[Forbes] My Answer To A VC's Bitcoin Question

...Without government checkpoints for financial institution wire transfers, bitcoin capital flows freely, without limits, and perhaps anonymously. The harmful tools of centralized monetary policy would also not exist. And finally, the taxation of income that began in the United States in 1913 would operate on the honor system — the honor of the taxpayer, that is. This could be welcome news for some as a progressive income tax was a fundamental tenet of Marxism.
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Bitcoin is the quintessential disruptor for not only does it disrupt established primary-level players in the field of payments, like VISA, Mastercard, and PayPal, but it disrupts the very nature of monetary authority. Bitcoin is disruption within supreme disruption....


more:
http://www.forbes.com/sites/jonmaton...coin-question/

While the exchange of bitcoins is very convenient, there is no intrinsic nor extrinsic value that backs up their worth so they are a ponzi-scheme. There will come a point in which sales of bitcoins will dwarf purchases and their value and the system will collapse. And with no value mechanism to back them up (taxes, gold, silver, dollars, etc...), this engine will not get started again. The only exception would be if false confidence was injected into the system (like a media report).

It is basic economics. An exchange system can not survive if you take out less value in the aggregate than you put in...which has to be the case with bitcoins because their production enjoys seigniorage profits. The only exceptions are government regulations/aid and/or ponzi speculation (where value is maintained or grown by the introduction of new buyers...but this is not sustainable).

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Originally Posted by rpwi

there is no intrinsic nor extrinsic value that backs up their value so they are a ponzi-scheme.

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They have intrinsic value in terms of CPU cycles. BitCoins are "mined" using CPU cycles. Lately people have been using graphic cards to mine bitcoins.

It may be weird, but that's how BitCoins are "dug up".


From Wiki:
Bitcoins are awarded to Bitcoin miners for the solution to a difficult proof-of-work problem which confirms transactions and prevents double-spending. This incentive, as the Nakamoto white paper describes it, encourages "nodes to support the network, and provides a way to initially distribute coins into circulation, since no central authority issues them."[1]

The network currently requires over 1,000,000 times more work for confirming a block and receiving an award (50 BTC as of February 2012) than when the first blocks were confirmed. The network adjusts the difficulty every 2016 blocks based on the time taken to find the previous 2016 blocks such that one block is created roughly every 10 minutes. Thus the more computing power that is directed toward mining, the more computing power the network requires to complete a block confirmation and to receive the award. The network will also halve the award every 210,000 blocks, designed to occur about every four years.

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Originally Posted by RonRules

They have intrinsic value in terms of CPU cycles. BitCoins are "mined" using CPU cycles. Lately people have been using graphic cards to mine bitcoins.

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But that isn't really intrinsic value. What is the intrinsic value of CPU cycles? I can't eat in them. Can't sleep in them. I can't even use them to say aid in my photo editing program because they are past tense CPU cycles...not present and reusable cycles. To me, it makes as much sense to assign CPU cycles to bitcoin's value as it would clapping my hands. If I clap my hands my hands a thousand times should I be entitled to 1 dollar worth of bitcoins? How does hand clapping have intrinsic or extrinsic value?

Now a currency doesn't need to have intrinsic value to circulate if it has extrinsic value. Say the government says you will go to jail if you don't acquire 100 bitcoins a year. This then gives the bitcoins very real and very powerful extrinsic value. The most common source of extrinsic value is taxes...which in the US majorly and artificially props up bank deposit money (demand deposits).

I also think that CPU cycles are kind of weird as an intrinsic value. If they could be future CPU cycles it would make more sense.

But don't forget that gold's intrinsic value is weird too.

I can't eat in them. Check!
Can't sleep in them. You're weird!
... aid in my photo editing program. Check!

Gold has value mostly because it's rare. It has industrial uses, but most industries try to avoid it because it's rare and expensive.

JUST talking efficiency:

Gold as a currency is inefficient, not only because of the weight and difficult of physically transferring it, but because it takes enormous money and labor to dig it up, an activity that has nothing productive.

If we both want to trade, electronic bits are currenty the most efficient way to trade. Paper money, less and metals least.

You don't hear these arguments from gold bugs.

What you described are the reasons I'm not a goldbug. Its circulation value is far and above what its fabrication value is...which from my perspective means it is quite overpriced...and there is no guarantee that the price could suddenly and without warning nor logical reasoning, come crashing down to industrial fabrication value (not counting jewelry). So if the real price of gold is 100 dollars an ounce and the market price is 1000 dollars...sure gold could say hover and bounce around in that high range...but it could only do so with ponzi justification.

Electronic transfers are easy...the key is how they are created and how they get value. One of the major problems we have in our economy now, is that that the Fed only allows banks to hold electronic dollars...which we in turn can only indirectly hold through fractional reserve deposits (debt money). If we could hold electronic dollars directly at the Fed this would greatly increase efficiency and cut out the wasteful middleman in the banker.

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Originally Posted by RonRules

I also think that CPU cycles are kind of weird as an intrinsic value. If they could be future CPU cycles it would make more sense.

But don't forget that gold's intrinsic value is weird too.

I can't eat in them. Check!
Can't sleep in them. You're weird!
... aid in my photo editing program. Check!

Gold has value mostly because it's rare. It has industrial uses, but most industries try to avoid it because it's rare and expensive.

JUST talking efficiency:

Gold as a currency is inefficient, not only because of the weight and difficult of physically transferring it, but because it takes enormous money and labor to dig it up, an activity that has nothing productive.

If we both want to trade, electronic bits are currenty the most efficient way to trade. Paper money, less and metals least.

You don't hear these arguments from gold bugs.

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Yes. Gold has high value because it is HARD to find. Its RARE. If it was as abundant as dirt it wouldn't have as much value.

But gold isn't "inefficient* because you don't have to use the actual physical gold. You can use certificates, checks, debit, etc

Also, the fact that gold has a small amount of value in a small amount of weight makes it MORE efficient, not less. Think about it, what if we used iron to back our money instead of gold. That would be a lot more inefficient.

Bitcoins are not at all comparable to gold. Gold is valued as gold. The bitcoin tokens are just that...tokens. They're like virtual chuck-e-cheese tokens that aren't good for anything except trading with other people as long as they decide to trade them. They have some collectible / novelty value because their supply is fixed but that's it really.

That's why I will never buy any bitcoins. Much rather have some silver or gold.

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Originally Posted by matt0611

Yes. Gold has high value because it is HARD to find. Its RARE. If it was as abundant as dirt it wouldn't have as much value.

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Rarity does not necessarily create value. I have a few small stones of the extremely rare Benitoite, the state stone of California. Although not dirt cheap, they are not as valuable as diamonds, even though they are much more rare. They are also MUCH prettier. Apparently they are so rare that there isn't a significant market for them and thus not much comparative value.
http://en.wikipedia.org/wiki/Benitoite
https://encrypted-tbn3.google.com/im...-4-mSPdn38Olf9

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Originally Posted by matt0611

But gold isn't "inefficient* because you don't have to use the actual physical gold. You can use certificates, checks, debit, etc

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Now you're back with paper money. How do you know that physical gold really backs it?

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Originally Posted by matt0611

Bitcoins are not at all comparable to gold.

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Full disclosure: I don't have any Bitcoins. I find the concept interesting, evolving and possibly leading to something good.

Even at this stage, I find them preferable to Federal Reserve notes.

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Originally Posted by RonRules

Rarity does not necessarily create value. I have a few small stones of the extremely rare Benitoite, the state stone of California. Although not dirt cheap, they are not as valuable as diamonds, even though they are much more rare. They are also MUCH prettier. Apparently they are so rare that there isn't a significant market for them and thus not much comparative value.
http://en.wikipedia.org/wiki/Benitoite
https://encrypted-tbn3.google.com/im...-4-mSPdn38Olf9




Now you're back with paper money. How do you know that physical gold really backs it?



Full disclosure: I don't have any Bitcoins. I find the concept interesting, evolving and possibly leading to something good.

Even at this stage, I find them preferable to Federal Reserve notes.

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You're right, the rarity in itself doesn't make it valuable in itself, its utility gives it value but the rarity lowers it supply so its price is higher.

How do I know that physical gold backs it? The same way I trust any corporation to ship me the correct things when I buy from them. Brand name, trust, legal consequences etc. Plus the fact that they would have to allow me to go to them with the paper or electronic money and exchange it for the metal.

Bitcoin is like a commodity pre-IPO. It is a hedge against inflation in the way gold is plus it is in an early enough stage and developing daily to the point where it is an investment into its potential future value as the technology advances.

Bitcoin has value beyond all other currencies in that it has the potential to do more than what any other currency can do. It will allow for even more secure transactions than what we have today. It allows for more flexible transactions. It has the potential to be used as a voting system. And much more coming down the pike.

Sort of like a combination of gold and Apple Computer. It is better than a currency backed by government.

Did anyone participating actually read the interesting article?

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Originally Posted by Indy Vidual

Did anyone participating actually read the interesting article?

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I did. You came at it from an interesting angle pointing out the Bitcoin startups as opposed to investing in Bitcoins.

This may be a better way to make money, sort of like how people will invest in mining stocks instead of just in gold.

There have been a lot of high return Bitcoin investments and they tend to pay out big returns compared to the regular market. But that is likely because of the greater risk in something that is so new. The market is wide open for many VC investments and it would be wise to consider some investments into competent projects that have the potential to have a huge impact.

I think the companies that are working toward point of sale technology have the potential for the highest returns. There are several competing toward that end.

Then again, there are a few companies that are the sole companies offering a service such as bitinstant. They dominate the market when it comes to converting cash to BTC. And they continue to grow their services.

^^^
Thanks, I'm not the author ("Contributor"), but I did like the article.

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Originally Posted by RonRules

They have intrinsic value in terms of CPU cycles. BitCoins are "mined" using CPU cycles. Lately people have been using graphic cards to mine bitcoins.

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Those are costs, not value. The whole market value of BitCoins comes from the fact that its purchasers believe they will be able to buy the same amount of goods and services with them as they could with the money required to buy them in the first place.

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Originally Posted by rpwi

What you described are the reasons I'm not a goldbug. Its circulation value is far and above what its fabrication value is...which from my perspective means it is quite overpriced...

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Then your perspective would be wrong. "Value" is not equal to a good's production cost. There is no such thing as "fabrication value" independend from how consumers value a good.

Many neo-classical economists would argue that champagne is so expensive, because land in the Champagne is so expensive. But of course they have it backwards. If consumers wouldn't value sparkling wine from that region as much as they do, the land would worth as much as any other generic piece of land anywhere else. Value is imputed to consumer goods by costumers and from there iterative to all former stages of production by the profit-expectations of their respective sellers.

Quote:

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and there is no guarantee that the price could suddenly and without warning nor logical reasoning, come crashing down to industrial fabrication value (not counting jewelry). So if the real price of gold is 100 dollars an ounce and the market price is 1000 dollars...sure gold could say hover and bounce around in that high range...but it could only do so with ponzi justification.

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You are right about the fact that gold could at every time drop in value/market price. But there is no "real" price of gold (as in: quantifiable/objective, based on anything else but on supply and demand). It just doesn't exist. It is correct that the gold price has to do with many factors. Some of them have to do with its use in electronical or medical products. Another factor (and I really don't understand why you won't count that) is its utilization as jewelry. And also the fact that people know that gold is valued for all the former reasons and more and that it's a nonperishable material adds to its aggregate value, because they see it as a store of value and even a possible means of exchange. Every single one of these factors adds to golds value. There is neither a ceiling nor a floor for the gold price. It could drop to zero tomorrow. As could every other existing product, if people stop to value its usages. The only question is: Is that very likely? Given that gold is mainly valued because of its physicle properties (and of derived usability and its valuation), I'd say it's better suited for money purposes than anything else I could come up with. But I prefer the position: Anything the market choses. I, as part of the market, would go for gold based currencies.

Bitcoin's value as far as holding bitcoins is just a small subset of what Bitcoin is all about.

It is a useful tool for the exchange of goods. The value of the BTC itself makes little difference in that regard.

PayPal has no intrinsic value either. But it has brought in a lot of money and aided in e-commerce.

+1

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Originally Posted by Elwar

Bitcoin's value as far as holding bitcoins is just a small subset of what Bitcoin is all about.

It is a useful tool for the exchange of goods. The value of the BTC itself makes little difference in that regard.

PayPal has no intrinsic value either. But it has brought in a lot of money and aided in e-commerce.

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Also, Bitcoin has proven to be an interesting story:
How fast will it develop?
What will Gov's do?
Look! It went way up, then lost half it's value in ~2 days; Buy Now?
What will happen next?



<back on topic>
Should people create BTC based businesses?
Will you get rich, or hassled by the Gov?

It always bums me out when libertarians subscribe to Marx's labor theory of value. Nothing has intrinsic value.

Edit: Danan nailed it. Nicely said.

Whether or not you think they have value, we just bought all new appliances and a new bed using bitcoin. No tax and we got them about half the price this way.

What's not to like about a currency that the Federal Reserve doesn't control?

Great deal.

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Originally Posted by amy31416

Whether or not you think they have value, we just bought all new appliances and a new bed using bitcoin. No tax and we got them about half the price this way.

What's not to like about a currency that the Federal Reserve doesn't control?

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+1776

+ rep

Some Libertarian types have yet to clue in that whether they like Bitcoin or not, is irrelevant (to the extent that 1 person can influence a market). The FACT that people DO place value in Bitcoin is EXACTLY what gives it tangibility as currency.

Currency can be anything, including digital manifestations.

As far as I'm concerned, anything should be allowed as currency. The only strict enforcements on money should be ON THE GOVERNMENT.

Something about NO BILLS OF CREDIT...As far as I'm concerned, if the government cash is honest in nature (gold...)...what everyday folk use to transact is 1) none of my business and 2) my ideals are not THE answer - merely a part.

Power to Bitcoin - more appropriately, power to those who seek to free themselves peacefully. Bitcoin is part of that solution - so long as enough people hold such a view.

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Originally Posted by amy31416

Whether or not you think they have value, we just bought all new appliances and a new bed using bitcoin. No tax and we got them about half the price this way.

What's not to like about a currency that the Federal Reserve doesn't control?

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Interesting take by Forbes. VCs by nature are extra cautious so jumping into something that isn't defined will be tricky. Setting up bitcoin as a payment for existing web businesses is relatively simple. My view is it wouldn't hurt to accept as you can always turn around and transfer to cash. Also right now there is a lack of people taking bitcoins so if you offer a semi unique product or service you may gain new customers.

As to mining.. Mining with graphics cards has been ongoing since early 2011 but that is just a small amount of what bitcoins are. People can purchase bitcoins, use them, and sell them without bothering doing anything dealing with mining. Besides the price point is coming when power costs to mining makes it really not a profitable market without getting into more non-commodity hardware. So while I can understand the whole idea of 'I let a computer run and I make money!' look at any of the exchanges and the dollar figures changing hands and realize that mining is now a small part of the overall bitcoin system.

*As a disclaimer, I have some mining machines. Bitcoins have paid for some kick ass gaming machines but I could never price justify getting into it too heavily. Serious power issues to go large scale when a multi GPU machine can draw over 1000W let alone the cooling needs.

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Originally Posted by Seraphim

+ rep

Some Libertarian types have yet to clue in that whether they like Bitcoin or not, is irrelevant (to the extent that 1 person can influence a market). The FACT that people DO place value in Bitcoin is EXACTLY what gives it tangibility as currency.

Currency can be anything, including digital manifestations.

As far as I'm concerned, anything should be allowed as currency. The only strict enforcements on money should be ON THE GOVERNMENT.

Something about NO BILLS OF CREDIT...As far as I'm concerned, if the government cash is honest in nature (gold...)...what everyday folk use to transact is 1) none of my business and 2) my ideals are not THE answer - merely a part.

Power to Bitcoin - more appropriately, power to those who seek to free themselves peacefully. Bitcoin is part of that solution - so long as enough people hold such a view.

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I don't want to "outlaw" Bitcoins or anything like that, but I won't advocate them either. Maybe for short-term usages, like electronic cash. But I don't believe that it's wise to transfer all the money from your bank accounts into Bitcoins.

Let's imagine a theoretical scenario:

There are two men on an island. One happens to be a good hunter and food collector. The other man, for some reason, cannot hunt or collect any food, but he happens to have a printing press. Are those two man going to trade food for paper money? Of course not, there is no reason for the hunter to want the money. He doesn't value it at all.

Now a third man enters the island and he happens to be a skilled toolmaker. So he and the hunter are trading tools for food and both are benefitting. Now the money producer "could" have chance to sell his money for food and tools, if he convinces the other men that their bargaining would be way easier if they used his paper money.

The more people there are joining them, the more likely his services would be a viable business, especially since he is the only one with a printing press.

But would it be wise to save in his paper money for the future, or your kids? I don't belive it would be, because who knows if the anyone manages it to create a second printing press, or if he runs out of paper or ink, or if the printing press breaks and nobody can fix it? It's way to risky to store wealth for a long-term perspective, if the only value of the good is its own purchasing power.

And the same is true for Bitcoins. Who knows what's going to happen in technology in the next 5, 10, 20, or 30 years? Maybe the way our computers work then is totally different from today. Maybe there is a giant leap in technology that influences Bitcoins immensly. As soon as there is a widespread loss of confidence in their future purchasing power it becomes a game of "Pass the Bomb" and they lose all their value quite quickly. Their value is purely conficence-based and more speculative. That doesn't mean that it's not as real as any other value, but it makes it very volatile.

So I believe that a gold-backed creditcard is a better solution for cash and savings at the same time. The very fact that gold is valued even if it's not used as a currency and not only because it is supposed to store wealth, has a direct implication on its valuation as a currency and preservation of wealth and makes it less volatile. Because people know it's always going to be worth at least something and that technology is very unlikely to influence this to a greater extend, there is less risk of a total gold-crash, than of a Bitcoin-crash. Even though gold's market value would be based on the same reasons too, to a great extend.

But again: Whatever the free market choses is certainly better than the current system.