Comment by nightski
4 years ago
You aren't talking about the intrinsic value of Bitcoin. You are talking about it's value relative to USD. These are completely different things.
Bitcoin has intrinsic value outside of the fiat system. It can be used entirely independent of fiat. Whether that will become common is another matter, but the value of Bitcoin does not have to depend solely on it's value relative to USD.
As long as miners can't pay the power company with their mining rewards, bitcoin can't exist outside the fiat system. The mining reward denominated in the currency the miner has to pay their electricity bill in MUST be higher than the electricity cost to mine the reward, otherwise the miners go bankrupt.
Capital-intensive industrial-scale miners might go bankrupt, but the origin of Bitcoin (starting from the whitepaper) imagined an ecosystem powered by effectively spare CPU cycles, where the marginal cost of electricity wasn't a big factor.
The beauty of the design lies in the balance of the incentives -- if electricity is too expensive, then sure miners will drop out, which lowers the hashrate and thus the security of the ecosystem, but remember that if electricity is expensive for honest miners than it will also be expensive for attackers. And if somehow there is an asymmetry where attackers have access to cheaper electricity than other honest miners, well it's likely in their economic interest to simply become miners themselves rather than attackers...
Bitcoin can easily exist at a minimal survival level that is effectively outside the fiat system for all practical intents and purposes, by leeching off free or near-zero cost electricity (I mean, nobody cares about the electricity bill for "folding@home"). In that kind of mode, it may not have industrial scale and you might not want to transact trillions of fiat-dollars worth of value through it, but it can easily exist.
From my understanding that's not exactly how Bitcoin mining works. It scales based on the amount of miners. So if the situation is as you described (value relative to USD tanks - which I find very unlikely due to inflationary nature of fiat) people would stop mining which would decrease the difficulty of mining causing it to use less electricity.
There are however miners using nearly free sources of electricity such as flared gas wells, solar, etc... If Tesla accepts Bitcoin/Doge for solar panels then you may have a system independent of fiat.
I'm just saying it's possible, not that I think it will necessarily happen. Like I mentioned I think BTC's value relative to USD will increase over time due to fiat's inflationary nature (Fed is targeting 2-3% inflation).
> people would stop mining which would decrease the difficulty of mining causing it to use less electricity.
This is true, but then you have a bunch of costly mining ASICs sitting idle. The bitcoin network does not pay miners out of the goodness of its heart but because it needs a very high hash rate to defend against double spend attacks. Guess what those unused ASICs might be very effective at? A prolonged fall in mining power caused by a falling BTC price is a death sentence for bitcoin as it would lead to massive attacks by opportunists renting hashing power to double spend their coins. You can already see this in many smaller coins.
> nearly free sources of electricity such as flared gas wells, solar, etc
Those may be cheaper than regular power, but they are not free. Taking solar as an example, you need to invest capital to buy the solar panels and they have a finite lifespan. Cost divided by lifespan gives you the running cost in $/year. Similar things are true for flared gas wells; you still need to capture the energy somehow and generators are not free.
> If Tesla accepts Bitcoin/Doge for solar panels then you may have a system independent of fiat.
This just moves the problem by one degree of separation. Unless Tesla can buy solar panels for bitcoin, they will need to sell crypto for fiat to buy their inputs. This goes all the way down the supply chain down to the real-world miners who dig up the ores for the solar panels and even they will need to pay their taxes, which you cannot do in bitcoin.
> I think BTC's value relative to USD will increase over time due to fiat's inflationary nature (Fed is targeting 2-3% inflation).
Perhaps. I suppose that this will depend on how much the maintenance costs in electricity and miner ASIC replacement costs as a percentage of total bitcoin market cap per year. If these costs are higher than 2-3% per year, bitcoin will see a net outflow of fiat as running costs and can only rise in price if new users continuously flow in (and of course, only ~7 billion potential users exist).
Also, it might be interesting to read up on why central banks universally target a low but nonzero inflation. There is a ton of established theory about why this is desirable and none of it is based on "let's screw taxpayers". Throwing that away will basically guarantee that crypto will never be very useful to pay your bills with.
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I can't pay my hydro bills with shares of a private company either or japanese yen either, it doesn't mean those things have no intrinsic value.
The difference is that you can pay someone with JPY and that's the whole transaction. When you pay someone in BTC, you also have to pay the power company with something. The system is an inherently leaky bucket.
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no one said that. you're paying in some fiat, right?
> Bitcoin has intrinsic value outside of the fiat system.
Not really, because even though the number of Bitcoins is limited, the number of cryptocurrencies is not. In any application that uses Bitcoin, you can substitute Litecoin, Dogecoin, or most other altcoins/shitcoins in existence, and there would be zero difference.
In fact, Bitcoin's only advantage over those coins is extrinsic--it has more longevity, better brand recognition, and a lot of large players interested in making it seem (relatively) legitimate.
Contrast this to when people talk about gold having an intrinsic value, as you can't just replace gold with silver or copper when e.g. manufacturing electronics.
> even though the number of Bitcoins is limited, the number of cryptocurrencies is not.
There will only ever be a single dominant SHA-2 PoW cryptocurrency, because mining power can be expended on only a single chain. Doesn’t matter how many new genesis blocks are minted, this is a natural monopoly and Bitcoin clearly is the monopolist.
Bitcoin being the "dominant" cryptocurrency doesn't seem to change any of the parent commenters points, right? Those regarding intrinsic vs extrinsic value?
Bitcoin itself does not because its low transaction speed makes it unusable for real world applications. Second, why use something in a financial transaction whose value can fluctuate 10-20% a day? That's not a stable currency.
So for all intents and purposes, Bitcoin is an unstable investment product.
Money doesn't have an intrinsic value. Money is just an accounting system, it is a balance sheet. People used physical gold as tokens or entries in that balance sheet.
Ultimately you are depending on another human who is actually doing work. This is why the credit theory of money is so appealing.
Money has value indirectly because someone obligated himself to give you value equal to the money created. When you add up debts and credits then you end up with nothing because money is just an agreement and not a commodity.
I don't think it is a meaningful distinction. Money itself might not have value, but the miners and nodes are providing value by ensuring the integrity and security of the blockchain.
But more to the point, when I said "intrinsic value" I meant value relative to goods/services. Where as when I used "extrinsic value" I meant relative to other "money" such as fiat. Maybe it was a poor choice of words.