This reminds me of the "Not Even Wrong" attribute of String Theory. How can something be overvalued, if it's only value is derived from the price people are willing to pay for it?
Usually when someone's saying something is overvalued, what they mean is that they think there is good reason to believe that what people are willing to pay for it now is significantly more than what they think people will be willing to pay for it at some undefined point in the future. Or, in a nutshell, that they think it's a fad.
I think it's generally a fairly safe bet to assume that, when there's a buying rush on something, the market price will end up being quite a bit higher than what it will be once things start to stabilize. That's a fairly intuitive implication of supply and demand, and I think the only real way around it is if there's some other force that's constantly working to push the price up. For example, the price of land tends to appreciate because the supply of land is approximately constant, but the number of people who want land is always growing.
Bitcoin maybe has that with its deflationary design. But a counterweight to that feature is that nobody really needs Bitcoin for anything. So, like land, the supply is pinned, but, unlike land, it's entirely possible for demand to plummet all the way to zero.
Take the US real estate market in 2007: You could argue that, hindsight, it was overvalued if you needed to be worried about what it would be worth 2 years later, but, 10 years later, prices were even higher.
Might also be different values to different people if they have differing levels of ability to exploit it. But, in the narrow case of cryptocurrency, I'm pretty sure it's (currently) got very little value outside of its exchange rate.
This is a mis-understanding of the term "value," at least in the context of investing. Value is the benefit you receive from holding an asset. If you buy an undervalued bond, the interest and maturity should pay you more than the price you paid for it. Same with stocks and dividends, derivatives and cash flows, et cetera.
Currencies seem like an exception until you consider how FX traders make money. Currencies give you access to borrowing and lending in their respective economies. Their relative values are enforced by market factors like the carry trade. Bitcoin doesn't have this because, like gold, it does not natively support interest rates.
That said, they're (usually, at least) in line behind bond holders, and most companies are trading a high multiple of their liquidation value these days, and companies tend to take on a lot of debt right before they go under, so to a reasonable approximation, the amount of that value that a common stock holder can expect to see is 0.
Not really the point, but land can clearly go to zero [0] (and below). Just ask St. Louis or its peer cities how well their giant land banks are working out.
[0] "Zero" here means the land is worth less than whatever amount justifies the obligations that come with owning it (e.g. taxes, maintenance, etc).
Things with intrinsic value (aka things that produce cash flow, like stocks, bonds, real estate, etc.) can be somewhat rationally priced based on their expected returns & risk profiles. Things without intrinsic value (gold, bitcoin, beanie babies, etc.) are priced primarily by speculation. BUT, gold, for example, has a built-in floor and ceiling price: since it's useful for electronics and medical purposes, its price cannot go to 0. Similarly, if the price gets high enough, mining becomes profitable, increasing supply, driving the price back down. Being a non-physical thing, Bitcoin has neither of these mechanisms, so its price can, as we've seen, flail around bounded only by investor greed.
That statement is false for a number of reasons, among which the fact that the US taxpayers have to pay their taxes in dollars and thus the value of a dollar is pegged to the value of the average worker's anual income.
But there's no feedback to the market if, for instance, power prices go up and mining becomes more expensive. The least efficient miners must simply either mine at a loss, or drop off until difficulty readjusts downward and those who are left are back in profit. More expensive power wouldn't affect the market price of a bitcoin.
--edit-- Because it doesn't affect the supply, the same number are created either way.
This seems intuitively wrong. Production and marginal costs are always factors.
If power goes up in value, it becomes more expensive to produce new Bitcoins as well as process transactions. That would feed into prices, fees and usage. The strength of this signal might be obscured by noise, but that doesn't mean it isn't there.
But it's still correct - there is no link there.
> If power goes up in value, it becomes more expensive to produce new Bitcoins as well as process transactions.
No it doesn't, because the number of bitcoins produced is a constant regardless of price, and they can only be sold at market price. If people stop mining because it costs too much, the supply to the market is entirely unaffected.
The cost of power has absolutely no bearing on the transaction fees or the transaction processing capabilities of the network either. Only congestion affects transaction costs, and the transaction capacity of the network is not connected to the number of miners online or the hash rate, it is roughly constant and dependent on protocol factors.
--edit-- - Replying to the child post here as I am rate limited :(
> If power costs go up 10x, the cost of operating the rigs that verify transactions goes up. Miners who find processing transactions unprofitable will remove themselves from the system
If those miners remove themselves, it has no bearing on the rate at which transactions can be processed or the price of a transaction.
They are all trying to validate the same transactions in parallel. The network does not get more capable as you add mining capacity.
> until transaction fees rise to a level that pays the bill.
What mechanism would cause the fees to rise?
(--edit-- last edit - I think what you're missing is that as the number of miners decreases, each miner gets a bigger share of block rewards and fees)
If power costs go up 10x, the cost of operating the rigs that verify transactions goes up. Miners who find processing transactions unprofitable will remove themselves from the system until transaction fees rise to a level that pays the bill.
There will be some short term effects as you describe until the difficulty adjusts.
Difficulty is adjusted every 2016 blocks based on the timing of previous blocks. So in the long term, the rate of block creation stays constant, averaging 1 block per 10 minutes.
Consider Bitcoin if there were a single miner running a single rig. They sink costs into the rig, and then run it, paying for electricity as it hums. The rig has to produce at least as much income to this miner as she pays out in electricity costs. Otherwise, it's more profitable to turn it off. So if electricity prices go up, income has to as well. If it doesn't, the rig goes off. This is fundamental to profit being equal to revenue minus costs.
In a networked state, there are more interaction effects but the fundamental relationship holds. Every miner must pay, directly or indirectly, their electricity costs. (More than that, every user has to pay electricity costs. If electricity prices skyrocketed, an electronic currency--whether digital dollars or Bitcoin--becomes fundamentally uncompetitive relative to paper.)
Constant-rate production dampens this effect, but does not remove it. At the end of the day, somebody is paying for the electricity the network consumes. Those somebodies aren't doing it for free.
What that means is that the threshold would be about ten times lower if electricity prices were ten times higher globally.
As you can understand, this is a big big waste - which is why alternatives to proof of work are researched heavily.
This change in threshold would flow into pricing. Also, energy costs are a factor in equipment costs, network access costs and the cost to end users. One would be hard pressed to find a single priced good or service on this planet that doesn't respond to energy prices.
You don't have to look further than Bitcoin. The cost of producing Bitcoin is primarily the cost of wasted energy - how much energy should be wasted is determined algorithmically. Too low and you get arbitrage opportunities; too high and people stop mining.
Bitcoin pricing is not at all related to energy prices in the middle-to-long-run.
> Every miner must pay, directly or indirectly, their electricity costs.
But they have no mechanism to pass this cost on. There is no change in the levels of production. They cannot increase fees as fees are voluntary and users only set them to improve their processing priority.
If a miner finds that mining is not profitable, they must indeed switch off. The hash rate of the network falls. The remaining miners get a bigger share of the daily block payout. Users though, are entirely unaffected, and so is the open market.
There is literally no mechanism by which mining costs can affect price in BTC. It's the other way around. Price affects the number of miners fighting for a share of the spoils. If it's no longer profitable, they stop. The hashrate drops, those left behind get more of a share.
I'm not sure how else I can explain this to you - the cost of mining cannot add value to the system (other than securing it) because there is no mechanism to pass on higher fees, the supply is unaffected by the number of miners, the transaction speeds are unaffected by the number of miners... there's a complete disconnect in that direction.
When bitcoin started there was basically one computer mining and the difficulty level reflected that and the cost of a bitcoin was less than a cent.
Now that there is billions of dollars worth of hardware dedicated to mining, the difficulty level goes up until the rate of block creation is one every 10 minutes. But now the 12.5 bitcoin reward every 10 min has to support billions in capital investment hence the price needed being higher, of the order of $2000. I guess if the price fell well below that to say $100 then there would be a lot of mining hardware repurposed or sold on eBay and we could get cheap graphics cards again.
re The speed of transactions? The price of transactions? The creation of new coins?
The speed remains about the same, the price of transactions tends to go up, the creation of new coins is not effected as it is hard coded in the bitcoin software. (https://www.anythingcrypto.com/guides/bitcoin-mining-block-r...)
None of the above. More miners means more people splitting the block rewards, and more network security against 51% attacks. Literally nothing else is affected.
It costs $62M to put 22,800KG into LEO with Falcon 9. But if all I'm sending up is a block of concrete, that isn't going to have much monetary value to anyone. Indeed, it might have negative value (particularly if, when it drops out of orbit, it lands on someone's house).
You could say the same thing about any currency, future or derivative.
Not really. Derivatives have intrinsic values. There are fundamental properties that push their prices into certain equilibria. Currencies are more complicated. But between interest rates, which all modern currencies natively support, and characteristics of the underlying economy, here too one can derive boundaries.
Cryptocurrencies don't have this because (a) they don't natively support rates and (b) have a poorly-defined exclusive economic base (if it exists at all). So you end up with a number that jolts around pretty much purely on animal spirits.
It can be overvalued if the transaction volume reduces, even if it the price doesn't reduce much.
Some things will sell more if the price goes down, some others won't.