The Fair Price of a Bitcoin is Zero

http://neweconomicperspectives.org/2013/12/fair-price-bitcoin-zero.html

by aliston • 13 years ago

38 62 13 years ago

I'm so tired of every Tom, Dick, and Harry throwing his hat in the ring to declare Bitcoin worthless. Can't we just agree that this is a new thing nobody quite understands and stop making prognostications about it's value or lack thereof?

Let those of us who are interested in furthering the Bitcoin economy do so unencumbered by pundits.

lukifer• 13 years ago

Things are worth what people are willing to pay (or trade) for them. What's a dollar worth? How about a Linden dollar, or WoW gold? What about rare stamps, or collectible coins, or baseball cards? All of those things are objectively worthless, yet they have value because humans imbue them with value.

Economics is like quantum physics: if you claim to understand it, you don't understand it. Let the experiment play out, and caveat emptor.

mullingitover• 13 years ago

Let those of us who are interested in furthering the Bitcoin economy do so unencumbered by pundits.

Bitcoin would be much more encumbered if it wasn't relevant enough for the pundits to pontificate on it.

fragsworth• 13 years ago

These posts are entirely the result of authors who didn't buy bitcoins when they were cheap. They want it to fail, and try to find any flaws in it that they can, because if it succeeds then they'll really feel like shit because they missed out.

There is extreme bias in the news community (on both sides) because of their investment (or lack thereof)... And possibly a certain amount of attempted market manipulation as well.

In other words, almost everyone writing about bitcoins is full of shit. Take everything you read, on all sides of the issue with a grain of salt.

hackerboos• 13 years ago

There's only been one rational post on Bitcoin in the last fortnight:

http://blog.samaltman.com/thoughts-on-bitcoin

voyou2• 13 years ago

"These posts are entirely the result of authors who didn't buy bitcoins when they were cheap."

That's nonsense. The post is a result of applying a particular economic theory of how money works to something that is apparently trying to be a form of money. This theory of money might be wrong in general, or it might for some reason not apply to bitcoin specifically. But to dismiss it simply as "bias" is willed stupidity - it is a way of avoiding addressing the actual arguments put forward in the post.

(The specific theory being drawn on in that post is called Modern Monetary Theory; it isn't generally accepted by mainstream economists: https://en.wikipedia.org/wiki/Modern_Monetary_Theory )

VexXtreme• 13 years ago

These posts are entirely the result of authors who didn't buy bitcoins when they were cheap. They want it to fail, and try to find any flaws in it that they can, because if it succeeds then they'll really feel like shit because they missed out.

I see it every day. One of my coworkers used to be into Bitcoin and owned a fair number and then decided to donate them away when they were still a few dollars a pop. These days he can't stop making predictions about how Bitcoin is going to fail and how it's all a bubble and ponzi.

It's unbelievable how some people are unable to deal with their cognitive biases.

foobarqux2• 13 years ago

I'm tired of every Tom, Dick and Harry taking that Bitcoins are worth $BIGDOLLARS as self evident and the idea of having to provide justification is repulsive.

foobarqux2• 13 years ago

That should read "as repulsive"

msandford3• 13 years ago

The Fair Price of an Ounce of Gold is Zero! Since there's no issuer of an ounce of gold it can't be worth anything. Q.E.D.

EDIT: Some context: "First, all financial instruments are accounting creatures. They are the asset of the bearer and the liability of the issuer. Gold coins were the liability of, e.g., the King, Federal Reserve notes are liability of the Federal Reserve, and coins are the liability of the Treasury."

An ounce of gold is worth a lot even prior to being minted into a coin. As such you could melt it, cut it in half, etc and it would retain it's value. That means it might technically be the liability of the government or the king, but practically speaking they're not. I could buy krugerrands, francs, golden eagles or whatever, melt them down and make jewelry out of them and it doesn't screw up the books of any of their issuers.

lignuist• 13 years ago

The fair price of an ounce of gold is one Bitcoin. More or less. Currently.

jstalin• 13 years ago

I found this odd as well. The US Dollar was essentially a unit of weight for much of its early history. Much of the money circulating was in fact silver Spanish dollars, issued by the Spanish empire as a result of the gigantic silver mines in central and southern America. Anyone could bring a unit of gold or silver to the treasury and be issued a silver or gold dollar. It was not a liability of the government in any way.

https://en.wikipedia.org/wiki/Eight_real_coin#United_States https://en.wikipedia.org/wiki/Coinage_Act_of_1792

bitcoin-truth9• 13 years ago

a) the treasury would take seignorage.

b) money is a free-market good as in your example above. all the government was doing was weights and measures standardization.

c) only fiat (paper) money is a liability of the government because the original deal (FRNs) was that the notes would be exchanged for coin. That is why the note says promise to pay the bearer a dollar (which is a denomination of weight of silver or gold).

voyou2• 13 years ago

So what can you make out of your bitcoins when you melt them down? The argument of the post is that gold-as-money is worth more than gold-as-commodity, and, if gold doesn't have an issuer, its value falls to that of the physical commodity. Because bitcoin, unlike gold, has no use except as a medium of exchange, if a bitcoin's value fell in the same way in the absence of an issuer, unlike gold, bitcoin's value would fall to zero.

msandford3• 13 years ago

One definition of money is "the most marketable commodity" and bitcoin does tend to pass that test. It's rapidly becoming a marketable commodity as so many people will accept it for goods or services.

My point wasn't so much that money has to be a commodity with an underlying value. It was to point out that the notion that "money is an asset to the holder and a liability to the issuer" might be the author's definition of money, but it's not THE ONLY RIGHT definition of money.

If gold can effectively be money, sans minting into coins that means that the earth is the issuer. Do we "owe" the earth an ounce of gold by virtue of having mined it? If so, do we then "owe" the earth a ton of steel for every ton we extract? And what happens if/when that gold or steel leaves the earth on one of the Voyager probes?

I'm making absurd arguments to point out that the author's definition of money is absurd. I'm not trying to troll but to illustrate a point. I think his definition of money works fine when you're issuing bills or notes, but it breaks down when people are using commodity money with none of the "debt" part that gets brought to play with notes.

When people start issuing paper notes redeemable for bitcoins then I'll accept the author's definition of money. But right now people are trading the actual commodity itself so his definition of money falls flat in this circumstance.

letstryagain• 13 years ago

If gold suddenly fell out of favour as a money it would lose more than 90% of its value. Bitcoin would lose 100%. Yes there's a difference but not much.

bobbles2• 13 years ago

So you have people exclaiming that bitcoins are worthless. Well... there are plenty of people right now spending bitcoins and receiving goods and services in exchange for those bitcoins.

Plenty of things in the world can be considered worthless if you aren't interested in them.

I'm quite happy for people to continue living in a world where sending money goes through several 3rd parties, all taking a cut and adding delays, but I don't want to be one of those people any more.

dingaling• 13 years ago

Your third sentence could just as easily apply to the Bitcoin network. Miners ( third parties ) take their cut ( transaction fees ) and the processing time is dependent upon the generosity of the fee-payer ( low-fee transactions are left out of blocks until finally swept after hours or days ).

You don't have a way to pay someone else BTC without participating in the system at least once.

I'm excited by Bitcoin but it isn't financial liberation.

bobbles2• 13 years ago

You're correct, but the fees are so low and the delay is so small as to be negligible (in comparison).

bachback• 13 years ago

also, the internet is worthless. just photos of cats, you know.

jferguson• 13 years ago

The price of a Bitcoin is the amount of other resource (possibly a more traditional currency, like electrum or cocoa beans ;) ) that two parties can agree to trade at.

What's fairness?

lcuff• 13 years ago

This is clearly low-quality flame-bait IMHO. Sophisticated math in the middle doesn't impress me.

knowitall• 13 years ago

Wouldn't the same logic also lead to the inevitable conclusion that the (fair) value of gold is zero?

Given that people pay real money for BTC, perhaps it is time to question the theory.

Btw, I found this really amusing: apparently the Tulip Mania never actually happened, or at least nobody knows for sure and lots of things seem to indicate that it didn't happen (overpriced tulips happened, but not a mania that made the common people join the frenzy and drove everybody to bankruptcy). It's on Wikipedia (the German version seems to be more clear about it, though).

warfangle• 13 years ago

If you think of the Bitcoin system itself as the issuer, the system itself promises to accept transaction fees -- ostensibly a bounty on verifying the transaction. So BTC are a liability of the Bitcoin system. QED.

Thus, instead of a debt-based economy, it will be a verification based economy.. which is a little funky, and I don't know if there are models for it yet.

/mostly-tongue-in-cheek

EGreg• 13 years ago

https://en.bitcoin.it/wiki/Myths#Bitcoins_are_worthless_beca...

BlackDeath3• 13 years ago

The structure of the payment system, not bitcoins, is actually what makes the bitcoin project so successful.

Isn't this statement just as valid when applied to USD?

morgante• 13 years ago

To follow the logic of this article, it could just as easily be titled "the fair price of gold is zero."

Gold billion has no value as a monetary instrument. But obviously it, like Bitcoin, has value as a unit of account because it is scarce.

schmichael2• 13 years ago

You're correct which is why he compares bitcoins to commodities instead of currency and declares it a "purely speculative asset."

Note that saying it has no fair price as a currency by no means implies it's worthless. It's just that its worth is purely speculative like any intangible asset like art, intellectual property (e.g.: patents), wine (or at least "valuable" wine whose cost bears no resemblance to how much it cost to produce).

Think of it this way: bitcoin isn't a currency you buy goods with; bitcoin is a commodity you barter with. It's just a far more convenient commodity than chunks of gold or pieces of art.

jacob0192• 13 years ago

Seems all currency is a ponzi scheme. Even gold is valuable only due to scarcity and peoples desire to have it. It's been currency for thousands of years and only recently has it been used in industry. That said, I keep expecting this bitcoin bubble to burst and it keeps going up. Could it stabilize as a true global currency, I doubt it, but maybe.

Rimpinths2• 13 years ago

Gold become desirable because it is an ideal metal to use for jewelry. That came first and its use as a currency came second. In that sense, it has been used in industry longer that it has been a currency.

jacob0192• 13 years ago

Excellent point, I wouldn't however use USD, EUR, or RMB for jewelry. The point remains that BTC has no less intrinsic value than any fiat currency. As soon as we promise each other work in exchange for something that thing gains value. In a sense BTC is more like gold than dollars because it is mined into circulation, rather than being conjured into existence by a central bank.

ericb• 13 years ago

Isn't that argument just turtles all the way down, though? If people stopped wanting jewelry, gold would not be desirable.

BetterLateThan• 13 years ago

Doesn't measuring BitCoin in dollars kinda beat the purpose of BitCoin?

maaku3• 13 years ago

No, it does not. Why would it? The point of a currency is to be exchangeable into any other good. That includes dollars.

schmichael2• 13 years ago

Excellent post, although as usual the title could be a be less sensational and more precise.

"Bitcoins are Purely Speculative Assets" would be an excellent line from the article to use as a title. Or perhaps as a comment put it: "Bitcoins are an Intangible Commodity Asset"

nutate• 13 years ago

I agree it was a great post from someone who doesn't necessarily understand the finer points of bitcoin, but does understand money writ large. I think the comments section actually ironed out a fair amount of the misinfo, etc. I quite liked it.

altoz2• 13 years ago

They should be easy to create (bitcoins are) BUT ALSO easy to destroy if demand declines;

You can provably destroy bitcoins by sending them to an address with no private key (this is provable). Believe it or not, this is actually useful for stuff like http://www.proofofexistence.com/

Hence the premise of this article, even if you take the underlying economic theory at face-value, is flawed.

tzs• 13 years ago

How do you prove that an address has no private key?

altoz2• 13 years ago

The actual number of public addresses that correspond to the generated group from the elliptical curve function is not 2^256, but slightly lower, since the cardinality of the group needs to be a prime number. Hence, if it's in that small gap, it would provably have no private key.

Lazare3• 13 years ago

...does "new economic perspectives" mean wrong ones? This article is lunacy. I started to skim it, but after the fifth or sixth ridiculously wrong assertion in as many sentences, I stopped. This article is so, so wrong.

It's littered with idiosyncratic phrases and simply incorrect definitions. For example:

Second, all financial instruments have a fair value that is defined as the discount value of future streams of monetary payments.

There's a grain of truth in there. Let's give the correct definition from Wikipedia:

In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give their present values (PVs)—the sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value or price of the cash flows in question.

In other words, it's nothing to do with "financial instruments"; it's how you value any asset. And it's not the "fair value" it's just one of many ways of valuing things. And it's not "the discount value" (as if there were only one), nor is it just "monetary payments"; rather it's all cash flows, in every direction, each one discounted appropriately.

And so on, and so forth. The author makes a big point of arguing that they aren't financial instruments so much as they are real assets. There's some truth to this; if I own a bitcoin nobody is obligated to give me anything in exchange; it doesn't exist as a liability on anyone's balance sheet. And? The same is true of a gold ingot. Or, largely, or a share of Apple stock; nobody is obligated to give you anything for that share. By the same logic, the "fair" value of gold (or Apple stock) is zero. Hell, the same logic would indicate the fair value of a Euro is zero. After all, nobody is actually obligated to give me anything for a Euro. I don't live in the EU, I have no EU debts, and no stores around here accept Euros. It's worthless! Except, you know, for the part where there's a large, liquid market where I can trade Euros for my local currency.

Now what is the fair value of a bitcoin? It does not provide any income (Y = 0), it has no maturity given that it is not a financial instrument. For the sake of argument, we might assume that their maturity is infinite because we are stuck with them forever once they are created.

Taken literally, this means that you cannot sell a bitcoin. I would suggest that this is not true. You can actually sell bitcoins. People do this every day! In which case we plug in the expected value of the future sale in his fancy equation, discount it appropriately to account for the time value of money and the uncertainty of how much I'll get when I sell it, and find that...

...bitcoins aren't worthless. Huh, who knew?

Rimpinths2• 13 years ago

And so on, and so forth. The author makes a big point of arguing that they aren't financial instruments so much as they are real assets. There's some truth to this; if I own a bitcoin nobody is obligated to give me anything in exchange; it doesn't exist as a liability on anyone's balance sheet. And? The same is true of a gold ingot. Or, largely, or a share of Apple stock; nobody is obligated to give you anything for that share. By the same logic, the "fair" value of gold (or Apple stock) is zero.

Gold has some intrinsic value. If nothing else, it has some industrial uses. Bitcoin has no comparable intrinsic value.

Owning a share of AAPL common stock has value. You get voting rights in the company. You also have a claim to Apple's assets, although with a lower priority than any bondholders or other creditors. So owning AAPL shares does come with obligations from Apple.

Euros (or dollars) also have some value as fiat currencies. You can pay debts and taxes in euros. The government has an obligation to accept euros as payment for taxes. So essentially these currencies are your ticket to stay out of jail.

Bitcoin doesn't share any of these qualities with gold, AAPL, or euros. That was the author's point and it still stands.

Lazare3• 13 years ago

Gold has some intrinsic value. If nothing else, it has some industrial uses.

The value of gold is not based on its intrinsic industrial uses. It shares this characteristic with bitcoins.

So owning AAPL shares does come with obligations from Apple.

Not in the sense OP used. He was very explicit:

One is that they are convertible into something else, another is that the issuer will accept them as final means of payment from his debtors.

Apple stock is not convertible on demand into gold or cash, nor is Apple obligated to accept Apple stock in payment of its debts. By OPs definitions, Apple stock is not a financial instrument, and thus has no value. (Note: Of course, as ever, OP has used an incorrect definition, but that's neither here nor there.)

But again, according to OP Apple stock is not a financial instrument; it shares this characteristic with bitcoins.

You can pay debts and taxes in euros.

No, I actually can't, no more than I can pay them in bitcoins. If I had some Euros I could trade them for my local currency and use that to pay my debts and taxes, but the same is true for bitcoins. We can argue that the market for euros is much more stable and liquid than the market for bitcoins (very true!), but this is a difference of degree, not a difference of kind.

The differences between bitcoins and gold, euros, or Apple shares are real and significant, but OP has failed to articulate them.

jeza• 13 years ago

You can't claim that the Euro isn't a financial instrument just because you don't live in Europe. They are issued by the European Central Bank and national central banks of Eurosystem members, who in turn share the liability (explained briefly here: http://en.wikipedia.org/wiki/Euro#Issuing_modalities_for_ban...).

This makes the Euro a traditional currency which bitcoin isn't. That's not to say bitcoin is worthless, since its value is really whatever someone is willing to pay for it.

Lazare3• 13 years ago

You can't claim that the Euro isn't a financial instrument just because you don't live in Europe.

Indeed, I can't claim that. Nor am I. It definitely is!

This makes the Euro a traditional currency which bitcoin isn't. That's not to say bitcoin is worthless, since its value is really whatever someone is willing to pay for it.

I don't think we disagree. :)

ademarre• 13 years ago

As I grow tired of journalists publishing their shortsighted opinions of Bitcoin, it is refreshing to see a critic employ a model to make his point. I don't know anything about Modern Monetary Theory, and I'm not sure that it's even a valid model for Bitcoin, but at the very least it resembles the type of thinking we need more of (i.e. thinking with models).

Cryptocurrency is a brilliant thing, but we need a better way to model its place in our world. I'd like to see someone develop a first-principles model to help us better understand the consequences of decentralized cryptocurrency. The right model could highlight the areas where more development or reform are needed.

thothamon• 13 years ago

Hmm, "Death of the Internet Predicted"? Seriously, are there one or two succinct points to this article? Is it saying:

- The author thinks Bitcoin users are either irrelevant crackpots (anarchists/libertarians) or criminals?

- Gold is valuable and Bitcoins are not because digging in the ground is fundamentally more valuable than discovering large prime factors of numbers?

- The author doesn’t like the properties of Bitcoin, or Bitcoin is not useful to national governments because they can’t control it (not a monetary instrument, can’t reduce supply, etc)?

- The author believes Bitcoin is doomed to collapse to essentially no value?

- The author believes people who engage in Bitcoin trading are involved in a Ponzi scheme?

I’m not sure what the point is, but to be fair, I’m not sure it matters. Bitcoin is useful for those who value its properties, and there are many people who do. No one can wave off these people by labeling them as money launderers, anarchists, or Ponzi schemers (which I don’t think is even true); nor will such statements, or analyses such as this article, prevent anyone from trading Bitcoin, buying or selling with Bitcoin, or holding Bitcoin. And since Bitcoins are fungible and becoming ever more so as time goes on, regulations and laws will prove difficult-to-impossible to enforce, in a manner very similar to P2P file-sharing (but with all the technical lessons of P2P sharing now learned).

You might bet against Bitcoin specifically because of one or more technical flaws, but digital currencies in some form, and specifically currencies not controlled by any nation or corporation, are here to stay.

javert2• 13 years ago

We do understand it bitcoin.

You can think of bitcoin as "backed" by speculators. It has a market price, because speculators will give you other currencies for it. That is what makes it useful for value transfer (trade).

And the more it is demanded for trade, the more liquid it will be, leading to less volatility and less risk for speculators.

Whether the price holds up in the long run or crashes to near-zero is impossible to predict. But it is now safe to say that it could go either way. It depends on the choices of people and governments.

Bitcoin has already proven (or very close) that digital currency that is purely a financial asset (not demanded for jewelry, industrial use, or taxes) is viable.

I don't see how bitcoin not meeting certain a priori definitions that were created before digital currency was even a possibility, are relevant. It seems likely to me that the blogger is either confused about abstract ideas relate to reality, or is dishonest.

bitcoin-truth9• 13 years ago

Jews and Gentiles in Moldbug's terminology.

javert2• 13 years ago

Can you please explain what you are talking about? I have no idea at all what you mean.

The Fair Price of a Bitcoin is Zero

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