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Comment by AndrewDucker | Hacker News Reader

I'd love to get an economist studying why the value of bitcoins goes up.

After all, they're infinitely reusable, totally fungible, and incredibly low friction. The only reason for their value to rise (rather than them just being passed around at the same price indefinitely) is if people expect them to rise, or if there's a shortage (forcing people to use fractions of a bitcoin to represent the same number of dollars as a whole one used to).

Is the cause largely the latter, or the former? Has there been a high enough rise in the transaction volume to explain the rise in value? Or is it all down to investors?

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I'm pretty sure the exchange price of Bitcoins is driven by the marginal supply and demand. So I think it's got to be what you call "investors" almost entirely (note that not all people buying in have to be speculators: if lots of people suddenly decided they'd rather have some Bitcoins because they want to use them, that would suffice).

So the question is how are the marginal supply and demand determined? The marginal demand is subject to spikes in interest, media coverage, the Cyprus crisis (I really doubt the latter is meaningful but perhaps it makes people everywhere think they want to move out of bank deposits. People certainly attribute things to it). The marginal supply is based on (1) mining, which happens at a fixed rate and (2) people who wish to exit Bitcoin, which is subject to lots of whims.

Lots of evidence shows that most Bitcoins are hoarded, so it's possible that what we see is just a supply crunch - nobody wants to sell their Bitcoins and some people want to buy. I suppose the natural way to answer that is to go look at historical exchange volume across all the exchanges (or, as a first-cut proxy, just Mt. Gox).

Can you please show me the evidence you mention that shows that most Bitcoins are hoarded? I'm genuinely curious -- the main metric I'm aware of is Bitcoin Days Destroyed, and that metric seems to show that hoarding is actually steadily decreasing over time.

http://eprint.iacr.org/2012/584.pdf

~80% of BTC are dormant, eg being hoarded.

>and that metric seems to show that hoarding is actually steadily decreasing over time.

This is the big question, isn't it. It's completely understandable the early adapters are hoarding, expecting a med/long-term payoff on their investment via appreciation. But will that continue indefinitely, or change eventually?

And dumping even a portion of that into the system would have significant price effect, and given how so many people seem to value BTC by its price more than its unique utility, what effect will that have on the economy.

You've answered your own question. It is all of the above.

The price system in any market factors in all of the information and motivations of the participants, and balances them out with a single value : the price.

The killer feature of the freely-trading market is the price. It communicates the state of the market as both an input and an outcome of the actions of the market players.

Remember that for any exchange to occur, two things of unequal value have to be exchanged by two willing participants. But the inequality between the items being exchanged is in the eye of the individual holder. The motivations are rarely the same for each participant, so you can never actually make blanket statements about why a market moves where and when it does - very rarely does a single issue dominate a price, because in those circumstances you have a market that stops exchanging if everyone has the same view.

People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.

http://mises.org/daily/1333

From a theoretical perspective, this is been the clearest elucidation to me. The reason the value of bitcoins is going up is because people who buy bitcoins expect that others will pay a higher price for it in the future.

Like I tell people: people who buy and sell bitcoins don't care that you don't want to participate. They just want anyone else who will participate.

The reason the value of bitcoins is going up is because people who buy bitcoins expect that others will pay a higher price for it in the future.

That has a much shorter name: http://en.wikipedia.org/wiki/Greater_fool_theory

The price of the Mona Lisa won't go down because the art community won't let it. It can do that because there is only 1 Mona Lisa. Such a force doesn't exist with Bitcoins.

There will be only 21 million bitcoins. Ever.

There are only 3 million copies of SUPERMAN #75.

yes, but for one thing

a) no one cares b) it is not a hard limit, actually

and, maybe, a) has something to do with b)

Actually, one of my favorite blogs is http://www.greaterfool.ca ;)

I'm familiar with the greater fool theory. But people buy commodities, currencies and financial instruments on this expectation of increased future valuation. There could be a case made that the greater fool theory is in effect for bitcoins, but it can't be said that it is the case simply because people expect higher valuation in the future.

"This whole country was made by greater fools!"

–

Oh sorry, wrong movie.

Good link. This particular paragraph struck me:

"Menger's theory avoids all of these difficulties. According to Menger, money emerged spontaneously through the self-interested actions of individuals. No single person sat back and conceived of a universal medium of exchange, and no government compulsion was necessary to effect the transition from a condition of barter to a money economy."

If Bitcoin is to be a success, it is the polar opposite of the origins of money. Instead of developing naturally as a more efficient means of exchange, it has had to be designed top-down in order to work backwards against all the cruft that fiat currencies have collected - features that would have prevented the original money from ever being widley adopted.

The value of bitcoins goes up because the entire system is a store of value. When bitcions are bought, people are transfering "real" value (USD or any other government backed currency) into the Bitcoin system where the value is being held. When they sell Bitcoins they are removing value from the system. Due to supply (limited) and demand (increasing), the amount real currency needed to purchase a unit of Bitcoin is going up. This transfer of value can be due to hopes of appreciation (speculative investment, possibly causing a bubble) or lack of faith in a base currency (hedging wealth, as is happening in Europe).

Since our monetary systems are now based on little more than unbacked faith and look to be failing in various ways, people are looking to put their wealth into something they feel they can trust and that might have more of a future than current fiat systems. Given the decentralized lack of control of Bitcoin and the rise in the current lack of trust in the offical financial systems, the rise of Bitcoin makes as much sense as the present rise in the value of gold, a traditional hedge of value and original currency backer. Now that people are now used to storing value in non-backed, faith based monetary systems, Bitcoin is the first fiat monetary system that has no ruler, and people are transfering their government backed faith based store of value into it. It can be thought of a democratic store of value, and as more people believe in it the more value it will have.

Yes. Bitcoin is the first fiat monetary system that has no ruler. Also, it has repealed the law of parsimony (haven't you heard, on the Internet, there are no laws).

So it's totally not the case that Bitcoin is going up because Bitcoin is going up, and people are bidding up its price on the expectation that the peak is nowhere in sight, and they'll make a tidy profit off later speculators.

Because the Internet has upended all the normal ways of doing things, just like it did for Sealand (remember those message board threads?), it doesn't matter that economists look at the price chart for Bitcoin and say "uh, that is a bubble", and then "also, bubble or not, that is not productive behavior for a currency". Nor does it matter that Bitcoin mostly buys you donations to extremely independent bands, tips for blog tip jars, "Avalanche Spa Powder Not For Human Consumption", and highly marginal web hosting. No, the price makes perfect sense: people can't trust the US dollar, which reliably purchases cars, air travel, thai food, houses, Macbooks, chest freezers, pork chops, chlorinated trisphosphate, tuition at Stanford, roofing shingles, dirt, methamphetamine, hookers, and guns. Not just here, but pretty much everywhere in the world.

It's definitely not because if the current price for Bitcoin makes no sense, it's not going to matter whether your online wallet gets hacked and all the Bitcoin stolen, because you've already lost 80-90% of your investment anyways.

    The original bailout plan, announced last Saturday, would
    have raised €5.8bn by skimming nearly 7% off all bank 
    deposits of less than €100,000, and 9.9% of bigger bank 
    accounts.

Source: http://www.guardian.co.uk/world/2013/mar/22/cyprus-savings-t...

Tell that to those in Cyprus how well the official system is doing at storing their value.

Edit: I'm sure you would call those people 'currency hoarders' since storing money in the bank means it's not flowing in the economy.

storing money in the bank means it's not flowing in the economy

Money in the bank is flowing through the economy, since the bank has lent it out to others.

You can have issues with partial-reserve banking, or not. But keeping a bunch of dollars or Euros in the bank is not hoarding them. They are active in the economy.

That edit was meant to be a joke based on the type of typical, echo chamber, limited knowledge response the s/he gave.

And since the repeal of Glass-Steagall who knows where the money in bank deposits goes.

When bitcions are bought, people are transfering "real" value (USD or any other government backed currency) into the Bitcoin system where the value is being held. When they sell Bitcoins they are removing value from the system.

These two sentences may be the perfect summary of how misguided the Bitcoin community is.

There is no value transferred into or out of the Bitcoin system when people buy or sell Bitcoins from each other. AAPL doesn't get money when I buy 1 share of AAPL from someone and they don't lose money when I sell 1 share of APPL to somebody. Because every purchase of AAPL is also a sale and every sale is also a purchase.

Try buying something with your APPL stock before converting it back to USD at the current market rate and tell me where your value went, especially when your probably don't even hold the paper the stock was printed on, if it ever was.

Maybe you put your money into a Stock Market system (buying stock), increasing its value, meaning that taking money out (selling your stock) would reduce the overall value of the system.

Maybe the Stock Market is just as misguided?

Try buying something with your APPL stock before converting it back to USD at the current market rate and tell me where your value went

Why would I do such a thing? It sounds like a giant waste of time.

Even if I were to, say, buy a Microsoft Tablet for 1 share of AAPL stock, no wealth has been transferred into or out of Apple Computer. Instead, the vendor now has 1 more share of AAPL and 1 less Surface, and I have 1 more Surface and 1 less share of AAPL.

And you have set the last sale price of APPL at 1 Tablet. If the current price of APPL was higher than the sticker price of a Tablet you have just gotten ripped off and vice versa. Some of the value just evaporated until the next sale, AKA arbitrage.

The point was that you can't do that even if you wanted to as the 'stock' is completely electronic without a way for you to transfer it's value to your seller of Tablets without first converting it to USD. The current system has no convenient general way to transfer their wealth in AAPL stocks from yourself to any person without going through an intermediary, which is the USD and the stock market itself. When you actually held the paper stocks you could give them to someone, now that value is stored in bits in a trading system.

I think your are confating my argument with 'giving' money to Bitcoin, which is a bit odd since nobody controls Bitcoin. Buying Bitcoin mean you are putting faith into the system, much like buying AAPL means you are putting faith into AAPL in hopes that the value of that stock with increase or at least not fall. If a large shareholder lost faith in AAPL and sold all their shares, the flux of money out of the system would devastate the investors, not APPL. Or at least not financially...the lack of faith might be quite devastating for APPL though.

I chose "Surface" as something that was around the price of a share of AAPL stock. I didn't think that would become an issue, but apparently it did. So just do the same thing with gallons of gas measured down to the cc, if you wanted.

PS: There are such things as fractional shares of stock.

The current system has no convenient general way to transfer their wealth in AAPL stocks from yourself to any person without going through an intermediary

Why is this relevant at all? Are you trying to say that Bitcoin is a more convenient form of currency than stock? No kidding.

Buying Bitcoin mean you are putting faith into the system

And other people are selling, which means they are losing faith in the system.

A stock is priced by the market based on the current value of all expected future dividend payments. ("Growth stocks" are just one more abstraction removed but in the end it all comes down to expected future earnings.) One-tenth of a company that will earn $10 a year every year from now to eternity has a value you can work out on paper.

APPL doesn't pay dividends.

This has gotten increasingly silly. I still don't know why you brought up stocks but now I have to waste time looking up very basic information.

#1. Yes, they do. [1][2]

#2. "Growth stocks" are just one more abstraction removed but in the end it all comes down to expected future earnings.

[1] http://www.dividend.com/dividend-stocks/technology/personal-...

[2] http://investor.apple.com/faq.cfm

4 dividends over 17 years, starting again about 7 months ago. Sorry for not knowing the latest news as all I've been hearing is that they don't. And what formula will give proper and accurate pricing on that many data points?

Don't answer that, this is getting silly. Have a good day. :)

or organized crime have started using Bitcoin en masse to move (drug) money out of developed markets back home.

>I'd love to get an economist studying why the value of bitcoins goes up.

Great sarcasm there!

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