bitcoin intrinsic value and mises regression theorem

[st434u]

Bitcoin is a payment infrastructure as well as a currency.  There are approximately 42,800,000 GH/s of physical computing power in the Bitcoin network.  There is utility in being able to accept payment worldwide (crypto currencies are only way to send worldwide due to other services being restricted by law).

Again, none of this means anything if Bitcoins have no value. Thus bitcoins need to have value first, in order for it to be useful to transfer them quickly and cheaply. Now, clearly Bitcoins do have value today. But why?As I argue, they only have value because people speculate that others will buy them in the future (selling your goods or services for Bitcoins in this sense is "buying" Bitcoins, too). So far so good. But based on what will these people buy Bitcoins in the future? Why of course, because they themselves in turn speculate that others will buy them in the future. This is a vicious circle. It doesn't go anywhere. Bitcoins have value because they have value.Bitcoin enthusiasts say, -hey, it's no problem, because value is subjective, so things have value only and if people think they have value-. Sure, but there is a difference between people actually deriving value from consuming a product, and simply thinking that the product has value because others think it has value because others think it has value... ad infinitum.There is another type of thing that follows the same pattern. A pyramid scheme. People think the investment has value because they're gonna get rich, but the *only* way for them to get rich is if they convince others to invest more. In fact, this is the only way not to go broke while remaining invested in a pyramid scheme. It can work well for a while, until new investors stop coming in, and old investors start cashing out, and then the whole thing collapses. 

I agree with Surda about network effects.  An example is the US dollar.  A large part of what gives the dollar value is its use as the global reserve currency

Do you realize that US dollars being the "global reserve currency" simply means that States all around the world tax their citizens in order to buy US dollars?Of course if States steal money and buy something, that is an additional demand for that thing and, ceteris paribus, that thing will go up in price (value).It doesn't surprise me that both Surda and Krugman agree that "US Dollars have value because everybody uses them".

[NumberSix]

A global payment infrastructure provides a service that people value.  This by itself creates value.  Western Union and Visa have stock prices partially based on the value of the service they provide.  Language is a great example of network effects.  The more people who speak a language, the more useful it is; an increase in number of English speakers only adds value to the language.  Most people, who choose to learn English as a second language, do so because of its world wide use in business.  In the same way, when you are choosing a currency, a global currency would be more attractive than a regional currency (all other things being equal).  And if more people choose Bitcoin the price will rise.  People wear gold because it makes them feel attractive, important, wealthy, and to impress others. Jewelry does not fulfill any basic human needs.  The value of gold arises more from its scarcity and its usefulness as a medium of exchange.  I didn't say the US dollar being the global reserve currency is a good thing, but the resulting increse in demand does add to its market value. 

[st434u]

A global payment infrastructure provides a service that people value.  This by itself creates value.  Western Union and Visa have stock prices partially based on the value of the service they provide.

Western Union and Visa would be broke tomorrow if they only settled transactions in a currency with no market value. You're still putting the cart before the horse.

People wear gold because it makes them feel attractive, important, wealthy, and to impress others. Jewelry does not fulfill any basic human needs. The value of gold arises more from its scarcity and its usefulness as a medium of exchange.

How do you determine what is a "basic human need" and what isn't?Also, the device you're using to post this requires gold to make. The computers that host the FDR server require gold to make. The satellites used to transfer the information over the internet require tons of gold to make.The value of gold absolutely does not arise from it's "scarcity" or it's usefulness as a medium of exchange. The value of gold arises *only* from the fact that many people want to consume it, and consume goods and services that require gold to make, and they are willing to give other things of value in exchange for those things which contain gold, in order to consume them.

[NumberSix]

Western Union and Visa would be broke tomorrow if they only settled transactions in a currency with no market value. You're still putting the cart before the horse.

You can go from local currency to Bitcoin and then send overseas via Bitcoin and back to local currency.  It's a new system so still not universal and easy but it will improve.  The reason why you would do this is less fees and country restrictions.

 

How do you determine what is a "basic human need" and what isn't?

I would go off something like Maslow's hierarchy of needs, although I don't 100% agree with Maslow.  So, basic needs would be food and shelter and things that keep you alive as compared to nice to have things like a TV.  http://en.wikipedia.org/wiki/Maslow%27s_hierarchy_of_needs

 

The value of gold absolutely does not arise from it's "scarcity" or it's usefulness as a medium of exchange. The value of gold arises *only* from the fact that many people want to consume it, and consume goods and services that require gold to make, and they are willing to give other things of value in exchange for those things which contain gold, in order to consume them.

Industrial use of gold is a very recent development. What about the other centuries of human history when people valued gold?  What practical purpose did it serve?  Why was it so valuable back then?

According to the supply and demand theory: “If demand increases (demand curve shifts to the right) and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.”http://en.wikipedia.org/wiki/Supply_and_demand

So, scarcity can cause higher prices.

[st434u]

You can go from local currency to Bitcoin and then send overseas via Bitcoin and back to local currency.  It's a new system so still not universal and easy but it will improve.  The reason why you would do this is less fees and country restrictions.

Again, this all requires that bitcoins have value in the first place. 

I would go off something like Maslow's hierarchy of needs, although I don't 100% agree with Maslow.  So, basic needs would be food and shelter and things that keep you alive as compared to nice to have things like a TV.

So on the one hand bitcoins are not consumed for ANY purpose (and never will be); and with gold, you believe that it's consumption uses "don't fulfill any basic human needs", whatever that means. That doesn't make the two equal. Not by any stretch of the imagination. 

Industrial use of gold is a very recent development. What about the other centuries of human history when people valued gold?  What practical purpose did it serve?  Why was it so valuable back then?

I don't know all the uses it served back then, but one of the main ones was ornamental. That doesn't make it any less important. You can't equate bitcoin with gold by attacking the consumption uses that people give to gold, and then say -hey, I don't find that use to be important, therefore it is the same as bitcoin, which has no consumption use at all-And by the way, this whole idea of the "basic human needs" and "practical purpose" sounds pretty communist to me. I'm sure you'd be the first to point out that value is subjective and that people can find value in whatever they want.

According to the supply and demand theory: “If demand increases (demand curve shifts to the right) and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.”So, scarcity can cause higher prices.

No, it does not. There are two curves that determine price, supply is only one of them, and absent demand, the fact that something is more scarce doesn't give it any more value at all.

[cynicist]

I agree with most of Stefs argument about bitcoin how it can be an excellent medium of exchange.But... am not sure how a bitcoin ever be a commodity first!I am surprised Stefan never said anything about "Mises Regression Theorem" in his bitcoin podcasts.any thoughts?

 

Mises Regression Theorem explains how currency first came to exist and be used. Obviously it has to have value for people to be willing to trade things for it and that's why it was natural for things like gold to be used as currency. Then as people learned what properties were most important for a currency to have, certain commodities (precious metals) rose above others.

 

Think about this for a second, what use was gold thousands of years ago? It was pretty and that's why it was valuable. It only proved so popular as money due to its other properties (divisibility, scarcity, etc) Bitcoin was designed with those qualities in mind from the start, and comes with some additional utility in the form of cryptographic signing for contracts, low transfer costs, and so on. So just like gold it started out relatively obscure and useless as a kind of nerdy hobby but gathered momentum through trade and the spread of its use, and now can be seriously considered as a currency.

 

A commodity is defined as something of use or value or an article of trade. Bitcoin seems to fit either of those fine.