Bitcoin as money vs. speculative investment, via the focus on its price in dollars

[brian0918]

I have seen Stefan repeatedly tout the fact that Bitcoin recently skyrocketed in terms of dollar price. Playing devil's advocate, how would you respond to this argument:

 

If you claim to be focused on Bitcoin's utility as money, but your primary concern is Bitcoin's price in dollars (in particular, its rising price), then you have shown that you do not yourself consider Bitcoin to be money, but rather a speculative investment, to be traded in the future for the currency that you consider more valid as money - dollars. If your primary concern were truly that Bitcoin be more widely accepted as money, its price in an irredeemable paper currency would not be relevant to you, as you would not have any interest in converting it to dollars in the future. Rather, you would be focused on encouraging trade directly in Bitcoin, and pricing physical property only in Bitcoin, with no reference to or concern for Federal Reserve notes.

 

 

This same argument was presented to me in regard to gold, and I have come to accept its validity. Of course, it is a comforting argument to accept when the price of gold in dollars is plummeting.   So I want to be sure that the argument is truly valid, and not just a comfortable delusion.

[Emanuel]

In my opinion, Bitcoin and Precious metals are money, but they are not used widely enough to replace the dollar standard yet. If we want these things to be used as money and see a possibility for their wider use in the future, the value will need to go up as the demand swells. In short, I think this guy is both right and wrong.

[brian0918]

The rising price in dollars doesn't really indicate whether its demand is increasing as money, or due to speculation (i.e., intent to sell in the future for a profit in dollars). A better indication of its increased demand as money would be to measure its actual utility as money, by looking at who will accept it in trade for goods. Have there been any measures of the progress that has been made in that regard?

[Sayo]

This argument: If my primary concern is bitcoin's price in dollars then (as a result of that) I do not consider bitcoin to be money. Is not valid because the conclusion does not follow from the premise. the second argument: If I am concerned that bitcoin becomes widely accepted as money then its price in fiat currency would not be relevant to me, Is also not valid for the same reason.

 

Correction: paper currencies are redeemable for a lot of stuff, including bitcoins.

 

I'm not sure what the purpose of these arguments are and I am curious were you got it form because there are a lot of rhetorical plays being made in the argument like: "you claim... but," and "If your primary concern were truly" which I find to be irritating. If you are going to call me a hypocrite just do it out in the open.

 

Bitcoin is not money, there should be no doubt about that given that the definition of money is "is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country." - Wikipedia.  

 

With that said, I think it is a dam good currency (currency being: something that is used as a medium of exchange (it may or may not be generally accepted as is the requirement for money)). There are a lot of outlets were you can do your business exclusively in bitcoin and as a currency  bitcoins hold many advantages over methods of exchange that have come before it. If you want to see them as a speculative investment then knock yourself out! They are sure out performing everything else out there at the moment. There are people who speculate on dollars all the time and that doesn't mean that dollars aren't money now does it?

 

Anyway don't listen to me I'm just an amateur prick on the internet, listen to the experts. You might want to try the twice weekly podcast/blog Let's Talk Bitcoin where they discuss everything bitcoin including these arguments. 

[brian0918]

Would you agree that whether or not one considers something money is demonstrated by whether or not one uses it as money?

 

It is not a claim to hypocrisy, but a claim as to how to properly evaluate one's actions in comparison to his beliefs. People can genuinely believe that they consider X to be money, but their actions may indicate otherwise. That doesn't necessarily imply hypocrisy or evasion on their part - more likely lack of understanding, which is fine.

[ThomasDoubts]

I don't really like the term speculative investment.  Was the guy that bought amazon stock at $10 speculating, or did he see competitive advantage where others didn't?  If I trade my dollars for bitcoin, I prefer the bitcoin to the dollar at that moment in time.  What I do with my bitcoin in the future is irrelevant.  I may decide I'd like to trade my bitcoin for a TV.  I may decide to trade my bitcoin for a swiss franc.  Either way, I'm trading my bitcoin for something I percieve to be more valuable than the bitcoin, otherwise I don't exchange.  If my primary concern is bitcoin's rising price in dollars, it doesn't follow that I intend to trade it in the future for dollars.  All it says is I'm encouraged by bitcoin gaining marketshare as a medium of exchange. 

 

Oil prices are demoninated in dollars.  The price is a dynamic relationship between the value of oil, and the value of the dollar it's priced it.  Sorting out one from the other can be difficult.  Bitcoin and gold are similar, but are priced in many currencies, and in many commodities through voluntary exchange.  Arbitraging bitcoin across different currencies helps to standardize the value of bitcoins and gold.  You could price bitcoins in oil, but you still have to be able to isolate bitcoin value from fluctuating oil supply/demand.  You could price bitcoin in corn, or pencils, or 30 minute sessions with a top notch hooker; you always have the problem of isolating the commodity/service value from the "money" value.  You could try to price bitcoin using a basket of goods, as we do to measure inflation, but who's to determine which basket best reflects the proper value.  It's the whole notion that value is subjective. 

 

If I buy bitcoin, what am I saying?  I'm saying, I believe bitcoin is more valuable than the market price.  I believe my bitcoin will be worth more in the future than the dollar I traded you for it.  I believe others will come to realize the same thing, and act upon that belief by buying bitcoins themselves.  I could be wrong, and I'd lose purchasing power if I am. 

 

I believe bitcoin offers a competitive advantage over ever fiat currency, and thus is vastly undervalued.  If bitcoin represents a sound currency alternative to gold, then it could potentially support relatively astronomical prices.  I don't give a hoot what it's price is in dollars in that regard.   I think people generally underappreciate the extent to which gold and bitcoin are in competition with each other to capture sound money marketshare.  Below is a fair representation of my thoughts on bitcoin, and it's unrealized potential.

 

 

Let’s use a broad guesstimate. One Bitcoin should theoretically be worth 700 ounces of gold or pretty close to $1,000,000, if we adjust existing supply of both to equal eachother.

 

One BTC is currently worth 0.14 ounces of gold.

 

That gives BTC an upside of 5000 times to equal the current price of gold, supply adjusted. Clearly, I and everyone else believes that Gold may well be much higher than here in the next 5 to 10 years, thus versus the US Dollar the upside for BTC could be multiples of that.

 

Now, before you shake your head, simply go back to the chart of Gold versus the US Dollar and just recognise that it has risen 8750% since the 1920s. And just remember that Microsoft rose 61,000% from its IPO to it’s peak.

 

Considering what we know about the world, I personally believe that Bitcoin may well explode in value as more and more people begin to use it.

 

If you stuck $5,000 into Bitcoins and each Bitcoin did go up to a gold equivalent of let’s say, only 100 ounces of gold (not the potential fair value of 700), then at current prices your Bitcoin stash would be worth $3.3m.

 

Now that’s what I call a tail-risk option. It’s either worth zero or it’s worth a truly outstanding amount of money.

 

http://www.zerohedge.com/news/2013-11-10/bitcoin-plunges-25-government-scrutiny-first-btc-fair-value-reco-has-stunning-price-

 

 

He gives a potential price target in dollars.  I think a better way to think about it, is to consider a world where bitcoin is a dominant currency.  If everyone realized how much better bitcoin is that fiat, then fiat demand collapses, and bitcoin demand explodes.  Rather than having a small percentage of the "money market," it could have a huge market share, and appreciate accordingly.  Rather than thinking about what a bitcoin costs in fiat, consider the trend of what a bitcoin can purchase.  Holding out on consumption (not "using" it as money) for price appreciation is simply the key manifestation of a deflationary currency, which encourages saving and delayed gratification. 

 

Bitcoin prices in dollars?  Who cares, I think about what I'll be able to buy with bitcoin with in the future, as a result of the competitive advantages it possess relative to gold & fiat.

[Bulbasaur]

I don't really like the term speculative investment.  Was the guy that bought amazon stock at $10 speculating, or did he see competitive advantage where others didn't?  If I trade my dollars for bitcoin, I prefer the bitcoin to the dollar at that moment in time.  What I do with my bitcoin in the future is irrelevant.  I may decide I'd like to trade my bitcoin for a TV.  I may decide to trade my bitcoin for a swiss franc.  Either way, I'm trading my bitcoin for something I percieve to be more valuable than the bitcoin, otherwise I don't exchange.  If my primary concern is bitcoin's rising price in dollars, it doesn't follow that I intend to trade it in the future for dollars.  All it says is I'm encouraged by bitcoin gaining marketshare as a medium of exchange. 

 

Oil prices are demoninated in dollars.  The price is a dynamic relationship between the value of oil, and the value of the dollar it's priced it.  Sorting out one from the other can be difficult.  Bitcoin and gold are similar, but are priced in many currencies, and in many commodities through voluntary exchange.  Arbitraging bitcoin across different currencies helps to standardize the value of bitcoins and gold.  You could price bitcoins in oil, but you still have to be able to isolate bitcoin value from fluctuating oil supply/demand.  You could price bitcoin in corn, or pencils, or 30 minute sessions with a top notch hooker; you always have the problem of isolating the commodity/service value from the "money" value.  You could try to price bitcoin using a basket of goods, as we do to measure inflation, but who's to determine which basket best reflects the proper value.  It's the whole notion that value is subjective. 

 

If I buy bitcoin, what am I saying?  I'm saying, I believe bitcoin is more valuable than the market price.  I believe my bitcoin will be worth more in the future than the dollar I traded you for it.  I believe others will come to realize the same thing, and act upon that belief by buying bitcoins themselves.  I could be wrong, and I'd lose purchasing power if I am. 

 

I believe bitcoin offers a competitive advantage over ever fiat currency, and thus is vastly undervalued.  If bitcoin represents a sound currency alternative to gold, then it could potentially support relatively astronomical prices.  I don't give a hoot what it's price is in dollars in that regard.   I think people generally underappreciate the extent to which gold and bitcoin are in competition with each other to capture sound money marketshare.  Below is a fair representation of my thoughts on bitcoin, and it's unrealized potential.

 

 

Let’s use a broad guesstimate. One Bitcoin should theoretically be worth 700 ounces of gold or pretty close to $1,000,000, if we adjust existing supply of both to equal eachother.

 

One BTC is currently worth 0.14 ounces of gold.

 

That gives BTC an upside of 5000 times to equal the current price of gold, supply adjusted. Clearly, I and everyone else believes that Gold may well be much higher than here in the next 5 to 10 years, thus versus the US Dollar the upside for BTC could be multiples of that.

 

Now, before you shake your head, simply go back to the chart of Gold versus the US Dollar and just recognise that it has risen 8750% since the 1920s. And just remember that Microsoft rose 61,000% from its IPO to it’s peak.

 

Considering what we know about the world, I personally believe that Bitcoin may well explode in value as more and more people begin to use it.

 

If you stuck $5,000 into Bitcoins and each Bitcoin did go up to a gold equivalent of let’s say, only 100 ounces of gold (not the potential fair value of 700), then at current prices your Bitcoin stash would be worth $3.3m.

 

Now that’s what I call a tail-risk option. It’s either worth zero or it’s worth a truly outstanding amount of money.

 

http://www.zerohedge.com/news/2013-11-10/bitcoin-plunges-25-government-scrutiny-first-btc-fair-value-reco-has-stunning-price-

 

 

He gives a potential price target in dollars.  I think a better way to think about it, is to consider a world where bitcoin is a dominant currency.  If everyone realized how much better bitcoin is that fiat, then fiat demand collapses, and bitcoin demand explodes.  Rather than having a small percentage of the "money market," it could have a huge market share, and appreciate accordingly.  Rather than thinking about what a bitcoin costs in fiat, consider the trend of what a bitcoin can purchase.  Holding out on consumption (not "using" it as money) for price appreciation is simply the key manifestation of a deflationary currency, which encourages saving and delayed gratification. 

 

Bitcoin prices in dollars?  Who cares, I think about what I'll be able to buy with bitcoin with in the future, as a result of the competitive advantages it possess relative to gold & fiat.

 

We seem to be thinking along the same line of reasoning. The current dollar value of bitcoins just reflects the current limited demand. Right now dollars still have a lot more utility than bitcoins for most of the purchases we make, because dollar-as-currency has such an established infrastructure. If bitcoin did become widely accepted, its dollar price would have to reflect what amounts to a very large increase in demand, while its supply remains inherently restricted. And the more useful bitcoin becomes for normal purchases, the less attractive dollars would become since they would be hemorrhaging value through both overprinting and reduced demand relative to bitcoin. 

 

Regarding the comparison with gold, I would argue bitcoin will be worth much more than even that projection IF (big if) it becomes a standard, widely accepted and convenient currency. As you point out, bitcoin competes with gold. To plagiarize myself from another thread,

 

 

 

People compare the amount of bitcoin to the amount of gold and try to extrapolate the eventual stable price to be several thousand times the current price, but keep in mind that price is a function of both supply and demand. Demand for gold is dominated by commercial use (electronics/jewelry) and as an investment vehicle, not as a currency. If bitcoin becomes a standard in the way that the dollar is currently, there will be a lot more demand for bitcoin than for gold. The convenience of instant electronic payments with negligible fees makes bitcoin a lot more potentially useful than gold for most people, and since it can't be printed at the whim of the Fed, there won't be much point to hedging your bitcoin holdings by investing in gold. 

 

I think the biggest things needed now are for innovative people to find ways to make bitcoins easier for regular people to buy and use, and to continue to create and promote businesses that sell everyday goods and services and accept payment in bitcoin. It can only evolve into a dominant currency if people can use it for the same things they use dollars for now.

[ThomasDoubts]

I think the biggest things needed now are for innovative people to find ways to make bitcoins easier for regular people to buy and use, and to continue to create and promote businesses that sell everyday goods and services and accept payment in bitcoin. It can only evolve into a dominant currency if people can use it for the same things they use dollars for now.

 

 

For sure.  I'm not a tech guy by any means, and I have a hard time being confident in my ability to maintain my security.  For many people, even if they're comfortable with the concept, they'd need someone to hold their hand the whole way.  I was reading not too long ago about Cody Wilson (3d printed gun guy) working on a new project called Dark Wallet.  I'm not sure I understand it all, but I know he's trying to incorporate mixing coins in blocks of transactions to enhance anonymity and something about browser plugins to make the process easier.  <--  I don't have much of an idea what that means though      I don't want a bitcoin wallet linked to my bank account.  I don't want my bitcoins stored on my phone.  I think there is a lot of room for innovation in a physical wallet (along these lines http://www.youtube.com/watch?v=CNTseu9SVYk)  Bitcoin needs to be easy for my grandmother to use.  Businesses are catching on, and I think they'll continue to do so.  I'm encouraged, bitcoin is still in it's infancy.

 

Regarding the comparison with gold, I would argue bitcoin will be worth much more than even that projection IF (big if) it becomes a standard, widely accepted and convenient currency. As you point out, bitcoin competes with gold. To plagiarize myself from another thread,

 

For sure.  I can't give a real price target, but the one I quoted is certainly lower than Bitcoin is capable of.  Maybe we could put together 5-10 bitcoins and buy Hawaii one day.     Who knows, I say it's potential is virtually unlimited (not that it's without risk). 

[Josh F]

I have seen Stefan repeatedly tout the fact that Bitcoin recently skyrocketed in terms of dollar price. Playing devil's advocate, how would you respond to this argument:

 

 

This same argument was presented to me in regard to gold, and I have come to accept its validity. Of course, it is a comforting argument to accept when the price of gold in dollars is plummeting.   So I want to be sure that the argument is truly valid, and not just a comfortable delusion.

The speculative value of bitcoin drives a massive market demand to utilize it.  When it was worth next to nothing, only a few fringe devotees were interested in buying or selling consumer products with it, now millions more people are coming up with ways to develop the utility of their investment.  And some of those plans are bigger than you can imagine.

For sure.  I'm not a tech guy by any means, and I have a hard time being confident in my ability to maintain my security.  For many people, even if they're comfortable with the concept, they'd need someone to hold their hand the whole way.  I was reading not too long ago about Cody Wilson (3d printed gun guy) working on a new project called Dark Wallet.  I'm not sure I understand it all, but I know he's trying to incorporate mixing coins in blocks of transactions to enhance anonymity and something about browser plugins to make the process easier.  <--  I don't have much of an idea what that means though      I don't want a bitcoin wallet linked to my bank account.  I don't want my bitcoins stored on my phone.  I think there is a lot of room for innovation in a physical wallet (along these lines http://www.youtube.com/watch?v=CNTseu9SVYk)  Bitcoin needs to be easy for my grandmother to use.  Businesses are catching on, and I think they'll continue to do so.  I'm encouraged, bitcoin is still in it's infancy.

For the average consumer security is incredibly easy.  Copy files to a thumbdrive, put thumbdrive in a safe.  To save digitally and maintain access, send via email to yourself, and delete the hard copy. 

 

I think the biggest things needed now are for innovative people to find ways to make bitcoins easier for regular people to buy and use, and to continue to create and promote businesses that sell everyday goods and services and accept payment in bitcoin. It can only evolve into a dominant currency if people can use it for the same things they use dollars for now.

 

I agree.  The biggest obstacle to this issue is that buying bitcoin requires a lot of work, and mining it requires a lot of work.  People need to get bitcoin as easy as they got money, from working their normal jobs.  I'd like to see some sites like fivver run off bitcoin

and for that matter, an ebay for bitcoin that doesnt sell illegal shit and people arent anonymous

[ThomasDoubts]

For the average consumer security is incredibly easy.  Copy files to a thumbdrive, put thumbdrive in a safe.  To save digitally and maintain access, send via email to yourself, and delete the hard copy. 

 

 

You've never seen my grandmother "use" the computer 

 

Point taken though.  I guess I'm just saying I think more energy needs to go into making bitcoin idiot proof.  If I asked either of my parents, or my neighbor, or my several of my middle aged ex-college professors to copy files to a thumbdrive, they'd have to first ask me what a thumbdrive is.  All things bitcoin would be so foreign to people who can scarely use computers to begin with.  Of course, one day they'll die, and I'm sure their kids won't have any problems.     

[Wesley]

Some time ago, BitInstant was working on a Bitcoin debit card that you stocked with Bitcoin. Then at the Point of Sale, you would swipe it like any other debit card and it would send them a credit using a company like Mastercard or something. 

 

I can only assume this hasn't worked out yet as I haven't heard anything about it since then.

 

Anyone who could create a viable Bitcoin debit/credit card system work do a lot in bringing Bitcoin within reach of the technical "Luddites". 

[Bulbasaur]

A bitcoin-based card that would work with current hardware at checkouts would be pretty big, but I heard that it's mainly regulatory rather than technical obstacles that have prevented this from happening already. As far as ease of buying into bitcoin for regular people, Coinbase seems to be a great option for people in the US. Generally these things seem to start very technical and gradually become more approachable as people see the opportunity in expanding the userbase, so I think it will happen sooner or later as long as government intervention doesn't prevent it. 

 

Regarding anonymity, I still have mixed feelings. I see the appeal in having the option for private, anonymous transactions (a coin called Zerocoin is aiming for this I think), but reputation is also an extremely useful way to reduce risk and reward virtue. A good reputation is a valuable thing, so when honest trades are rewarded with reputation gains, everyone wins. When reputation is squandered, the consequences could be devastating; this is the basis of a lot of 'practical anarchy' solutions for retaining order, and the option of anonymity is really in direct opposition to this. You can see how anonymity brings out the worst in people in pretty much any set of youtube comments. But it seems like it should be possible to make the transactions private while keeping the public reputations visible, so that might be the best of both worlds.

 

There's some interesting ideas from a company called Invictus around extending the bitcoin concept to other applications, including how we approach the idea of online identity (http://letstalkbitcoin.com/own-your-identity-with-bitshares/#.Uo4ICMQ_utZ). I just started reading about it so I haven't really formed an opinion, but I do very much like that they're thinking about how to extend this idea of decentralized networks to solving other problems besides sending payments. 

[RuralRon]

There's some interesting ideas from a company called Invictus around extending the bitcoin concept to other applications, including how we approach the idea of online identity (http://letstalkbitcoin.com/own-your-identity-with-bitshares/#.Uo4ICMQ_utZ). I just started reading about it so I haven't really formed an opinion, but I do very much like that they're thinking about how to extend this idea of decentralized networks to solving other problems besides sending payments. 

 

Alot has happened with Invictus since November last year, and it's quite exciting. The BitShares website is going through a metamorphis as I write this. Their forum is quite active.

 

Daniel Larimer really has his act together when he discusses BitCoin and BitShares. His solid arguments against bitcoin are based on the fact bitcoin as a company is not profitable and he makes an excellent claim it therefore is not sustainable. He  explains the flaws in the terminology and metaphores used to describe BitCoin while giving high praise and credit to the distributed model of the blockchain pioneered by it. Larimer is interviewed by Michael Dean in this fantastic 90 minute podcast where they address what BitShares are and all of the issues it was invented to solve.

 

A month ago I bought 6 namecoins and was planning on using some of them to obtain .bit domain names. All I was waiting for  was a group decision on the first domain name to be registered. After that name was chosen 5 weeks later I went back to obtain the .bit domain and discovered Micheal Dean and the chief developer of MeowBit have abandoned Namecoin for the architectures under the BitShares umbrella. After a couple of weeks of research into BitShares I decided Namecoin will probably not last much longer in part b/c it doesn't solve the problem of domain squating. BitCoin probably won't be going away anytime soon but I believe the writting is on the wall about it's long term prospects.

 

There are some great videos about BitShares on youtube that delve into the details of the BitShares business model. If you want a thorough overview of the foundation and basis of the BitShare approach listen to Michael Dean's podcast.

 

One thing I have been concerned about since starting my study of BitCoin back in March is that it is no longer economically feasible for the average person to mine BitCoins. The money required to do so is pushing the resources required into the realm of big business and that kindof scares me.