Don't worry! It won't ever fall below its intrinsic value!
That said, the tax part does add a bit of stability in the form of an additional friction to any hypothetical plan for everyone in the US to coordinate to start exchanging gold or Euros in lieu of dollars.
The vast volume of why the value is there is clearly because of such thinking, so you are right.
But the parent post is also right, because circular logic tends to be awfully inadequate at explaining things. This is where taxation comes in, because it serves as the "induction base case", so to speak. Taxation is what sets the wheel in motion initially; the additional momentum then builds gradually, but the continued existence of the base case is what gives it stability.
Take taxation away, and the wheel will still continue because loan repayment acts as a "secondary base case". But once that secondary base case disappears as well, it is just a matter of time until collapse - kind of like the cartoon characters that keep running over the edge of the cliff, until they look down and notice gravity.
So if you want to understand why money has value in the first place, the parent comment gives the better answer. But that doesn't mean your reply is wrong, either.
But I disagree that you need taxation as a bootstrap to get you to the equilibrium. Indeed, in the actual history of the US it was the backing by gold that established the dollar; initial taxation was minimal. Now that backing has been removed, and the dollar still functions. Then, I infer, you would argue that taxation has replaced gold-backing as the stabilizer.
Your penultimate paragraph is an interesting suggestion, but I'm not convinced. Could you point me toward some place where it was fleshed out? I can easily imagine a world where people keep writing new contracts denominated in dollars, whose street value is set by the process that I described. Where is the motivation for people to defect? One answer is that a new currency (like Bitcoin) comes along that has special properties that make it useful enough for people to absorb transaction costs and to start exchanging alongside the original fiat currency. Then things could unravel. And indeed, taxation could suppress this by providing additional friction like I mentioned in my original comment. But in the absence of such a new currency I don't expect the dollar to spontaneously start to unravel on its own simply because there are no taxes. People would continue to need a medium of exchange and the dollar is very good.
Go just a bit past Econ 101, and you'll discover that economists do not universally agree on these things. That being said, here is one popular view:
https://en.wikipedia.org/wiki/Modern_monetary_theory
From wiki:
"[Knapp] argued the state could create pure paper money and make it exchangeable by recognising it as legal tender, with the criterion for the money of a state being "that which is accepted at the public pay offices"."
Or in other words, taxes, torts, and other laws give money its value.
i think legitimacy is more correct than value - value is a result of what people demand in exchange for their goods/services. Legitimacy is the trust that people have on the currency (ie, the trust that others woudl also accept the currency).
And that kind of backing is what the community is TRYING to build for BTC.
I believe this doesn't stop people from creating special obligations through contracts that are denominated in other currencies. It more means that if I run over your mailbox and a judge orders me to compensate you, I can use dollars.
If you're referring to the 'legal tender for all debts public and private' clause on the notes themselves, that means that it can be used for such purposes, not that it must be accepted. If we agree that I'll do your deck and you'll give me your car, you can't just say 'I want to keep my car, here's some cash instead'.
Before the contract is agreed to, the parties can make any arrangement they want, including agreeing to pay in bitcoins. But if one party fails to deliver and they wind up in court, then the court (as kragen pointed out) will almost never require them to deliver the item, the court will instead require that the victim be compensated and will allow dollars to be used to compensate them.
Now, if bitcoins were worth $250 each at the time the deck got painted and are only worth $160 each by the time the court case completes, there is a fairly good chance that the court will demand the $250 price be used to determine what the compensation should be.
Huh? What does this mean? This phrase can be applied to government bond ("The US gov't promises to pay you back") or to FDIC insurance ("The US gov't promises to refund your money if your bank closes"). But it doesn't have any meaning for dollars, unless it were to mean that the gov't would exchange it for gold, which of course is false.
If the US Gov't stopped collecting taxes -- or had some other substantial liquidity crisis -- the very real issue is debt service. Since the USD is the global reserve currency, we are in the rather unique situation of having our debt denominated in our own currency under control of our own central bank. This is where the "full faith and credit" of the USA enters the discussion of our currency. If we had issues servicing our public debt, the government has the option of devaluing our currency. In other words, inflating away our debt. In such a scenario, the value of USD plunges against foreign currencies, and there would be a massive effort by everybody with substantial USD holdings to sell.
This, among other reasons, is why Keynes envisioned a super-national reserve currency traded among central banks. If the US public debt was denominated in Bancor, the option of inflating it away wouldn't exist.
So you're saying that "full faith and credit" just means "The gov't promises not to crazily inflate the money by printing lots of it". Fine. (That doesn't explain what process determines the street value, it just acknowledges that the government can destroy it.)
I don't really see how the rest of what you are talking about applies to my comment. Are you claiming that fiat currencies are impossible in countries without debt?
Yes, every country CAN issue national debt. But issuing sovereign debt is more common largely because investors prefer it.
Either way, I didn't mean to sound misleading by calling it "rather unique." Thanks for helping me clarify.
You are, however, correct that most of these countries issue their debt in US dollars ("sovereign debt") rather than their national currencies.
It means, "The government will accept it for tax payment," and for the payment of various other debts and fees.
And to some extent it is currently based on the ability of the United States to protect its interests overseas, the trading of oil in the US dollar and significant trade partners accepting the US dollar as a means of exchange for goods shipped to the US.
And that works as long as significant portion of the world continues to believe in all of the above, if that should ever stop I hope I won't be there to watch the carnage. That's the kind of 'interesting times' that one would hope to avoid.
There for, the US gov't (or more correctly, the Fed reserve) can print their way out of debt that they owe to third parties, until those third parties all wise up. But then you got 11 air craft carriers paroling the world, untold number of submarines and missiles, massive air force etc, and if the US gets a whiff that you are no longer denominating your goods (e.g., oil) in USD, you might find yourself being called the axis of evil.
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If all the population did that, that would mean the government had decided that. The population and the government aren't disjoint sets.
It is true that nothing absolutely guarantees the value of the US dollar in the strongest absolute sense, but that's true of absolutely everything. There are no absolute stores of value that are guaranteed. (This bothers a lot of people, but it's true.) But there's a qualitative difference between being backed by the US government and being backed by nothing at all, a very substantial one.
I would point out that one of the usual things touted in BitCoin's favor is precisely that fiat currency can be arbitrarily manipulated by governments; this is possible because the backer of a currency can manipulate said currency, in a way that I cannot. On the other hand, I can arbitrarily issue and manipulate JerfDollars, but nobody takes them. (Not even me.) One of the things BitCoin tries to solve is precisely that people don't like what's backing the US Dollar, and they'd rather try something else. If it were indeed a backingless currency precisely like the US Dollar, the entire point of BitCoin goes up in smoke; what's the difference between two backingless currencies? Not much. In trying to claim that the two currencies are identical in this fashion, you may win the battle but you lose the war entirely.
So while you may feel its value is higher as jewelry etc., its utility is still quite high in electronics.
So if something improbable or drastic happened tomorrow that made the currency not useful (e.g. governments outlawing it, a bug in the code) then the price would fall well below what it costs in electricity to mine it and the currency would become mostly defunct, i.e. it's intrinsic value plummeted because it's usefulness did.
tl;dr the intrinsic value is the usefulness of the currency not how many electrons you pump into it (though there is likely some corollary between them)
Cost of production should be a price ceiling, not floor: if I can make it for $X, why would I buy it for $Y >> $X?
Edited: To hopefully head off further misunderstandings, by "should" here I mean "it makes the most sense to expect" - not any ethical imperative - and I'm speaking in broad terms, in the long run.
The lower bound ought to be at least the cost to the miner that produced the new bitcoin (when they try and sell it or use it in the market).
The upper bound is essentially nonexistent. If I have $3000 to invest in bitcoin, what is the possibility of me getting a decent return on $3000 worth of mining hardware? Vs (based on the recent explosive growth) spend $3000 on BTC directly at $200 a piece and you have 15BTC. If it continues to generally rise in value against the dollar a portion of that can be turned back into USD later and spent on a more worthwhile rig, or just used in the BTC economy itself (to the extent that it exists).
"Cost of production", in an economic sense, includes opportunity cost - that is, the amount of money I could be making if I did something else with the time instead, which can be more or less taken to mean a reasonable accounting "profit".
Edit: Also, I may sell it to you at a loss because I can't do anything better with it, if the price fell since I produced it.
> The lower bound ought to be at least the cost to the miner that produced the new bitcoin (when they try and sell it or use it in the market).
Yes, if the price of bitcoins falls below the cost of producing them, more won't be produced, but that won't actually prevent the price from falling further.
If we end up with a very competitive market for using cryptography to clear digital transactions, miners might well face a situation where it is barely worth it to burn electricity.
Besides people buy things for $Y >> $X everyday simply for convenience. You could go buy ingredients and make a sandwich for $X dollars, but instead you go to the food truck and buy one for $Y dollars because it's convenient. It's not like food truck guy is selling his product at cost.
And regardless, there's absolutely no conceptual reason cost of production would represent any kind of floor.
Well no sane/rational entity would want to sell for less than cost of production because that would entail a loss (let's keep this simple and say there aren't any ulterior reasons one would receive gains/benefits from selling at below cost).
Since competition drives the price towards the cost of production it's reasonable to consider it or a price just above it as the floor.
Edit: I guess I should state, I'm not trying to say there is a 'hard' floor in which the price can't possibly drop below. I'm more saying it's a relative benchmark for where the lowest price would tend to settle given a healthy bitcoin market/environment.
If bitcoins were overproduced, say during a bubble, they could well remain low long-term - there is no particular pressure driving them up.
Well if the cost to produce them was higher than the price, people would simply stop mining. Perhaps my understanding of bitcoins isn't correct, but I thought that if there were no miners then transactions would stop being processed and the currency would basically stop working and die.
I know right now bitcoins are still being created/produced by miners, but at some point in the future that will stop happening and miners will be compensated through transaction fees as a percentage of each transaction. At that point if price of bitcoins falls below the cost to mine we likely will see people stop mining and transactions ceasing until the price rises enough for it to be worthwhile.
Of course bitcoin is a bit special in that there are a lot of fans of it that will likely be completely willing to accept a loss to keep the currency going. As we all know humans don't act as perfect economic-minded rationalists. But I still think the cost of production is a good bottom metric to keep an eye on. If the price falls below that we will know that the currency is in rather dire straits and being artificially propped up by those with an interest in keeping it going.
Could it be said that bitcoins _do_ have an intrinsic value equal to the marginal amount of electricity and equipment needed to produce one?
No, that's an intrinsic cost. It would only be an intrinsic value if that electricity and equipment could inherently be extracted back from the bitcoin. The intrinsic value of gold comes from what you can use gold for other than a medium of exchange. Bitcoin has neither the intrinsic value of commodity currencies nor the sovereign backing of fiat currencies.
Intrinsic value is derived from what you can do with something, not what you did to get it.
You do present an interesting conundrum though.
That seems like a fairly artificial mental exercise. Why would market value be zero if intrinsic value is greater than zero? I suppose the only situations would be if a good has a unique property that can provide utility to you but no one else, like a food that for some reason only provides nutrients for you, or any good in a truly post-scarcity society or region, or if the market is extremely uninformed or irrational.
I think the real problem is with the metaphysical implications inherent in the word "intrinsic." You can always go "one level higher" and say that the value at the previous level was not intrinsic or "as intrinsic." Does an apple have intrinsic value if there are no humans alive anymore, and if not, is the value really "intrinsic" in the apple?
As far as I can tell, the specific term used in finance is based on predictions of the future value that can be derived from the good, regardless of its current market price. Of course, I would suspect that most market participants already make predictions about the future and that those predictions affect the price they are willing to buy or sell a good at. Granted, some people will be able to predict the future more accurately than other people, but does that mean we can only tell what the intrinsic value of something was in hindsight?
There it is, folks. We aren't talking about a simple concept, we are talking about the metaphysical and the deeper implications of words. What is a "word", anyway? Let's take a moment to consider.
So then, the market price of any good is its intrinsic value? Under this definition, if I can sell a bitcoin for x USD, then its intrinsic value is x USD.
Or today there is a communist coup in country X and the new regime declares the old currency worthless.
That's what I meant by "trust."
A Bitcoin is essentially a tradable hashcash, which has direct value in spam filtering.
"Isn't it enough that I ruined a pony, making a gift for you?