I have read about it and watched youtube videos about it but I am still not sure I totally understand how they are created and why the have value. Some dialog with someone who understands it well would be great.

There are really no bitcoins, not in a physical sense of course, but also not in a digital sense. There is no string of data or anything like it that corresponds to a bitcoin.

When someone says they have a bitcoin, what they really have is an agreement with all the other bitcoin users, that a bitcoin address they control contains one bitcoin. A bitcoin address is kind of like an account number, and to control it you need the private key, which is kind of like the password for it. A file called the blockchain acts as a ledger, holding the history of all bitcoin transactions, and is used as a record of which addresses hold bitcoins, and how many.

Bitcoins are created by people called miners. In order to secure the bitcoin network, that is, to prevent people from changing the blockchain for their own benefit, miners compete to solve a difficult mathematical problem. The difficulty of the problems to be solved is adjusted periodically, so that a miner will solve one roughly every 10 minutes.

When a miner solves the problem, called solving a block, he gets to add all the pending transactions to the blockchain, and gets the block reward, which is currently 25 bitcoins. The problem is difficult to solve, but easy to verify. All other miners on the network verify that the solver followed all the rules, and if so, accept the new blockchain as valid, and then begin work on the next problem. All bitcoins in existence are from block rewards.

The question of why bitcoins have value is trickier. Things have value when they are both useful to human ends, and scarce, also taking into account alternate means to fulfill those ends. The supply of bitcoin is limited by the rules of the system. And they are useful because people can transact with strangers around the world over an internet connection.

At first, this ability was not as useful, because not many people or companies accepted bitcoin. The exchange rate in the early days reflected this. Someone once paid 10,000 bitcoins to get $40 worth of pizza delivered. As more people started using and accepting bitcoins, their value increased. This is called the network effect.

This thread is going to be fairly dead because no one seems to come to the economics forum anymore. It would probably be best to continue the discussion here:

http://forumserver.twoplustwo.com/30...rency-1011408/

Thanks man. It's still difficult to understand. I know Austrian economists will say that bitcoin is not a viable alternative to the dollar because it derives its value from the value of the dollar. I'm still not really clear on that point either.

Thanks for the response though.

Bitcoin does not derive it's value from the dollar at all. People trade dollars for bitcoins, as well as many other currencies. This market sets the price. When someone trades say, $800 for a bitcoin, all that means is that he wanted the bitcoin more than he wanted the $800, and someone else wanted the $800 more than they wanted the bitcoin. Similar preferences of many thousands of people trading on exchanges give bitcoin its market value at any given time.

A hard commodity like gold doesn't make a great currency because you have to carry it around, it's tough to make the exact change, can't send it over the internet, etc. A paper/digital currency that may be redeemable for a hard asset is easy to move around but relies on faith in a 3rd party (to not create more units than there is gold to back it up, to have a strong army and a reasonable inflation rate, whatever).

The innovation with Bitcoin is that now you have a frictionless currency unit that also doesn't rely on trust in a 3rd party. (And it's even a little better than centralized digital currency, in that you can send it directly to anyone in the world who has an internet connection. They don't need an account with the same bank or web wallet or whatever.)

There are only so many units in the Bitcoin network, so if the network itself has value then it follows that each unit will have value.

That's the very basic explanation imo.

Ya, wtf is up with this forum, lol. Do they just delete all the threads eventually? I don't look at this forum much but I know it had many more threads than this at some point.

By default the display options only show posts bumped in the last 75 days.

Some guy figured out a way to make 21 million bitcoins and limit the supply. By doing so, all you have to do is attempt to advertise those coins such that an initial value is created. Bitcoin was less than $1 for over a year. As more people got involved, more and more people traded them resulting in a price increase. Many started to collect them and speculate in them.

Unlike linden dollars, pokemon cards, gold, or full tilt poker u.s dollars, the amount and value is not controlled by anyone, but a bittorrent of computers. Bitcoin is decentralized. Thus everyone is their own bank that runs the bitcoin software. If full tilt poker was based off bitcoins instead of u.s. dollars many of us would still have our money and be millionaires with a $1000 full tilt balance.

So in summary bitcoin is just 21 million units of digital coin where complex encryption is used to send coins between users. By consensus people decided to use bitcoin for trade.

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Many Austrians think a coin should be backed by a commodity like gold. Bitcoin does have a problem in that new coins like dogecoin can be created that in a way that increase the supply of cryptocoins as a whole. Thus 100000s of new coins can be created. Gold is an element and only about 30 elements could possibly be used as currency.

The Euro , mexican peso, and all currencies are compared and traded between each other. Thus to say it is valued in dollars is not correct. If all dollar exchanges went down there would still be a price in China Yuan and the Euro.

Bitcoins don't derive their value from the US dollar in any direct way. This argument is completely wrong. The only indirect way in which there is a relationship, is that people are willing to invest in bitcoins because the whole world has gone insane when it comes to money, as evidenced by everybody using paper with no intrinsic value.

The problem is that bitcoin not only doesn't solve that problem, but it's actually worse than fiat currency. Because fiat currency is backed up by government force. That is, either you use it, accept it, and pay your taxes in it, or you get a bullet in your head. Bitcoin has no such advantage and as such will collapse in value much sooner than fiat currencies in general.

Bitcoins, ultimately, derive their value from the same place that fiat currency derives it's value nowadays: speculative investment. But this isn't the kind of speculation that is based on sound fundamentals. It's the kind of speculation that gets people to participate in get-rich quick chain letters.

Most people don't know how currencies were bootstrapped because it happened in a age which we have very little literature from.

Here is a good video about the history of money:


Cliffs: Currencies might have started as gifts. Bitcoin's value started with some geeks giving each other gifts.

First off, a currency is not a money. It is a money substitute. A currency is a system of certificates for money that is stored at the currency issuer's vaults, and is redeemable on demand to the bearer of the certificate (the currency unit).

And, secondly, money was, originally, simply a highly marketable good in a barter economy. Furthermore it was durable, fungible/divisible and easy to transport. Because of all of these properties, agents in the market started using this good as a medium of exchange, in order to overcome, to some extent, the problems of double coincidences of wants, and of accounting.

But Bitcoin, -although it is extremely durable, fungible/divisible, and easy to transport- is not and can never become a highly marketable good, because it's not a "good" in any sense. It's not even a service (although one can argue that the transfer system embedded in the software is a service, but not the Bitcoin units in and of themselves). Nobody wants to consume them. Nobody wants to use them to produce anything that others want to consume. All you can do with a Bitcoin is get rid of it by passing it to the greater fool.

A sound money needs to be a store of value. Bitcoins can never be a store of value because all value derives purely from empty speculation. There is no expectation that anyone will ever derive value from consuming a Bitcoin, or using it in the production of other consumer goods. In fact everybody realizes that to expect such a thing would be ludicrous.

The payment service is exactly what people value, and to use it you need to obtain bitcoins. Thus bitcoins are a means to an end of limited supply, just like every other thing in the world that has value.

This is obvious wrong so probably a good starting point explain how something can "magically" have value by having properties best in line with what money should have.


The reason any type of money has value is:
Uniform
Easily divisible
Durable
Exchangeable (related to the above)
Easy to transport
Easy to identify (by computers or otherwise)
Hard to counterfeit


Gold, dollars, and bitcoins all have properties of the above. The reason many argue bitcoin is a better money than gold or dollars is that its much better at being exchangeable (lower/zero fees and faster), easiest to transport, hardest to counterfeit, etc.

Those who say bitcoin needs inherit value simply don't understand the economics of money by definition. ANYTHING than has the above characteristics the best will have value. "Inherit" value is complete BS. Someone try calling me out as wrong and good luck.


netdraft, why are dollars or gold a store of value? Do they have any properties bitcoin does not have that outweigh the benefits I listed of bitcoin? These reasons gold or dollars HAVE value is because of these properties, it is not inherit (the market creates this value BECAUSE they have the above properties).

Too many posters posting and voting without understanding economics and this means poor people suffer. *sigh*

Your understanding of monetary theory is actually quite superficial.

US Dollars are not a store of value. Gold is a store of value.

The reason gold has value is because it's a consumer good, and a producer good. It's used in jewelry, dentistry, computers, cellphones, satellites, and many others.

The reason why gold is a store of value is because all of these uses (and/or others) from which consumers and producers derive value from gold, will continue to exist in the future, indefinitely. That's what something being a "store of value" means. You can take your gold and bury it in the ground for 1000 years, and when your great-great-great-great-great-great-great-great-greatX30-grandson digs it up, he will still be able to derive value from it, and to exchange it for other things of value because other people will also be able to derive value from using it.

You can recover gold from a ship that sunk in the middle of the ocean 500 years ago, and it's still worth a fortune.

It is true that gold has alternate uses that are non-monetary, and that can make it a safer investment. Anyone holding bitcoin should keep in mind that it can go to zero in a worst case scenario. Gold will likely always retain some value since, as its price falls, additional uses will become economically viable.

These facts do not negate the value of either USD or bitcoin, because there are still cases where either of those are better to use than gold.

FYP

If I want to send money to a stranger on the other side of the world, I'm most likely going to want to use bitcoin. And of all the possible ways to send money, any way involving gold will be one of the least likely.

netdraft - "These facts do negate the value of either USD or bitcoin, because there are no cases where either of those are better to use than gold."


I just told you the cases. From above:

"(bitcoin is) much better at being exchangeable (lower/zero fees and faster), easiest to transport, hardest to counterfeit"


I'm a goldbug too. But this doesn't mean there can't be something invented that is better than gold at being money in certain ways. Both can have value.

There can exist things that can outperform gold as a money. Bitcoin is not one of them.

You're confused. No one is saying bitcoin has to outperform gold overall to have value. It just has to have utility in specific cases, and clearly it does. There doesn't need to be only one "money".

I'm not confused. When I said Bitcoin cannot outperform gold, that's because Bitcoin is not a sound money. It's a terrible money. The only "utility" that it may have as a medium of exchange is dependent on it's value temporarily being maintained by pyramid-scheme speculation.

And of course I put utility in quotes because it really has no utility in and of itself, that is, it has no value coming from consumption demand or production demand, and it will never have any in the future. The only "utility" is in passing it to the greater fool. It's a game of hot potato. And when the music stops, whoever's holding the bag gets burned.

Or another analogy that I like, is that it's like a game of musical chairs, except the chairs are imaginary, much like some Bitcoin enthusiasts imagine that Bitcoins are a store of value or that they are a perfectly sound money. As long as the music is playing and everybody is dancing around, pretending the chairs exist, it's all fine and dandy. But at some point, the music's gonna stop, and everybody's gonna get hurt.

The difference between Bitcoin and fiat currencies is that with fiat currencies, you have all sorts of weapons pointing at the piano player's head, telling them they better not stop playing.

So guess which music is gonna stop playing first.

and netdraft continues to ignore my post above listing a few properties bitcoin has that no other money does WHICH GIVES IT VALUE. trouble proving this wrong?

I already proved it wrong. You just don't understand. Possibly because you're blindfolded by your zealous Bitcoin mania. You wouldn't be the only one. Just about every BTC enthusiast I've ever met has this problem.