What's the economic model for gold?
I thought earlier today about the question: "What if bitcoin was exclusively used as a store of wealth? Would it still be valuable?". This question came up because I realized that the actual need for currency to make transactions is a lot lower than I had previously thought. At current prices, only about 30,000 BTC are needed to support the silkroad, which is arguably one of the more sizeable parts of the economy. Let's assume a high number (in dollar-terms) of transaction volume done in bitcoin each day: 2,500,000 USD (37 times silkroad). This would justify a price of roughly 2.5e5 / 1e7 = 0.25 USD/BTC! Ergo bitcoins value is already almost exclusively derived from its function as a store of wealth ("hope that price will go up").
If above conclusion is correct, we don't have to worry about an economic model for bitcoin if all we want is higher value.
I think this is exactly right. I believe that Bitcoin could succeed if it were "merely" successful as a store of value (like gold) rather than a medium of exchange. But I don't think that's likely because unlike gold, Bitcoin has tremendous potential to be more than just a reliable store of value. It's just that it's much harder to become a successful medium of exchange than it is to become a successful store of value because the former relies more heavily on network effects. In other words,
it's going to take longer! But Bitcoin is already succeeding as a medium of exchange for certain niche markets (e.g., illicit drugs and gambling) where its advantages make it really shine. These early successes are planting the seeds for larger successes down the road. But there's no shortcut. I see a lot of people hoping for some huge player (e.g., Amazon) to start accepting Bitcoins. But that's unrealistic in the near future, and it's also unnecessary. Here's a good article from a few months back by Amir Taaki that speculates about the adoption pattern we'll likely see in the years ahead.
http://bitcoinmedia.com/roadmap-for-the-revolution-the-future/Here are some excerpts that I think sum up the key idea well:
It is a pyramid of dependency. Growth in bottom layers feeds into growth at higher layers. Trying to effect growth in a later layer is immature without building the foundational infrastructure necessary first.
...
Right now we are seeing a premature realisation of classical markets. Six months ago, people were rushing in a desperate land grab to duplicate the most popular sites like Kickstarter or eBay in the bitcoin ecosystem. But they didn’t draw on bitcoin’s strengths in any meaningful way and failed to do anything new or creative. Ultimately these sites always fail as it is too early in bitcoin’s life for these sites to exist and be sustainable.
