
The Fair Price of a Bitcoin is Zero - aliston
http://neweconomicperspectives.org/2013/12/fair-price-bitcoin-zero.html
======
msandford
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.

~~~
voyou
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.

~~~
msandford
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.

~~~
dragonwriter
> 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.

"Rapidly becoming a marketable commodity" is vastly different than being "the
most marketable commodity".

~~~
bitcoin-truth
The process of rapidly becoming a marketable commodity is called monetization.

Bitcoin is in a hypermonetization melt-up phase.

~~~
dragonwriter
> The process of rapidly becoming a marketable commodity is called
> monetization.

No, its not. That's the process of printing money to pay off a debt. Or the
act of a government making something legal tender. It might even be a tenable
name for something becoming money (which isn't just _a_ marketable commodity.)

Things often become marketable commodities -- even rapidly, especially when
they are newly discovered or new uses are discovered for them -- without
becoming money.

> Bitcoin is in a hypermonetization melt-up phase.

What is that even supposed to mean?

~~~
bitcoin-truth
you are referring to monetization of debt. monetization per se is the process
of becoming a money. Mises is a good read.

> (which isn't just _a_ marketable commodity.)

You got that right. It's _the_ marketable commodity.

> What is that even supposed to mean?

A melt-up is the opposite of a melt-down.

------
colinbartlett
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.

~~~
fragsworth
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.

~~~
voyou
"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](https://en.wikipedia.org/wiki/Modern_Monetary_Theory)
)

~~~
maaku
Furthermore, theories in economics are descriptive. One should not expect with
certainty an innovative currency to succeed or fail based on how well it
matches a particular theory. When we are in new territory, we should expect a
few surprises.

~~~
bitcoin-truth
Scientific theories are falsifiable: they make testable predictions.

Austrian Economic theory comes closest to this ideal.

~~~
maaku
And now you've discovered why economics is a _social science_. It builds
models of human behavior. Humans are non-deterministic at this scale. As soon
as you build an economic model, it's possible it stops working because its
existence influences the behavior of the humans its modeling.

------
warfangle
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

------
javert
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-truth
Jews and Gentiles in Moldbug's terminology.

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

~~~
bitcoin-truth
[http://unqualified-reservations.blogspot.in/2013/01/how-
bitc...](http://unqualified-reservations.blogspot.in/2013/01/how-bitcoin-
dies.html)

------
bobbles
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
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.

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

------
thothamon
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.

------
ademarre
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.

------
EGreg
[https://en.bitcoin.it/wiki/Myths#Bitcoins_are_worthless_beca...](https://en.bitcoin.it/wiki/Myths#Bitcoins_are_worthless_because_they_aren.27t_backed_by_anything)

------
altoz
> 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/](http://www.proofofexistence.com/)

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

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

~~~
altoz
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.

------
BlackDeath3
>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?

------
jacob019
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.

~~~
Rimpinths
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.

~~~
jacob019
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.

------
schmichael
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
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.

------
morgante
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.

~~~
schmichael
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.

------
jferguson
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?

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

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

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

------
Lazare
...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?

~~~
Rimpinths
> 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.

~~~
Lazare
> 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.

------
knowitall
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).

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

