Yes, I understand that transaction confirmation is a valuable service, but how do you put a particular price on it? The average amount of money spent on confirming a transaction today (including hardware, electricity, and profit) is obviously orders of magnitude higher than it was a couple years ago. The only difference between then and now is higher security. The bitcoin network will function just fine whether it's operating at 1 terahash/sec or 1 exahash/sec. Now, I agree that security is important, but how much security do you need? You'd have trouble outspending a multi-billion-dollar financial institution, and you'd never be able to outspend some of the biggest governments of the world.
I realize that the cost of transaction confirmation is linked to the price of bitcoin, but what if bitcoin fell to $100 and stayed there? A bunch of miners would turn off their hardware, the market would rebalance, and bitcoin would continue just fine with a lower network hash rate. If this is false, please tell me why. If it's true, then how can you tell me that bitcoins should actually be worth ~$620 each right now?
(And btw, as I have some bitcoin, I'd like to believe that it is backed by something valuable, but I'm having a hard time seeing how the mining network has to have any particular value.)
In what way and/or to what degree do you think the cost of transaction confirmation is linked to the price of bitcoins? I agree generally with this statement, but I think the relationship is complex and quite possibly moot, other than the fact that we know that the value of bitcoins depends upon network functionality.
Yes, the relationship is complex. It's probably more appropriate to talk about transaction cost as a function of bitcoin price.
It seems to me that we're talking about the value of a lot of things, and these things conceptually overlap each other. First, we are considering the value of bitcoins. Second, there's the value of the network. Arguably, third and fourth could be the value of transaction processing or the value of the protocol/codebase. Fifth, there's market cap, and this could be valued differently than the network.
One way to approach finding the value of something is to consider that ascribing a value to something invokes the question, "To whom is it valuable?" And then there's the follow up question, "Why?"
It seems the simplest valuation of the Bitcoin network is that it's at least as valuable as the market cap with an unknown upper bound. Part of my reasoning for thinking this is that market cap (i.e. whether a market cap actually exists, not its exact value) is entirely dependent upon network functionality. To me, there's something self-evident about the idea that if something is entirely dependent upon something else to exist, it can't be more valuable than the thing it depends on.
What exactly do you mean by valuation? Are you talking about the dollar amount for which you can buy something, or a value that can be used to compare it with other similar things (e.g., you talk about market cap)? I assume you mean the latter because you obviously couldn't just go out and buy all bitcoins for the current market cap of about $8B. Nor would it cost you that much to go out and buy all the network mining equipment. Market cap can be useful for comparing with things like stocks and commodities, but it's too simplistic to be used as an accurate "trade-in value."
I'm not sure if it's possible to ascribe an exact value to the network because there seems to be a mathematical uncertainty regarding various methods that all seem equally plausible. For example, I imagine that one could come up with a lot of good ways to determine the value of added network security. Furthermore, I imagine one could define the boundaries of things like "transaction processing" and "network" in different-but-plausible ways which would affect how one determines the value of these things.
So, moving to bitcoins themselves, I would think that if the price of bitcoins dropped to $100, then the network should be worth less, too. It also seems to me that there's no theoretical reason why the price couldn't stay there so long as enough fiat kept flowing into the market throughout the duration of Bitcoin's inflationary period.
Now, asking what price bitcoins *should* be at is a question that confuses me, and that's because I can approach that in different ways, too. It's kind of like asking what an antique pocket watch *should* go for at an auction. There's no real specific answer, but you could say something like, "Well, based upon the last 10 auctions, the average selling price was $500, and the most recent sale was $550." With this information, you could arrive at different conclusions, but they'd still be vague (e.g. "the watch should sell for at least $500"; "the watch should sell for at least $550).
I guess I'll go with an Occam's-Razor-esque valuation of bitcoin and say that bitcoin should be worth about what it's trading at right now. Unfortunately, this type of answer doesn't yield much utility.
I like the way you broke this down. It made me think in ways I hadn't.
So let me try to approach this a little differently. It seems like the ideal for a currency is to have it backed by something tangible that just about everyone agrees is valuable, like gold. Being able to trade in your currency for that commodity gives the currency a lot of stability as the supply of gold is stable and known. The backing of a currency can also be abstracted the way USD is now, where its value is basically attached to the economic output of the country. As the economic output of a country varies, the value of such a currency is less stable and less predictable. So then we come to bitcoin. I can attach at least a conceptual value to a currency backed by a commodity or economic output, and I can understand the factors that determine that value. But with bitcoin, I have no idea how to value a mining network and the ways in which it changes. This concerns me because without some way to judge the value of the network, there's nothing to give bitcoin stability, which makes it impossible to predict where its price will go.
Do you have any thoughts on this? I can see how you could look at the total amount of money invested in mining hardware and electricity, but I don't see the need for any specific correlation between money spent on building the network and the price of a bitcoin because it seems very fluid to me. As I said before, the bitcoin protocol will work just fine whether you have a 1-terahash network or a 1-exahash network. The only difference is security. Some people may be willing to "pay extra" for more security, but I don't know that that's something many users are truly concerned about (meaning they won't use bitcoin unless the network is a least as large as X-hashes/sec).
I guess what this comes down to is that I'm trying to figure out if there are fundamental reasons that will "force" the price of bitcoin to increase over time (all other things being equal). Just like with a stock, if a company continues to grow their profits, the price of the stock will eventually go up.
and then well mostly drugs 
.... and now fiat 
