5 ms·

I'd love to get an economist studying why the value of bitcoins goes up. After all, they're infinitely reusable, totally fungible, and incredibly low friction.

I'd love to get an economist studying why the value of bitcoins goes up. After all, they're infinitely reusable, totally fungible, and incredibly low friction. The only reason for their value to rise (rather than them just being passed around at the same price indefinitely) is if people expect them to rise, or if there's a shortage (forcing people to use fractions of a bitcoin to represent the same number of dollars as a whole one used to). Is the cause largely the latter, or the former? Has there been a high enough rise in the transaction volume to explain the rise in value? Or is it all down to investors?

brc 14y ago
You've answered your own question. It is all of the above. The price system in any market factors in all of the information and motivations of the participants, and balances them out with a single value : the price. The killer feature of the freely-trading market is the price. It communicates the state of the market as both an input and an outcome of the actions of the market players. Remember that for any exchange to occur, two things of unequal value have to be exchanged by two willing participants. But the inequality between the items being exchanged is in the eye of the individual holder. The motivations are rarely the same for each participant, so you can never actually make blanket statements about why a market moves where and when it does - very rarely does a single issue dominate a price, because in those circumstances you have a market that stops exchanging if everyone has the same view.
Tenoke 14y ago
>I'd love to get an economist studying why the value of bitcoins goes up. Great sarcasm there!
Tenoke 14y ago
>I'd love to get an economist studying why the value of bitcoins goes up. Great sarcasm there!
skylan_q 14y ago
People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power. http://mises.org/daily/1333 http://mises.org/daily/1333 From a theoretical perspective, this is been the clearest elucidation to me. The reason the value of bitcoins is going up is because people who buy bitcoins expect that others will pay a higher price for it in the future. Like I tell people: people who buy and sell bitcoins don't care that you don't want to participate. They just want anyone else who will participate.
- danielweber 14y ago
  The reason the value of bitcoins is going up is because people who buy bitcoins expect that others will pay a higher price for it in the future. That has a much shorter name: http://en.wikipedia.org/wiki/Greater_fool_theory http://en.wikipedia.org/wiki/Greater_fool_theory The price of the Mona Lisa won't go down because the art community won't let it. It can do that because there is only 1 Mona Lisa. Such a force doesn't exist with Bitcoins.
  - vrotaru 14y ago
    There will be only 21 million bitcoins. Ever.
    - danielweber 14y ago
      There are only 3 million copies of SUPERMAN #75.
      - vrotaru 14y ago
        yes, but for one thing a) no one cares b) it is not a hard limit, actually and, maybe, a) has something to do with b)
  - skylan_q 14y ago
    Actually, one of my favorite blogs is http://www.greaterfool.ca http://www.greaterfool.ca ;) I'm familiar with the greater fool theory. But people buy commodities, currencies and financial instruments on this expectation of increased future valuation. There could be a case made that the greater fool theory is in effect for bitcoins, but it can't be said that it is the case simply because people expect higher valuation in the future.
  - donald_draper 14y ago
    "This whole country was made by greater fools!" – Oh sorry, wrong movie.
- brc 14y ago
executive 14y ago
or organized crime have started using Bitcoin en masse to move (drug) money out of developed markets back home.
deepblueocean 14y ago
I'm pretty sure the exchange price of Bitcoins is driven by the marginal supply and demand. So I think it's got to be what you call "investors" almost entirely (note that not all people buying in have to be speculators: if lots of people suddenly decided they'd rather have some Bitcoins because they want to use them, that would suffice). So the question is how are the marginal supply and demand determined? The marginal demand is subject to spikes in interest, media coverage, the Cyprus crisis (I really doubt the latter is meaningful but perhaps it makes people everywhere think they want to move out of bank deposits. People certainly attribute things to it). The marginal supply is based on (1) mining, which happens at a fixed rate and (2) people who wish to exit Bitcoin, which is subject to lots of whims. Lots of evidence shows that most Bitcoins are hoarded, so it's possible that what we see is just a supply crunch - nobody wants to sell their Bitcoins and some people want to buy. I suppose the natural way to answer that is to go look at historical exchange volume across all the exchanges (or, as a first-cut proxy, just Mt. Gox).
- eric_bullington 14y ago
  Can you please show me the evidence you mention that shows that most Bitcoins are hoarded? I'm genuinely curious -- the main metric I'm aware of is Bitcoin Days Destroyed, and that metric seems to show that hoarding is actually steadily decreasing over time.
  - SkyMarshal 14y ago
    http://eprint.iacr.org/2012/584.pdf http://eprint.iacr.org/2012/584.pdf ~80% of BTC are dormant, eg being hoarded. >and that metric seems to show that hoarding is actually steadily decreasing over time. This is the big question, isn't it. It's completely understandable the early adapters are hoarding, expecting a med/long-term payoff on their investment via appreciation. But will that continue indefinitely, or change eventually? And dumping even a portion of that into the system would have significant price effect, and given how so many people seem to value BTC by its price more than its unique utility, what effect will that have on the economy.
kruhft 14y ago
The value of bitcoins goes up because the entire system is a store of value. When bitcions are bought, people are transfering "real" value (USD or any other government backed currency) into the Bitcoin system where the value is being held. When they sell Bitcoins they are removing value from the system. Due to supply (limited) and demand (increasing), the amount real currency needed to purchase a unit of Bitcoin is going up. This transfer of value can be due to hopes of appreciation (speculative investment, possibly causing a bubble) or lack of faith in a base currency (hedging wealth, as is happening in Europe). Since our monetary systems are now based on little more than unbacked faith and look to be failing in various ways, people are looking to put their wealth into something they feel they can trust and that might have more of a future than current fiat systems. Given the decentralized lack of control of Bitcoin and the rise in the current lack of trust in the offical financial systems, the rise of Bitcoin makes as much sense as the present rise in the value of gold, a traditional hedge of value and original currency backer. Now that people are now used to storing value in non-backed, faith based monetary systems, Bitcoin is the first fiat monetary system that has no ruler, and people are transfering their government backed faith based store of value into it. It can be thought of a democratic store of value, and as more people believe in it the more value it will have.
- tptacek 14y ago
  Yes. Bitcoin is the first fiat monetary system that has no ruler. Also, it has repealed the law of parsimony (haven't you heard, on the Internet, there are no laws). So it's totally not the case that Bitcoin is going up because Bitcoin is going up, and people are bidding up its price on the expectation that the peak is nowhere in sight, and they'll make a tidy profit off later speculators. Because the Internet has upended all the normal ways of doing things, just like it did for Sealand (remember those message board threads?), it doesn't matter that economists look at the price chart for Bitcoin and say "uh, that is a bubble", and then "also, bubble or not, that is not productive behavior for a currency". Nor does it matter that Bitcoin mostly buys you donations to extremely independent bands, tips for blog tip jars, "Avalanche Spa Powder Not For Human Consumption", and highly marginal web hosting. No, the price makes perfect sense: people can't trust the US dollar, which reliably purchases cars, air travel, thai food, houses, Macbooks, chest freezers, pork chops, chlorinated trisphosphate, tuition at Stanford, roofing shingles, dirt, methamphetamine, hookers, and guns. Not just here, but pretty much everywhere in the world. It's definitely not because if the current price for Bitcoin makes no sense, it's not going to matter whether your online wallet gets hacked and all the Bitcoin stolen, because you've already lost 80-90% of your investment anyways.

brc 14y ago

You've answered your own question. It is all of the above. The price system in any market factors in all of the information and motivations of the participants, and balances them out with a single value : the price. The killer feature of the freely-trading market is the price. It communicates the state of the market as both an input and an outcome of the actions of the market players. Remember that for any exchange to occur, two things of unequal value have to be exchanged by two willing participants. But the inequality between the items being exchanged is in the eye of the individual holder. The motivations are rarely the same for each participant, so you can never actually make blanket statements about why a market moves where and when it does - very rarely does a single issue dominate a price, because in those circumstances you have a market that stops exchanging if everyone has the same view.

Tenoke 14y ago

>I'd love to get an economist studying why the value of bitcoins goes up. Great sarcasm there!

Tenoke 14y ago

>I'd love to get an economist studying why the value of bitcoins goes up. Great sarcasm there!

skylan_q 14y ago

People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power. http://mises.org/daily/1333 http://mises.org/daily/1333 From a theoretical perspective, this is been the clearest elucidation to me. The reason the value of bitcoins is going up is because people who buy bitcoins expect that others will pay a higher price for it in the future. Like I tell people: people who buy and sell bitcoins don't care that you don't want to participate. They just want anyone else who will participate.

danielweber 14y ago
The reason the value of bitcoins is going up is because people who buy bitcoins expect that others will pay a higher price for it in the future. That has a much shorter name: http://en.wikipedia.org/wiki/Greater_fool_theory http://en.wikipedia.org/wiki/Greater_fool_theory The price of the Mona Lisa won't go down because the art community won't let it. It can do that because there is only 1 Mona Lisa. Such a force doesn't exist with Bitcoins.
- vrotaru 14y ago
  There will be only 21 million bitcoins. Ever.
  - danielweber 14y ago
    There are only 3 million copies of SUPERMAN #75.
    - vrotaru 14y ago
      yes, but for one thing a) no one cares b) it is not a hard limit, actually and, maybe, a) has something to do with b)
- skylan_q 14y ago
  Actually, one of my favorite blogs is http://www.greaterfool.ca http://www.greaterfool.ca ;) I'm familiar with the greater fool theory. But people buy commodities, currencies and financial instruments on this expectation of increased future valuation. There could be a case made that the greater fool theory is in effect for bitcoins, but it can't be said that it is the case simply because people expect higher valuation in the future.
- donald_draper 14y ago
  "This whole country was made by greater fools!" – Oh sorry, wrong movie.
brc 14y ago

executive 14y ago

or organized crime have started using Bitcoin en masse to move (drug) money out of developed markets back home.

deepblueocean 14y ago

I'm pretty sure the exchange price of Bitcoins is driven by the marginal supply and demand. So I think it's got to be what you call "investors" almost entirely (note that not all people buying in have to be speculators: if lots of people suddenly decided they'd rather have some Bitcoins because they want to use them, that would suffice). So the question is how are the marginal supply and demand determined? The marginal demand is subject to spikes in interest, media coverage, the Cyprus crisis (I really doubt the latter is meaningful but perhaps it makes people everywhere think they want to move out of bank deposits. People certainly attribute things to it). The marginal supply is based on (1) mining, which happens at a fixed rate and (2) people who wish to exit Bitcoin, which is subject to lots of whims. Lots of evidence shows that most Bitcoins are hoarded, so it's possible that what we see is just a supply crunch - nobody wants to sell their Bitcoins and some people want to buy. I suppose the natural way to answer that is to go look at historical exchange volume across all the exchanges (or, as a first-cut proxy, just Mt. Gox).

eric_bullington 14y ago
Can you please show me the evidence you mention that shows that most Bitcoins are hoarded? I'm genuinely curious -- the main metric I'm aware of is Bitcoin Days Destroyed, and that metric seems to show that hoarding is actually steadily decreasing over time.
- SkyMarshal 14y ago
  http://eprint.iacr.org/2012/584.pdf http://eprint.iacr.org/2012/584.pdf ~80% of BTC are dormant, eg being hoarded. >and that metric seems to show that hoarding is actually steadily decreasing over time. This is the big question, isn't it. It's completely understandable the early adapters are hoarding, expecting a med/long-term payoff on their investment via appreciation. But will that continue indefinitely, or change eventually? And dumping even a portion of that into the system would have significant price effect, and given how so many people seem to value BTC by its price more than its unique utility, what effect will that have on the economy.

kruhft 14y ago

The value of bitcoins goes up because the entire system is a store of value. When bitcions are bought, people are transfering "real" value (USD or any other government backed currency) into the Bitcoin system where the value is being held. When they sell Bitcoins they are removing value from the system. Due to supply (limited) and demand (increasing), the amount real currency needed to purchase a unit of Bitcoin is going up. This transfer of value can be due to hopes of appreciation (speculative investment, possibly causing a bubble) or lack of faith in a base currency (hedging wealth, as is happening in Europe). Since our monetary systems are now based on little more than unbacked faith and look to be failing in various ways, people are looking to put their wealth into something they feel they can trust and that might have more of a future than current fiat systems. Given the decentralized lack of control of Bitcoin and the rise in the current lack of trust in the offical financial systems, the rise of Bitcoin makes as much sense as the present rise in the value of gold, a traditional hedge of value and original currency backer. Now that people are now used to storing value in non-backed, faith based monetary systems, Bitcoin is the first fiat monetary system that has no ruler, and people are transfering their government backed faith based store of value into it. It can be thought of a democratic store of value, and as more people believe in it the more value it will have.

tptacek 14y ago
Yes. Bitcoin is the first fiat monetary system that has no ruler. Also, it has repealed the law of parsimony (haven't you heard, on the Internet, there are no laws). So it's totally not the case that Bitcoin is going up because Bitcoin is going up, and people are bidding up its price on the expectation that the peak is nowhere in sight, and they'll make a tidy profit off later speculators. Because the Internet has upended all the normal ways of doing things, just like it did for Sealand (remember those message board threads?), it doesn't matter that economists look at the price chart for Bitcoin and say "uh, that is a bubble", and then "also, bubble or not, that is not productive behavior for a currency". Nor does it matter that Bitcoin mostly buys you donations to extremely independent bands, tips for blog tip jars, "Avalanche Spa Powder Not For Human Consumption", and highly marginal web hosting. No, the price makes perfect sense: people can't trust the US dollar, which reliably purchases cars, air travel, thai food, houses, Macbooks, chest freezers, pork chops, chlorinated trisphosphate, tuition at Stanford, roofing shingles, dirt, methamphetamine, hookers, and guns. Not just here, but pretty much everywhere in the world. It's definitely not because if the current price for Bitcoin makes no sense, it's not going to matter whether your online wallet gets hacked and all the Bitcoin stolen, because you've already lost 80-90% of your investment anyways.