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You are exactly right that bitcoins are exactly like fiat money, and have no intrinsic value. You actually unintentionally explained what you don't understand.

You are exactly right that bitcoins are exactly like fiat money, and have no intrinsic value. You actually unintentionally explained what you don't understand. Fiat currency is a problem because it can be so easily manipulated by the governments behind it. Just like the dollar, bitcoins have value only because people believe they have value. Your statement that at least the dollar has a government with big military behind it is exactly what the problem is that bitcoin solves. Bitcoin does NOT have a big government or organization controlling it, so unlike the dollar, no single party can inflate the currency. Central banks are able to create money out of nothing, therefore creating something with perceived value without offering anything of value in exchange (i.e. inflation). That leads to all kinds of problems, as we're seeing with the global economic crisis right now. While Bitcoin does not have any intrinsic value, it also does not have a way to be inflated. The system by design creates DEFLATION instead, so the currency becomes more valuable(infinite divisibility handles issues with deflation). Since there is a finite number of bitcoins that can ever be mined, it acts much more like gold than like the dollar. Gold cannot be inflated by any government. If bitcoins gain mass adoption, then they will begin to look very similar to gold. The main difference being that they are purely digital and have no intrinsic value(thus making gold still a better currency).

davidw 14y ago
Deflation, by most mainstream accounts, isn't exactly a good thing in your money supply, either, though.
- LyndsySimon 14y ago
  That depends on your perspective, and what you value in a monetary supply. If deflation outstrips investment returns, then yes - that would cause capital to stay in one place, as people wouldn't want to spend money that would be worth more tomorrow. Investment would stop, businesses couldn't get financing, and everything would grind to a halt. That's not a sustainable situation though; there will never be a time when all units of currency are held, nothing changes hands, and value is infinite. Instead, as value increases there will be profit-taking, which will hold down the value to some point. With the current relative lack of liquidity, you get a boom/bust cycle (the price will shoot up as more people try to get in on the value incrase, then confidence falters and the price crashes back to near baseline). This has already happened once for Bitcoin, and it's important to note that the value over time has been somewhat linear when you account for the impact of the boom/bust. As the liquidity of the market increases due to wider adoption, then you'll start to see the cycles increase in duration, as the market seeks balance. There will always be fluctuations, though, so the ultimate goal is ubiquitous use of Bitcoin in the general economy, and years- or decades- long variance in value. I believe we're entering a new phase of growth, which will be sustained. I predict we'll see a good-sized correction relatively soon, and lots of smaller ones on the way up, but otherwise the value of Bitcoin in USD will steadily rise for the foreseeable future. This doesn't look like another boom to me. This looks like people moving wealth to Bitcoin, and actually using it to buy things other than banknotes.
oleganza 14y ago
There is no intrinsic value in gold either. In fact, all value is subjective and individual. If for you the gold may have technological value, it may not have such value for me. But it may have exchange value for me because you or other people demand gold for their own subjective reasons. And yes, technological value is still subjective because there is no objective measure why you should be involved in that particular technology requiring that much of gold. It all depends on your own decision (which may take in account equally subjective valuations of your customers who demand products of your technology). Gold may have started being used as money because it was already demanded for, say, jewellery. Bitcoin may have started for "fun" or belief in future growth and even bigger demand. The truth is in both cases the initial value was purely subjective.
pixie_ 14y ago
Bitcoins are like gold, but better in a many ways. It's much faster to send bitcoins around the world than gold. It's also easier to verify payment in bitcoins as opposed to weighing and verifying the gold you received is actually gold and not fake.
w0utert 14y ago
> You actually unintentionally explained what you don't understand. Fiat currency is a problem because it can be so easily manipulated by the governments behind it. Just like the dollar, bitcoins have value only because people believe they have value. Your statement that at least the dollar has a government with big military behind it is exactly what the problem is that bitcoin solves. I think you misread my comment. I'm aware of the fact that people like Bitcoins because there is no government/central bank that can manipulate them. To me, that's a red herring though, the proverbial 'itch that Bitcoins scratch' for some people. I don't think Bitcoins solve any issues related to wealth preservation, and I don't think they offer any advantages as a store of value compared to other forms of wealth/value or currency that are not (directly) government controlled (at least not in similar ways as fiat money), such as commodities, precious metals, art, production capacity, etc. In fact, I think anyone holding lots of wealth in Bitcoins will someday lose all of it, in an instant. The point is, that even though there is a limited amount of bitcoins, and even though governments have no influence on the supply of bitcoins or who holds them, they can still affect the value of bitcoins in dramatic ways. For example by legislation that makes any form of bitcoin trade illegal. Or maybe it doesn't even require legislation, maybe just the threat of legislation to curb bitcoin trade will cause people to lose trust in Bitcoins altogether. Just because the government can't inflate Bitcoins, doesn't mean it cannot destroy the trust some people have in it. I mentioned military power not because I think it's a good thing, or an insurance against the depreciation of wealth expressed in fiat money, but as an example why fiat money is at least backed by something, unsustainable as it is. In times of resource scarcity or world-wide economic collapse, military power will 'buy' you (or at least some) the means to survive, not some virtual currency that nobody has a use for in times of distress. > Since there is a finite number of bitcoins that can ever be mined, it acts much more like gold than like the dollar. It acts like gold, but it is not gold. Gold is a tangible asset that has been a proven store of wealth since as long as we know about the history of human civilization. Gold is shiny, you can store it somewhere, make handy pieces out of it and and take it with you, people like holding and looking at gold, almost anybody, anywhere in the world will take gold in exchange for other goods or services. Smart governments are stockpiling gold at an accelerating rate, because they damn well understand that someday in the future dollars, euro's or yens will be worthless. Bitcoins are nothing like that. They are purely virtual, strings of bits, just like Linden dollars, or WoW gold. I think it is extremely unlikely people will ever lose faith in gold as a store of wealth, but I can imagine many scenario's where people will lose faith in Bitcoins. It will happen, trust me. The money supply and inflation/deflation thing is purely theoretical. Hyperinflation doesn't occur because governements purposefully manipulate the money supply, but because paper rectangles and metal circles are useless if nobody has a use for them. I know the same can be said about gold, but I would bet everything on gold outliving Bitcoins as store of wealth. You don't need a PhD in economics to recognize this. My advice: don't put your money in bitcoins. If you don't trust fiat money, buy tangible assets, invest in yourself, learn how to generate utility and wealth after the inevitable fiat money crash.

davidw 14y ago

Deflation, by most mainstream accounts, isn't exactly a good thing in your money supply, either, though.

LyndsySimon 14y ago
That depends on your perspective, and what you value in a monetary supply. If deflation outstrips investment returns, then yes - that would cause capital to stay in one place, as people wouldn't want to spend money that would be worth more tomorrow. Investment would stop, businesses couldn't get financing, and everything would grind to a halt. That's not a sustainable situation though; there will never be a time when all units of currency are held, nothing changes hands, and value is infinite. Instead, as value increases there will be profit-taking, which will hold down the value to some point. With the current relative lack of liquidity, you get a boom/bust cycle (the price will shoot up as more people try to get in on the value incrase, then confidence falters and the price crashes back to near baseline). This has already happened once for Bitcoin, and it's important to note that the value over time has been somewhat linear when you account for the impact of the boom/bust. As the liquidity of the market increases due to wider adoption, then you'll start to see the cycles increase in duration, as the market seeks balance. There will always be fluctuations, though, so the ultimate goal is ubiquitous use of Bitcoin in the general economy, and years- or decades- long variance in value. I believe we're entering a new phase of growth, which will be sustained. I predict we'll see a good-sized correction relatively soon, and lots of smaller ones on the way up, but otherwise the value of Bitcoin in USD will steadily rise for the foreseeable future. This doesn't look like another boom to me. This looks like people moving wealth to Bitcoin, and actually using it to buy things other than banknotes.

oleganza 14y ago

There is no intrinsic value in gold either. In fact, all value is subjective and individual. If for you the gold may have technological value, it may not have such value for me. But it may have exchange value for me because you or other people demand gold for their own subjective reasons. And yes, technological value is still subjective because there is no objective measure why you should be involved in that particular technology requiring that much of gold. It all depends on your own decision (which may take in account equally subjective valuations of your customers who demand products of your technology). Gold may have started being used as money because it was already demanded for, say, jewellery. Bitcoin may have started for "fun" or belief in future growth and even bigger demand. The truth is in both cases the initial value was purely subjective.

pixie_ 14y ago

Bitcoins are like gold, but better in a many ways. It's much faster to send bitcoins around the world than gold. It's also easier to verify payment in bitcoins as opposed to weighing and verifying the gold you received is actually gold and not fake.

w0utert 14y ago

> You actually unintentionally explained what you don't understand. Fiat currency is a problem because it can be so easily manipulated by the governments behind it. Just like the dollar, bitcoins have value only because people believe they have value. Your statement that at least the dollar has a government with big military behind it is exactly what the problem is that bitcoin solves. I think you misread my comment. I'm aware of the fact that people like Bitcoins because there is no government/central bank that can manipulate them. To me, that's a red herring though, the proverbial 'itch that Bitcoins scratch' for some people. I don't think Bitcoins solve any issues related to wealth preservation, and I don't think they offer any advantages as a store of value compared to other forms of wealth/value or currency that are not (directly) government controlled (at least not in similar ways as fiat money), such as commodities, precious metals, art, production capacity, etc. In fact, I think anyone holding lots of wealth in Bitcoins will someday lose all of it, in an instant. The point is, that even though there is a limited amount of bitcoins, and even though governments have no influence on the supply of bitcoins or who holds them, they can still affect the value of bitcoins in dramatic ways. For example by legislation that makes any form of bitcoin trade illegal. Or maybe it doesn't even require legislation, maybe just the threat of legislation to curb bitcoin trade will cause people to lose trust in Bitcoins altogether. Just because the government can't inflate Bitcoins, doesn't mean it cannot destroy the trust some people have in it. I mentioned military power not because I think it's a good thing, or an insurance against the depreciation of wealth expressed in fiat money, but as an example why fiat money is at least backed by something, unsustainable as it is. In times of resource scarcity or world-wide economic collapse, military power will 'buy' you (or at least some) the means to survive, not some virtual currency that nobody has a use for in times of distress. > Since there is a finite number of bitcoins that can ever be mined, it acts much more like gold than like the dollar. It acts like gold, but it is not gold. Gold is a tangible asset that has been a proven store of wealth since as long as we know about the history of human civilization. Gold is shiny, you can store it somewhere, make handy pieces out of it and and take it with you, people like holding and looking at gold, almost anybody, anywhere in the world will take gold in exchange for other goods or services. Smart governments are stockpiling gold at an accelerating rate, because they damn well understand that someday in the future dollars, euro's or yens will be worthless. Bitcoins are nothing like that. They are purely virtual, strings of bits, just like Linden dollars, or WoW gold. I think it is extremely unlikely people will ever lose faith in gold as a store of wealth, but I can imagine many scenario's where people will lose faith in Bitcoins. It will happen, trust me. The money supply and inflation/deflation thing is purely theoretical. Hyperinflation doesn't occur because governements purposefully manipulate the money supply, but because paper rectangles and metal circles are useless if nobody has a use for them. I know the same can be said about gold, but I would bet everything on gold outliving Bitcoins as store of wealth. You don't need a PhD in economics to recognize this. My advice: don't put your money in bitcoins. If you don't trust fiat money, buy tangible assets, invest in yourself, learn how to generate utility and wealth after the inevitable fiat money crash.