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The problem with all fiat currencies is they have no inherent value; it is all in the eye of the beholder. So what is an "appropriate" price is quite difficult

by Jd 14y ago

The problem with all fiat currencies is they have no inherent value; it is all in the eye of the beholder. So what is an "appropriate" price is quite difficult to determine. Most currencies are driven by being effective monopolies wherever they are issued, so the market price remains somewhat stable. Even so, many professional economists have opined that the exchange rates even between major currencies are way too volatile. This is, among other things, because there is a whole lot of loose money floating around that can easily jump between currencies. We are probably going to see a lot more of this in the Bitcoin world, which I expect has a lot more volatility ahead of it -- somewhat ironically in this case, as the increased liquidity promotes volatility, since it becomes an instrument of pure speculation that was previously too difficult for professional traders to deal in. In any case, I also had the intuition around the $11-12 mark that bitcoin was a good investment, since the major hurdles around the security issues were probably ironed out, but didn't invest anything -- probably because deep down I'm a value investor and don't see a lot of value in driving speculation in something that doesn't have inherent value (despite the many interesting technical aspects to Bitcoin).

jswinghammer 14y ago
Well Bitcoin is not a fiat currency since it being defined as money is not dictated by fiat. It isn't attached to a physical good which is interesting. I'm guessing that its' value is being helped by the increasing amount of inflation in fiat currencies around the world and that the newly created money doesn't have a better home. Many people are scared of stocks and real estate so other assets become more attractive. I'm not sure I have any use for Bitcoin in my life and in this financial environment I wouldn't be involved in Bitcoin at this or any price.
- pixie_ 14y ago
  Exactly. People take note - Bitcoin is NOT fiat currency. Fiat is latin for 'let it be done.' As in governments can create new money at will. New bitcoins can't be created on demand by anyone.
  - nullc 14y ago
    You've misunderstood that defintion. Economically speaking fiat is a currency that exists by rulemaking instead of having an inherent value— it's constructed. The definition doesn't say who does the constructing or how. Bitcoin is a fiat currency— the fiat is embedded in the software that runs on and is enforced by all the Bitcoin nodes, it's the rules that make the currency exist and work. It's largely immutable, participated with by consent, transparent, and cryptographically strong in the way no government fiat is— bit it is technically a fiat currency. This is no big deal unless you make the Internet-liberitarian/goldbug mistake of thinking fiat is a dirty word.
    - pixie_ 14y ago
      Fiat does not imply constructed. The notion that gold (or tulips) are valuable are equally constructed ideas by humans. Nothing has 'inherent' value apart from the value humans perceive these things to have. No, the only thing fiat implies is manipulation - the ability for a government or person to mess with the value of a currency by 'willing it to be.' Bitcoin is not fiat.
      - teebs 14y ago
        Just based on the Wikipedia article, I don't think you're right that fiat implies manipulation: http://en.wikipedia.org/wiki/Fiat_currency http://en.wikipedia.org/wiki/Fiat_currency So, based on that definition, it is true that Bitcoin is not a fiat currency because it is not given value by law or government. However, although it technically does not have a centralized issuing authority that can arbitrarily create Bitcoins, Satoshi Nakamoto did hard code a creation rate for Bitcoin. In a sense, he is the original issuing authority. The only difference between Bitcoin and fiat currencies, when it comes to currency manipulation, is that Nakamoto committed early on to a specific plan for issuing currency. The government (or the Fed) not only does not make that commitment, but it is unable to make such a strong, unbreakable commitment, although it verbally makes similar commitments all the time.
        nullc 14y ago
Retric 14y ago
The dollar has a huge inherent demand in that you need to pay US taxes in dollars. Bit-coins lack that demand but there total value is so tiny just about any perceived long term use creates a huge speculation opportunity. PS: For comparison WoW gold is a much larger currency.
- jerguismi 14y ago
  Is it possible to calculate market cap for WoW gold? Is there way to know how much is in circulation?
thefreeman 14y ago
To say Bitcoin has no inherent value is not quite accurate. The inherent value of the Bitcoin comes from the electricity required to power the computational cycles to "create" it.
- Dylan16807 14y ago
  Cost does not equal value. And it goes the other way around anyway. Higher prices lead to more people mining.
  - jswinghammer 14y ago
    Correct. The problem being the use of the word inherent to describe value. There is no such thing as inherent value unless you are describing a use and not the price someone would be willing to pay for something. For example, wood can be used to fuel a fire but that doesn't tell us anything about its' inherent value in exchange. That it has inherent value on these terms is obvious enough. For me it has almost none because I don't have a stove to safely burn it. Others feel differently.
    - Dylan16807 14y ago
      You have to take a more general sort of view to things. To the median person making use of the value, how much are they getting out? How many people would find value? For example not everyone likes shiny things but gold is also compact, protective, conducting, nonreacting, testable, etc. Wood has a thousand and one uses but it's a bad currency because in addition to being bulky it's easy to make more wood. But in certain circumstances it would work fine. There is barely any use people can get out of bags of sand, so it wouldn't work as a currency. Salt looks similar but used to be hard to get and is important to food and living, made a great currency. Bitcoins by themselves don't have value. You could make a hundred knockoff block chains and they wouldn't do you any good. The bitcoin network as an entity that you can trust is where anything useful is actually derived from.
      - conroe64 14y ago
jstalin 14y ago
Nothing has inherent value. All value is relative. The difference between fiat (paper) currencies and currencies that are composed of a physical good, like gold, is solely the ability to control quantity. Fiat currency can be (and often is) produced in unlimited quantities, which leads to inflation. So-called hard currencies, backed by a precious metal, are limited in their expansion by production of that metal. This is why so many are coming out in favor of metal-backed currencies, because it restrains governments in what they can print to pay their own bills and their ability to devalue the savings of the populace (as Venezuela just did minutes ago, devaluing the savings of its citizens by 47% in one fell swoop).
- Jd 14y ago
  If all value is relative then there is no such thing as value at all. Of course the converse statement, that "inherent value" is a construct is true, since people rarely agree on the value of any given object, and generally the only way we can speak meaningfully about value is to take something that people agree has value. That said, there are certain types of objects that have been considered by most people to have value at most points in history. Gold, a fungible, maleable, shiny metal has been considered to be this for most of human history. There are other things of course, water being a very good example. The problem for currencies has historically been that alternative valuable objects either are not especially limited or not fungible, making them a bad base for a currency. There may also be things that have "inherent value" insofar as they are necessary to the continued existence of humanity, whether or not we perceive them as so. Damaging our environment beyond a certain degree would certainly be this. Unfortunately international governance has not risen to this particular challenge and fully utilized available technology (e.g. carbon credits).
Symmetry 14y ago
Well, in general the price level of bitcoins, how much individual bitcoins are worth compared to other goods, is going to end up being governed by MV = PQ Where M is the quantity of bitcoins, V is how fast they criculate, P is the price things in bitcoins, and Q is the size of the economy that bitcoins are used for. Since the bitcoin design prevents M from increasing that much, and since V tends to fluctuate a lot but remain stable in the long run, you should find that the value of each bitcoin mirrors the size of the economy that uses bitcoins in the long run. So buying bitcoins is essentially a bet that people will use them for more and more things. With US dollars the government (or central bank). tries keep M at a level where Q doesn't move around too much, but bitcoin doesn't and can't have an institution like that.
- Jd 14y ago
  I think Q is closer to the size of the market rather than the size of the "economy." "Economy" implies both tangible goods and buyers and sellers for those goods. The problem with Q in the Bitcoin sense is that it can move around a lot, since it is an obvious target for speculators with no interest in tangible goods.
- conroe64 14y ago
  I think you need to include speculators in your equation. If S is the number of bitcoins being horded, we would get (M - S)V = PQ. Since the perception seems to be shifting where more and more people believe that Q is going to continue to increase, S becomes larger (and in extreme cases, a bubble).
  - Judson 14y ago
    No need for "S". Hoarding is accounted for by a drop in V.
- SkyMarshal 14y ago
  >you should find that the value of each bitcoin mirrors the size of the economy that uses bitcoins in the long run. Your equation is actually saying the opposite, that the value (P) of each bitcoin is inversely proportional to the size of the bitcoin economy (Q): MV = PQ => (refactored) => (MV)/Q = P Hence P ~ 1/Q. Thinking about it more, I think you may have Q and M mixed up. From a supply/demand point of view, the greater supply of bitcoin (M), relative to demand at least, the lower the value (P). If we assume aggregate demand can be approximated by overall size of the economy that uses bitcoin (Q), then P ~ Q and P ~ 1/M so (QV)/M = P hence QV = MP Right?
anigbrowl 14y ago
The problem with all fiat currencies is they have no inherent value; it is all in the eye of the beholder. Apart from the claim on a country's treasury which is implicitly backed by a country's resources. Sure, this isn't always reliable, as in the case of countries like Zimbabwe, but they're very much the exception rather than the rule. Bitcoin's fiat value is posited on the artificial scarcity of something that doesn't have any particular utility in the first place. Gold at least has the virtue of looking nice and having useful physical properties (malleability, non-reactivity, high conductivity).
betterunix 14y ago
"The problem with all fiat currencies is they have no inherent value; it is all in the eye of the beholder" We'll see if you really believe that is true if you ever find yourself having to pay taxes but lacking the money needed to do so. Fiat currencies do have value: their value is in their ability to cancel debts (like taxes).

by Jd 14y ago

jswinghammer 14y ago

Well Bitcoin is not a fiat currency since it being defined as money is not dictated by fiat. It isn't attached to a physical good which is interesting. I'm guessing that its' value is being helped by the increasing amount of inflation in fiat currencies around the world and that the newly created money doesn't have a better home. Many people are scared of stocks and real estate so other assets become more attractive. I'm not sure I have any use for Bitcoin in my life and in this financial environment I wouldn't be involved in Bitcoin at this or any price.

pixie_ 14y ago
Exactly. People take note - Bitcoin is NOT fiat currency. Fiat is latin for 'let it be done.' As in governments can create new money at will. New bitcoins can't be created on demand by anyone.
- nullc 14y ago
  You've misunderstood that defintion. Economically speaking fiat is a currency that exists by rulemaking instead of having an inherent value— it's constructed. The definition doesn't say who does the constructing or how. Bitcoin is a fiat currency— the fiat is embedded in the software that runs on and is enforced by all the Bitcoin nodes, it's the rules that make the currency exist and work. It's largely immutable, participated with by consent, transparent, and cryptographically strong in the way no government fiat is— bit it is technically a fiat currency. This is no big deal unless you make the Internet-liberitarian/goldbug mistake of thinking fiat is a dirty word.
  - pixie_ 14y ago
    Fiat does not imply constructed. The notion that gold (or tulips) are valuable are equally constructed ideas by humans. Nothing has 'inherent' value apart from the value humans perceive these things to have. No, the only thing fiat implies is manipulation - the ability for a government or person to mess with the value of a currency by 'willing it to be.' Bitcoin is not fiat.
    - teebs 14y ago
      Just based on the Wikipedia article, I don't think you're right that fiat implies manipulation: http://en.wikipedia.org/wiki/Fiat_currency http://en.wikipedia.org/wiki/Fiat_currency So, based on that definition, it is true that Bitcoin is not a fiat currency because it is not given value by law or government. However, although it technically does not have a centralized issuing authority that can arbitrarily create Bitcoins, Satoshi Nakamoto did hard code a creation rate for Bitcoin. In a sense, he is the original issuing authority. The only difference between Bitcoin and fiat currencies, when it comes to currency manipulation, is that Nakamoto committed early on to a specific plan for issuing currency. The government (or the Fed) not only does not make that commitment, but it is unable to make such a strong, unbreakable commitment, although it verbally makes similar commitments all the time.
      - nullc 14y ago

Retric 14y ago

The dollar has a huge inherent demand in that you need to pay US taxes in dollars. Bit-coins lack that demand but there total value is so tiny just about any perceived long term use creates a huge speculation opportunity. PS: For comparison WoW gold is a much larger currency.

jerguismi 14y ago
Is it possible to calculate market cap for WoW gold? Is there way to know how much is in circulation?

thefreeman 14y ago

To say Bitcoin has no inherent value is not quite accurate. The inherent value of the Bitcoin comes from the electricity required to power the computational cycles to "create" it.

Dylan16807 14y ago
Cost does not equal value. And it goes the other way around anyway. Higher prices lead to more people mining.
- jswinghammer 14y ago
  Correct. The problem being the use of the word inherent to describe value. There is no such thing as inherent value unless you are describing a use and not the price someone would be willing to pay for something. For example, wood can be used to fuel a fire but that doesn't tell us anything about its' inherent value in exchange. That it has inherent value on these terms is obvious enough. For me it has almost none because I don't have a stove to safely burn it. Others feel differently.
  - Dylan16807 14y ago
    You have to take a more general sort of view to things. To the median person making use of the value, how much are they getting out? How many people would find value? For example not everyone likes shiny things but gold is also compact, protective, conducting, nonreacting, testable, etc. Wood has a thousand and one uses but it's a bad currency because in addition to being bulky it's easy to make more wood. But in certain circumstances it would work fine. There is barely any use people can get out of bags of sand, so it wouldn't work as a currency. Salt looks similar but used to be hard to get and is important to food and living, made a great currency. Bitcoins by themselves don't have value. You could make a hundred knockoff block chains and they wouldn't do you any good. The bitcoin network as an entity that you can trust is where anything useful is actually derived from.
    - conroe64 14y ago

jstalin 14y ago

Nothing has inherent value. All value is relative. The difference between fiat (paper) currencies and currencies that are composed of a physical good, like gold, is solely the ability to control quantity. Fiat currency can be (and often is) produced in unlimited quantities, which leads to inflation. So-called hard currencies, backed by a precious metal, are limited in their expansion by production of that metal. This is why so many are coming out in favor of metal-backed currencies, because it restrains governments in what they can print to pay their own bills and their ability to devalue the savings of the populace (as Venezuela just did minutes ago, devaluing the savings of its citizens by 47% in one fell swoop).

Jd 14y ago
If all value is relative then there is no such thing as value at all. Of course the converse statement, that "inherent value" is a construct is true, since people rarely agree on the value of any given object, and generally the only way we can speak meaningfully about value is to take something that people agree has value. That said, there are certain types of objects that have been considered by most people to have value at most points in history. Gold, a fungible, maleable, shiny metal has been considered to be this for most of human history. There are other things of course, water being a very good example. The problem for currencies has historically been that alternative valuable objects either are not especially limited or not fungible, making them a bad base for a currency. There may also be things that have "inherent value" insofar as they are necessary to the continued existence of humanity, whether or not we perceive them as so. Damaging our environment beyond a certain degree would certainly be this. Unfortunately international governance has not risen to this particular challenge and fully utilized available technology (e.g. carbon credits).

Symmetry 14y ago

Well, in general the price level of bitcoins, how much individual bitcoins are worth compared to other goods, is going to end up being governed by MV = PQ Where M is the quantity of bitcoins, V is how fast they criculate, P is the price things in bitcoins, and Q is the size of the economy that bitcoins are used for. Since the bitcoin design prevents M from increasing that much, and since V tends to fluctuate a lot but remain stable in the long run, you should find that the value of each bitcoin mirrors the size of the economy that uses bitcoins in the long run. So buying bitcoins is essentially a bet that people will use them for more and more things. With US dollars the government (or central bank). tries keep M at a level where Q doesn't move around too much, but bitcoin doesn't and can't have an institution like that.

Jd 14y ago
I think Q is closer to the size of the market rather than the size of the "economy." "Economy" implies both tangible goods and buyers and sellers for those goods. The problem with Q in the Bitcoin sense is that it can move around a lot, since it is an obvious target for speculators with no interest in tangible goods.
conroe64 14y ago
I think you need to include speculators in your equation. If S is the number of bitcoins being horded, we would get (M - S)V = PQ. Since the perception seems to be shifting where more and more people believe that Q is going to continue to increase, S becomes larger (and in extreme cases, a bubble).
- Judson 14y ago
  No need for "S". Hoarding is accounted for by a drop in V.
SkyMarshal 14y ago
>you should find that the value of each bitcoin mirrors the size of the economy that uses bitcoins in the long run. Your equation is actually saying the opposite, that the value (P) of each bitcoin is inversely proportional to the size of the bitcoin economy (Q): MV = PQ => (refactored) => (MV)/Q = P Hence P ~ 1/Q. Thinking about it more, I think you may have Q and M mixed up. From a supply/demand point of view, the greater supply of bitcoin (M), relative to demand at least, the lower the value (P). If we assume aggregate demand can be approximated by overall size of the economy that uses bitcoin (Q), then P ~ Q and P ~ 1/M so (QV)/M = P hence QV = MP Right?

anigbrowl 14y ago

The problem with all fiat currencies is they have no inherent value; it is all in the eye of the beholder. Apart from the claim on a country's treasury which is implicitly backed by a country's resources. Sure, this isn't always reliable, as in the case of countries like Zimbabwe, but they're very much the exception rather than the rule. Bitcoin's fiat value is posited on the artificial scarcity of something that doesn't have any particular utility in the first place. Gold at least has the virtue of looking nice and having useful physical properties (malleability, non-reactivity, high conductivity).

betterunix 14y ago

"The problem with all fiat currencies is they have no inherent value; it is all in the eye of the beholder" We'll see if you really believe that is true if you ever find yourself having to pay taxes but lacking the money needed to do so. Fiat currencies do have value: their value is in their ability to cancel debts (like taxes).