago
    You forgot the part where the gov doesn't know how much Bitcoin you received.
    - mobileman 15y ago
      Until you convert to a currency that enables you to drink alcohol..
- georgemcbay 15y ago
  "try taxing the guy that's paid in Bitcoins" ...try hiring the guy who is willing to be paid in Bitcoins.
johno215 15y ago
Modern (post gold standard) currencies have no intrinsic value either. Their only value is that people think they have value.
- achompas 15y ago
  Well it's more than people--my government believes the US dollar has value too, and it's willing to insure my bank accounts as a result. That's a hell of a vote of confidence.
  - glenra 15y ago
    > my government believes the US dollar has value too, and it's willing to insure my bank accounts as a result. That's a hell of a vote of confidence. Really? When dollars were "silver certificates" the bank's willingness to let you come collect your silver was a real vote of confidence in the currency. But nowadays if they "insure your bank account" they only pay you back in dollars. They're insuring that its value doesn't drop in dollars. How does that constitute a vote of confidence in the currency itself? I'd say it's only a vote of confidence in (a) the bank, (b) the government's ability to print more money, (c) the government's ability to tax.
  - kragen 15y ago
    There are several confusions in your short post. First, assuming you're talking about the US, your bank accounts are insured by the FDIC, and the FDIC is not part of or formally backed by the US government. There are lots of people who believe that if the FDIC were in danger of bankruptcy, the US government would step in to support it — as it did with Fannie Mae and Freddie Mac — but until the government actually promises to do that, you can't call it a "vote of confidence". Second, the US government's dollar position is short, not long — its dollar-denominated debts are greater than its dollar-denominated assets. In financial terms, a short position is a way to bet against the value of the underlying commodity. The US government is currently about $7 million million dollars "short". An illustration may help to clarify. Suppose you are a private in the Zimbabwean military in September 2007. Suppose your monthly pay is about US$180, but you are paid in Zimbabwean dollars, so your pay packet is actually Z$5.4 million for the month. The Zimbabwean dollar has been hyperinflating, and you expect it to continue to lose value. You don't currently need to pay any expenses. Consider the following options: A. Keep the Z$5.4 million in cash. B. Immediately buy other commodities with it; for example, buy 300 kilograms of rice and store it in Tupperware in the pantry. C. Immediately buy other commodities with it, and also borrow an additional Z$10 million some poor sucker is willing to lend you at an extortionate 20% APR, and use that to buy rice too. Option "A" is maintaining a "long" position in the Zimbabwean dollar. This amounts to a bet that the Z$ will retain its value. If you had taken this option, you would have lost 90% of your salary within a few weeks. Option "B" is maintaining no position in the Zimbabwean dollar. It doesn't matter what the Zimbabwean dollar does thereafter; you still have the same amount of rice. (Practically speaking, in situations like this, there tend to be price controls on most things you can buy with the collapsing currency.) Option "C" is maintaining a "short" position in the Zimbabwean dollar. If you had somehow found such a sucker, then within a few weeks, you could have paid them back by selling off a tiny percentage of the rice you bought, as the Zimbabwean dollar continued to inflate. This is the position the US government has taken relative to the US dollar. There are, of course, other reasons to take long or short positions on commodities other than speculation on their future value. Third, even if we accept the premise that the implicit guarantee of the US government to keep the FDIC afloat amounts to "the US government is willing to insure my bank accounts", that is simply a further short position. FDIC insurance is for dollar-denominated accounts up to a fixed dollar limit. Whoever is on the hook to underwrite that insurance in the end, they'll have an easier time paying out their claims if the US dollar loses value. If your bank account has $78000 in it and the currency loses ¾ of its value (which happened here in 2001), the FDIC bailout only has to come up with the current equivalent of $19500 to pay you back. Fourth, the government is not "more than people". It's just people.
beagle3 15y ago
> Bitcoins have no intrinsic value. Gold has very little - it is used in jewelery, CDR coating, teeth and a few other industries -- but you can't live in it, nor can you eat it. Beans have more intrinsic value than gold of the same weight.... Yet, no one doubts gold as a currency. The main, strike that, ONLY, relevant feature of a currency is the willingness of others to exchange stuff for it. At this point in time, bitcoin possesses this feature.
- achompas 15y ago
  Can you exchange your bitcoins for gold or beans? Because right now, bitcoin purchasing power amounts to a hill of beans. Gold is a commodity, not a currency. It is a scarce commodity that is highly demanded as a part of luxury goods. Thus, it commands a high price on the open market. Beans are also commodities, but they are plentiful. Bean demand is easily met, so they're not priced very highly. Bitcoins are not production inputs, so their only value is (ostensibly) as an alternative fiat money or value store. Unlike country-backed fiat money, you cannot exchange bitcoins for goods, so the only demand for bitcoins comes from people "investing" in them. If you want to play the bitcoin market, that's fine--in that case, you're generating wealth for yourself. Not value.
  - richcollins 15y ago
    But you can exchange your bitcoins for goods: http://www.theatlantic.com/technology/archive/2011/06/libertarian-dream-a-site-where-you-buy-drugs-with-digital-dollars/239776/ http://www.theatlantic.com/technology/archive/2011/06/libert...
  - beagle3 15y ago
    > Can you exchange your bitcoins for gold or beans? At this point in time, you can. Next week, that might not be true. But the same could be said of the currency of Belarus, which was devalued 50% overnight last week (the USD in 1931 suffered the same fate after physical gold was confiscated). Which is all that is required to make it a currency. > Gold is a commodity, not a currency. It is a scarce commodity that is highly demanded as a part of luxury goods. Thus, it commands a high price on the open market. :) That's a game of semantics. Gold's current price has little to do with its luxury good status, and everything to do with its scarcity and historical claim to fame as a currency. That was historically gold's role in the last 3000 years or so, and it hasn't been dethroned yet. > Unlike country-backed fiat money, you cannot exchange bitcoins for goods But you can. And people around the world are not accepting USD as much as they used to 20 years ago - in the past, in most middle eastern and south american countries, you were able to pay with US dollars everywhere. That is no longer true. Does that make the fiat US dollar less of a currency? You can play semantics all you want, but gold and to some extent silver are used as currencies.

mcantelon 15y ago

>Bitcoins have no intrinsic value. Part of the value is in their utility as an anonymous currency: try taxing the guy that's paid in Bitcoins. Another part is the integrity of the currency: the currency is backed by math, rather than men, and not subject to hyperinflation resulting from corruption (i.e. the US Fed can create money out of thin air, but there is no authority that can create Bitcoins out of thin air: they must be mined).

achompas 15y ago
I didn't downvote you, (I don't think I'm allowed to!) but the "US Fed" (the Federal Reserve) does not simply add $X million to the money supply--it actually purchases Treasury bills on the open market. The net transaction is $0 (an exchange of currency for T-bills of equal value), but the market now contains more paper money. Meanwhile, I've already discussed Bitcoin's potential as an alternative currency (or lack thereof) in other comments. If people demand Bitcoins as a "tax haven" from the government, then Bitcoins aren't long for this world.
- mcantelon 15y ago
  >The net transaction is $0 (an exchange of currency for T-bills of equal value), but the market now contains more paper money. Whatever the mechanism, fiat currencies are subject to inflation through the pressure of an ever-increasing money supply. >If people demand Bitcoins as a "tax haven" from the government, then Bitcoins aren't long for this world. It'll be interesting to see how the state tackles this. It'll be easy to drive it underground, but preventing its use will be another matter. Bitcoin transactions through a VPN seem hard to prevent.
  - achompas 15y ago
    Whatever the mechanism, fiat currencies are subject to inflation through the pressure of an ever-increasing money supply. As they should be, given that populations increase. Anyway, even if Bitcoins go underground, they'd have to be priced such that they'd be cheaper than other money laundering channels. Due to their finite supply, though, money laundering through Bitcoins will get very expensive. So their utility re: taxes will be squashed by either the government or the black market.
    - nkassis 15y ago
      I think this is a very important thing that people don't understand. Static money supply in a world where as you point it out population increases means deflation. And increasing popluation is only one example of the need for inflation. We create wealth all the time, people in other countries are buying their first car etc... the more goods are purchases and sold the more money you need. At least that's what I understand from my couple Economics classes.
      - mobileman 15y ago
        Bitcoins are divisible, so everyone's share gets smaller
    - sigil 15y ago
      > As they should be, given that populations increase. Is the U.S. Population increasing like this? [1] That's what the U.S. monetary supply looks like. More correctly, fiat money supply should ideally match total economic output, not population. But the GDP graph also doesn't look anything like that monetary supply graph. Given this, the BitCoin phenomenon is understandable: savers are looking for a currency that's not subject to manipulation and is most of all predictable in terms of supply. Whether or not it succeeds, I'm glad there's the pressure of a competing, not-centrally-manipulated currency. [1] http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=AMBNS http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D...
- beagle3 15y ago
  > The net transaction is $0 (an exchange of currency for T-bills of equal value) That is only true if T-bills are generated slower than the rise of other money instruments. In the last few years, that has not been the case (and evidence for that is seen in the tanking dollar value compared to any other currency, including gold).
anamax 15y ago
> Part of the value is in their utility as an anonymous currency: try taxing the guy that's paid in Bitcoins. Easy - I collect taxes at the point where physical goods are exchanged for bitcoins or are used to deliver products. If you can't use bitcoins for food, housing, netaccess, or energy....
- cube13 15y ago
  >Easy - I collect taxes at the point where physical goods are exchanged for bitcoins or are used to deliver products. Or just collect the taxes at the point where it's converted from BTC to a real, government-backed currency. It's simpler, because there needs to be a paper trail there.
- mcantelon 15y ago
  >Easy - I collect taxes at the point where physical goods are exchanged for bitcoins or are used to deliver products. The state does this, but people already get around this by conducting cash transactions. Bitcoin creates another option for this.
  - anamax 15y ago
    > The state does this, but people already get around this by conducting cash transactions. Bitcoin creates another option for this. Govts tolerate a certain amount of black market because it costs too much to reduce the black market to 0. However, that toleration goes away when govts are seriously hurting for revenue.
rmc 15y ago
Easy. Lock the guy in prison till be pays you what you think you are owed.
rprasad 15y ago
The taxation of non-cash income has been a settled issue for decades (in the US). They would tax Bitcoin receipts the same way they tax service-for-service or service-for-property exchanges. The government will calculate the fair market value of the services/property received at $X dollars (based on facts and circumstances such as the amount exchanged in similar cash-based transactions), deem the taxpayer to have received $X in income, and impose a tax of $Y on that deemed income.
- _arturh 15y ago
  You forgot the part where the gov doesn't know how much Bitcoin you received.
  - mobileman 15y ago
    Until you convert to a currency that enables you to drink alcohol..
georgemcbay 15y ago
"try taxing the guy that's paid in Bitcoins" ...try hiring the guy who is willing to be paid in Bitcoins.

johno215 15y ago

Modern (post gold standard) currencies have no intrinsic value either. Their only value is that people think they have value.

achompas 15y ago
Well it's more than people--my government believes the US dollar has value too, and it's willing to insure my bank accounts as a result. That's a hell of a vote of confidence.
- glenra 15y ago
  > my government believes the US dollar has value too, and it's willing to insure my bank accounts as a result. That's a hell of a vote of confidence. Really? When dollars were "silver certificates" the bank's willingness to let you come collect your silver was a real vote of confidence in the currency. But nowadays if they "insure your bank account" they only pay you back in dollars. They're insuring that its value doesn't drop in dollars. How does that constitute a vote of confidence in the currency itself? I'd say it's only a vote of confidence in (a) the bank, (b) the government's ability to print more money, (c) the government's ability to tax.
- kragen 15y ago
  There are several confusions in your short post. First, assuming you're talking about the US, your bank accounts are insured by the FDIC, and the FDIC is not part of or formally backed by the US government. There are lots of people who believe that if the FDIC were in danger of bankruptcy, the US government would step in to support it — as it did with Fannie Mae and Freddie Mac — but until the government actually promises to do that, you can't call it a "vote of confidence". Second, the US government's dollar position is short, not long — its dollar-denominated debts are greater than its dollar-denominated assets. In financial terms, a short position is a way to bet against the value of the underlying commodity. The US government is currently about $7 million million dollars "short". An illustration may help to clarify. Suppose you are a private in the Zimbabwean military in September 2007. Suppose your monthly pay is about US$180, but you are paid in Zimbabwean dollars, so your pay packet is actually Z$5.4 million for the month. The Zimbabwean dollar has been hyperinflating, and you expect it to continue to lose value. You don't currently need to pay any expenses. Consider the following options: A. Keep the Z$5.4 million in cash. B. Immediately buy other commodities with it; for example, buy 300 kilograms of rice and store it in Tupperware in the pantry. C. Immediately buy other commodities with it, and also borrow an additional Z$10 million some poor sucker is willing to lend you at an extortionate 20% APR, and use that to buy rice too. Option "A" is maintaining a "long" position in the Zimbabwean dollar. This amounts to a bet that the Z$ will retain its value. If you had taken this option, you would have lost 90% of your salary within a few weeks. Option "B" is maintaining no position in the Zimbabwean dollar. It doesn't matter what the Zimbabwean dollar does thereafter; you still have the same amount of rice. (Practically speaking, in situations like this, there tend to be price controls on most things you can buy with the collapsing currency.) Option "C" is maintaining a "short" position in the Zimbabwean dollar. If you had somehow found such a sucker, then within a few weeks, you could have paid them back by selling off a tiny percentage of the rice you bought, as the Zimbabwean dollar continued to inflate. This is the position the US government has taken relative to the US dollar. There are, of course, other reasons to take long or short positions on commodities other than speculation on their future value. Third, even if we accept the premise that the implicit guarantee of the US government to keep the FDIC afloat amounts to "the US government is willing to insure my bank accounts", that is simply a further short position. FDIC insurance is for dollar-denominated accounts up to a fixed dollar limit. Whoever is on the hook to underwrite that insurance in the end, they'll have an easier time paying out their claims if the US dollar loses value. If your bank account has $78000 in it and the currency loses ¾ of its value (which happened here in 2001), the FDIC bailout only has to come up with the current equivalent of $19500 to pay you back. Fourth, the government is not "more than people". It's just people.

beagle3 15y ago

> Bitcoins have no intrinsic value. Gold has very little - it is used in jewelery, CDR coating, teeth and a few other industries -- but you can't live in it, nor can you eat it. Beans have more intrinsic value than gold of the same weight.... Yet, no one doubts gold as a currency. The main, strike that, ONLY, relevant feature of a currency is the willingness of others to exchange stuff for it. At this point in time, bitcoin possesses this feature.

achompas 15y ago
Can you exchange your bitcoins for gold or beans? Because right now, bitcoin purchasing power amounts to a hill of beans. Gold is a commodity, not a currency. It is a scarce commodity that is highly demanded as a part of luxury goods. Thus, it commands a high price on the open market. Beans are also commodities, but they are plentiful. Bean demand is easily met, so they're not priced very highly. Bitcoins are not production inputs, so their only value is (ostensibly) as an alternative fiat money or value store. Unlike country-backed fiat money, you cannot exchange bitcoins for goods, so the only demand for bitcoins comes from people "investing" in them. If you want to play the bitcoin market, that's fine--in that case, you're generating wealth for yourself. Not value.
- richcollins 15y ago
  But you can exchange your bitcoins for goods: http://www.theatlantic.com/technology/archive/2011/06/libertarian-dream-a-site-where-you-buy-drugs-with-digital-dollars/239776/ http://www.theatlantic.com/technology/archive/2011/06/libert...
- beagle3 15y ago
  > Can you exchange your bitcoins for gold or beans? At this point in time, you can. Next week, that might not be true. But the same could be said of the currency of Belarus, which was devalued 50% overnight last week (the USD in 1931 suffered the same fate after physical gold was confiscated). Which is all that is required to make it a currency. > Gold is a commodity, not a currency. It is a scarce commodity that is highly demanded as a part of luxury goods. Thus, it commands a high price on the open market. :) That's a game of semantics. Gold's current price has little to do with its luxury good status, and everything to do with its scarcity and historical claim to fame as a currency. That was historically gold's role in the last 3000 years or so, and it hasn't been dethroned yet. > Unlike country-backed fiat money, you cannot exchange bitcoins for goods But you can. And people around the world are not accepting USD as much as they used to 20 years ago - in the past, in most middle eastern and south american countries, you were able to pay with US dollars everywhere. That is no longer true. Does that make the fiat US dollar less of a currency? You can play semantics all you want, but gold and to some extent silver are used as currencies.