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Comment by digitalengineer | Hacker News Reader

Bitcoins certainly took a look at gold. You have to 'mine' it and it's limited like gold. It's dividable as well, for easy transactions. Unlike gold you can send them over the world. There is one problem however. They have no intrinsic value. That's why gold became money, everybody around the world wants it (or know they can accept it and swap it for a (local) currency). Right now the only reason people want bitcons is because they think somebody will want them in the future. With gold, people want gold to itself.

Bitcoin is not gold. It's a currency at best. Even fiat currency is backed by the full faith in governement. Bitcoins seem to be valuable because a lot of people are hoarding them instead of using them. Looks like a bubble with people wanting in on the action...

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Nobody wants gold because they want gold. They want gold because it has value, and that value is purely based on what someone else will give you for the gold. There's no intrinsic usefulness to gold that makes it worth $1000 per ounce, or whatever the current price is.

Yes, gold is selling for quite a lot right now, and it's probably not because people spontaneously developed a taste for jewelry. Having established gold's price due to valuation from those who do like jewelry, gold is a convenient way to store and transfer buying power. As such, people snatch it up, availability goes down, exchange rates go up. Given those considerations, it still must rely on people bidding those higher prices for jewelry, but now it's only available for the higher bidders among them. However, especially in the economic climate, there is another source of valuation, which is speculation that in the future, prices will go up. Based on this phenomenon, the price of gold could conceivably rise up, yes, past the point where any consumer would want to buy it for jewelry. But this is only because speculators believe that in the forseeable future, USD will be devalued so much that some will be willing to buy for jewelry at that higher rate.

Finally, there is another form of speculation, which I will call "Hot Potato Speculation". This is the one you're talking about. This is speculation based purely on other people's speculation, which in turn is based on other people's speculation, ad infinitum. This is the "greater fool" scenario. It adds a lot of volatility to the market. Hot Potato speculation does surely exist in the gold market, just as it does in any market. But the valuation based on jewelry consumption serves as a negative feedback loop to keep it in check. Further, valuation based on gold's storability and transferability as a currency piggybacks on it and bolsters it further. Long-term, informed speculators, who will not be spooked by a small price fluctuation, bolster it further. So, the first three sources of value serve as protection against fluctuations from Hot Potato Speculation.

However for Bitcoin, Hot Potato Speculation is all that exists.

Jewelery's value is as a price tag you can wear. It's not about it being "shiny" as cheaper materials can be made to be just as shiny. And gold is only a price tag because it was the best technology for implementing a secure distributed account system. Until bitcoin.

> Jewelery's value is as a price tag you can wear.

That may have been the case at some point, but it's taken on a life of its own, such that people value it for its own sake. Maybe that will leave the culture if gold's price drops, but I think it won't happen all at once. People care about gold specifically, and diamonds specifically, for weddings. For some reason, but it's there. And I use "shiny" as a half-joking way to describe desire for something unto itself.

"People care about gold specifically, and diamonds specifically, for weddings."

A brilliant piece of marketing by De Beers, that.

Here's Satoshi's response to the "intrinsic value" problem:

https://bitcointalk.org/index.php?topic=583.msg11405#msg1140...

Quoted that for you:

As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: - boring grey in colour - not a good conductor of electricity - not particularly strong, but not ductile or easily malleable either - not useful for any practical or ornamental purpose

and one special, magical property: - can be transported over a communications channel

If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.

Maybe it could get an initial value circularly as you've suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it.

I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something.

(I'm using the word scarce here to only mean limited potential supply)

Good link in your links:

As I see it, BitCoins do qualify as money when they are used as currency — which they actually are — because they are present goods, the same way that software or an mp3 file are also a present goods. And they are useful as currency because they have good properties as a medium of exchange: They are scarce, homogeneus, difficult to fake, easy to identify (this could be improved), easy to transport, divisible, etc. The perceived utilitiy of these properties is what makes Bitcoins valuable. Purchasing power is a consequence of utility, not the opposite.

It would make the BitCoins value more stable if they could be used for a non monetary purpose. Maybe some cryptographic application? I think that it would be a good idea for the BitCoin community to research for a non monetary utility for the BitCoins.

As long as BitCoins don´t have a non monetary utility, Mises followers are correct when they say that if BitCoins loses its currency status, then their value would drop to zero, the question is, how much value would also lose silver or gold if they were not used as currency or store of value anymore? BitCoins are not risk-free, as nothing in life is risk-free. It´s a matter of choice.

Gold has been valuable for over 4.000 years, Bitcoins? 4, and that's already longer than the Tulip Mania ;-) We'll see how it works out but it sure is interesting.

http://eleconomistaprudente.wordpress.com/2011/06/06/bitcoin...

Well, I'm glad Satoshi got right to the point. So many defenders come up with these roundabout counterarguments. "There's value in the system" "As I understand, its intrinsic value come from being so easy to spend across the world"

The bottom line is, there is a belief that there can be a currency bootstrapped into an exchange rate, with no compelling reason to have it other than to pass it on to the next. It's a hard one to argue either way, but I'm still holding out in camp "no".

Here's a simple engineering analogy since I'm among engineers. In both cases, valuation is based on some sort of subjective valuation (advocates love to point this one out, which is why I don't use the phase "intrinsic value" anymore, they're right that there's really no such thing). In both cases, prices can swing wildly. This is because there is a positive feedback loop constantly pushing prices in either direction, from people subjectively reacting to previous prices and wanting to follow suit. However the consumable commodity has an additional negative feedback loop, from people always ready to buy if prices get low enough, without regard to future expected prices, because they just want a pretty ring.

Correct. Not only because they want a pretty ring, also because it's what their culture demands and has demanded for century's. (India, Asia, heck even Germany with it's 'hard money'-policy finds it's roots in a defense against a debasement of the currency). We should not forget we are the generation that has never seen a currency connected to something intrinsic like gold. (I'm referring to the closing of the gold-window by Nixon in the 70's). We are viewing this through our own culture.

The biggest thing that makes me doubt my position is the fact that the gold window was closed and the US hasn't collapsed in 40 years. Even if there's a slow debasement, that's not what I expect to happen to Bitcoin, [edit to clarify] I expect it to collapse very quickly. I know there's the "you need dollars to pay taxes" argument. But that doesn't sit right with me. It's not a fixed amount of dollars, it's a percentage of your salary. Exchange rates of the dollar can go down, people's real salaries go down, and the real amount of taxes they pay go down. There's no negative feedback loop.

Yes, the gold window was closed (as was predicted by The Triffin Dillema http://en.wikipedia.org/wiki/Triffin_dilemma ). It was replaced by the petrodollar. Oil could only be paid for in US dollars. Lately we have seen more and more counties trading in their own currency amongst one another. (Mainly China and BRICS). The fact that the EURO does revalue gold's price to it's market price and the dollar does not is also very interesting.

"Even fiat currency is backed by the full faith in government."

What does this mean? Government won't give you another commodity in exchange for fiat. Is it faith that government will give you a dollar in exchange for a dollar?

Exactly. The American dollar is backed ONLY by the good faith of the U.S. government. It is not backed by gold at any Federal Reserve Bank as it used to be until 1933. After 1933 privately held gold was confiscated and it's price in dollars revealed upwards.

Gold's intrinsic value is such a small percentage of its market value it's basically irrelevant.

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