Topic: How to value a currency (Read 5295 times)
Well, it's tough to say when you are valuating a relatively new and deflationary currency with an old and outdated deflationary currency that is teetering on the brink of hyperinflated collapse. Given those facts alone, it's hard enough to determine a "Spot price", when you start talking future value, you are trying to quantify adoption rate of the new currency, and inflation of the old one at the same time. But it's not even that simple either, because bitcoin is global. The shittyness of many of the world's currencies needs to be factored in. How soon until the next Euro bailout? 'Cause that will add about $60 value, apparently. Currency war coming? Hmm, tack on another $50? $100? Shit, I don't know. At some point it's futile to even measure a BTC vs USD. Has anyone bothered to figure out how many shells a BTC is worth? My guess is nobody cares, and if they still had a portion of their savings in shells or pelts, they would probably trade it all for 1 BTC.
...I tend to side with the OP as I feel I get more explanations for the viewpoints given.
"For every complex problem there is an answer that is clear, simple, and wrong."
--H. L. Mencken
I'd be glad to explain in greater detail anything you don't get, but I'm afraid there's no simple equation you can plug some variables into to get the value of a currency. Value is subjective, and each person will value a currency a different amount. The purchasing power/price of a currency is a result of these subjective valuations interacting.
Not saying your wrong just saying what I felt after a short read threw I have to go over the thread again before I had any real questions to ask. Thanks for offering to explain further.
...I tend to side with the OP as I feel I get more explanations for the viewpoints given.
"For every complex problem there is an answer that is clear, simple, and wrong."
--H. L. Mencken
I'd be glad to explain in greater detail anything you don't get, but I'm afraid there's no simple equation you can plug some variables into to get the value of a currency. Value is subjective, and each person will value a currency a different amount. The purchasing power/price of a currency is a result of these subjective valuations interacting.
P.S. This also explains why people are hoarding BTC rather than spending them. The expected future value of a BTC is higher than its value today--so why spend it today?
I think Sword Smith's analysis that fair USDBTC is $50 is probably about right.
The reason USDBTC is now trading at $100+ is because of the expected growth in Q.
It's a bit like a growth stock--the PE ratio is higher because of expected future growth.
My conclusion: the current price on the exchanges of $100+ is about right for now, given that we think that BTC is likely to be adopted ever more widely.
Thanks for the analysis.
The reason USDBTC is now trading at $100+ is because of the expected growth in Q.
It's a bit like a growth stock--the PE ratio is higher because of expected future growth.
My conclusion: the current price on the exchanges of $100+ is about right for now, given that we think that BTC is likely to be adopted ever more widely.
Thanks for the analysis.
After briskly reading a few posts I'm liking the premise of this thread, it's very intriguing and makes one think deeper of the value of a currency and how we view what that value truly is based on.
I appreciate the equation you gave to explain your points, very helpful and interesting breakdown. Much of what I've read here makes sense. Some stuff leaves me a little confused but overall a good debate I tend to side with the OP as I feel I get more explanations for the viewpoints given. All in all it's good to here opposing arguments on the topic.
I appreciate the equation you gave to explain your points, very helpful and interesting breakdown. Much of what I've read here makes sense. Some stuff leaves me a little confused but overall a good debate I tend to side with the OP as I feel I get more explanations for the viewpoints given. All in all it's good to here opposing arguments on the topic.
My apologies. I'll address it now.
Hmm. Even if I were presenting an either/or, this still wouldn't apply. Since I'm not presenting an either/or, you're wrong here, too. Not running a very good track record, I'm afraid.
USD becomes more valuable since the goods and services that I can produce can be traded in USD.
Not if nobody wants your goods or services. I say again, value is a measure of how much someone wants something.USD gains value since the same amount of dollars can now be traded for more goods, i.e. Q has increased by me accepting USD.
If USD gains any value from you accepting it, it's not from the objects which you are willing to trade for it, but rather from your desire for it.What you are presenting is a false dichotomy.
Quote
false dichotomy (plural false dichotomies)
(logical fallacy) A situation in which two alternative points of views are presented as the only options, whereas others are available.
(logical fallacy) A situation in which two alternative points of views are presented as the only options, whereas others are available.
Hmm. Even if I were presenting an either/or, this still wouldn't apply. Since I'm not presenting an either/or, you're wrong here, too. Not running a very good track record, I'm afraid.
What you are presenting is a false dichotomy.
Great. And I believe I am the one educating you. You failed to address my main argument:
Quote
Great! Now you have accepted that the reason that I accept USD is that I can buy stuff with it. And here comes the central point: USD becomes more valuable since the goods and services that I can produce can be traded in USD!! The value that it gains this way is proportional to the worth of the goods that I can produce and am willing to trade in USD. USD gains value since the same amount of dollars can now be traded for more goods, i.e. Q has increased by me accepting USD. What applies to my sevices or good also applies for other people so Q is one of the determining factors of valueing a currency.
A currency is a network and its value increases when more people adopt it.
Not at all necessarily. If a lot of people wanted USD, but not very much, then the value of USD would be low. If very few people wanted USD very much, then the value would be high. Value is a function of how much people want something, not how many.Are you trolling me? If so, it is working 
No, I am educating you. That you are getting emotionally involved in the education is unfortunate, since it reduces the likelihood that you will listen to what I am trying to teach you. Your idea was bad. This does not mean you are bad.And your silly picture is just that, silly, and not an argument.
It wasn't intended as an argument, but to illustrate yours. You want a currency so you can buy something (person A lifts person B). You can buy something because someone else wants the currency (person B lifts person A). Therefore, the value of the currency is based on the purchasing power (and off they go into the sky).The only reason you can buy something with a currency is because someone else wants that currency. Purchasing power might be a good way to measure the value of a currency, but it certainly does not determine the value.
So you see, now, that purchasing power is not the only determining factor in the value of a currency?
Value determines purchasing power. Not the other way around. This is self-evident if you examine what the terms mean:
Value: How much people want A.
Purchasing power: How much B you can get for A.
Since you have to get B from someone, how much they want A will be the deciding factor in how much B they're willing to give up for it.
OK, that's why you want USD. To buy stuff. But you're missing the point. The only reason you can buy stuff with it is because people want it. And yes, part of why people want a currency is so that they can buy stuff with it. But that does not determine it's value. How much people want it is what determines it's value, and trying to base the value on purchasing power is like trying to get to space this way:
Are you trolling me? If so, it is working
And your silly picture is just that, silly, and not an argument.
So you see, now, that purchasing power is not the only determining factor in the value of a currency?
Value determines purchasing power. Not the other way around. This is self-evident if you examine what the terms mean:
Value: How much people want A.
Purchasing power: How much B you can get for A.
Since you have to get B from someone, how much they want A will be the deciding factor in how much B they're willing to give up for it.
OK, that's why you want USD. To buy stuff. But you're missing the point. The only reason you can buy stuff with it is because people want it. And yes, part of why people want a currency is so that they can buy stuff with it. But that does not determine it's value. How much people want it is what determines it's value, and trying to base the value on purchasing power is like trying to get to space this way:
So you see, now, that purchasing power is not the only determining factor in the value of a currency?
Value determines purchasing power. Not the other way around. This is self-evident if you examine what the terms mean:
Value: How much people want A.
Purchasing power: How much B you can get for A.
Since you have to get B from someone, how much they want A will be the deciding factor in how much B they're willing to give up for it.
So you see, now, that purchasing power is not the only determining factor in the value of a currency?
Value determines purchasing power. Not the other way around. This is self-evident if you examine what the terms mean:
Value: How much people want A.
Purchasing power: How much B you can get for A.
Since you have to get B from someone, how much they want A will be the deciding factor in how much B they're willing to give up for it.
So you see, now, that purchasing power is not the only determining factor in the value of a currency?
People value a currency for many other things than just what you can buy with it. As I said before, you've got it backwards. You can buy stuff with bitcoin because people value it. Not the other way around. People have to value a currency, and desire it, before you can buy things with it, or else, they wouldn't offer to sell things for it. It's common sense.
It is just as much common sense to state that people value it because they can buy stuff with it. It is, as mentioned above, not either or. It is both - a feedback process.No, it isn't. If I tried to buy your computer from you using Rai stones, you'd run me off, because you don't want Rai stones. This, despite the fact that on the island of Yap, one could conceivably buy a large estate and the livestock (and wife!) to go with it. You don't value Rai stones, so you won't sell me anything for one, no matter how much you could buy with one.
i would value a Rai stone according to the purchasing power that it could give me and how much value that purchasing power. And maybe I would also value it just because it would be cool to say that I owned one.
In fact, from the Rai stone article:
Quote
The ... value of a specific stone is based not only on its size and craftsmanship but also on the history of the stone. If many people—or no one at all—died when the specific stone was transported, or a famous sailor brought it in, the value of the rai stone increases.
The story determines the value. Just like you would love one, "just because it would be cool to say that I owned one."
People value a currency for many other things than just what you can buy with it. As I said before, you've got it backwards. You can buy stuff with bitcoin because people value it. Not the other way around. People have to value a currency, and desire it, before you can buy things with it, or else, they wouldn't offer to sell things for it. It's common sense.
It is just as much common sense to state that people value it because they can buy stuff with it. It is, as mentioned above, not either or. It is both - a feedback process.No, it isn't. If I tried to buy your computer from you using Rai stones, you'd run me off, because you don't want Rai stones. This, despite the fact that on the island of Yap, one could conceivably buy a large estate and the livestock (and wife!) to go with it. You don't value Rai stones, so you won't sell me anything for one, no matter how much you could buy with one.
i would value a Rai stone according to the purchasing power that it could give me and how much I value that purchasing power on Yap. I might value it at a discount since it was on some remote island. And maybe I would also value it just because it would be cool to say that I owned one.
People value a currency for many other things than just what you can buy with it. As I said before, you've got it backwards. You can buy stuff with bitcoin because people value it. Not the other way around. People have to value a currency, and desire it, before you can buy things with it, or else, they wouldn't offer to sell things for it. It's common sense.
It is just as much common sense to state that people value it because they can buy stuff with it. It is, as mentioned above, not either or. It is both - a feedback process.No, it isn't. If I tried to buy your computer from you using Rai stones, you'd run me off, because you don't want Rai stones. This, despite the fact that on the island of Yap, one could conceivably buy a large estate and the livestock (and wife!) to go with it. You don't value Rai stones, so you won't sell me anything for one, no matter how much you could buy with one.
For instance, the person who only wants to get his 5 million dollars through border checkpoint without being hassled won't give a shit that you can buy tea with it. He just wants a few thousand coins to keep in a brainwallet to avoid having to explain why he's carrying 5 million dollars.
That is an excellent point which does not completely make my calculations irrelevant, though. The reason that he can change back from BTC to fiat is that other people also value BTCs because they can buy stuff for it.People value a currency for many other things than just what you can buy with it. As I said before, you've got it backwards. You can buy stuff with bitcoin because people value it. Not the other way around. People have to value a currency, and desire it, before you can buy things with it, or else, they wouldn't offer to sell things for it. It's common sense.
It is just as much common sense to state that people value it because they can buy stuff with it. It is, as mentioned above, not wither or. It is both - a feedback process. In other words, people think that it is worth buying, so they buy it.
Do I sense that we are reaching some kind of understanding? 
An expectation of a large future Q is what drives this investment strategy:http://youtu.be/NG1qooBzE2w
Q doesn't play a part in many user's valuations, though. For instance, the person who only wants to get his 5 million dollars through border checkpoint without being hassled won't give a shit that you can buy tea with it. He just wants a few thousand coins to keep in a brainwallet to avoid having to explain why he's carrying 5 million dollars.
People value a currency for many other things than just what you can buy with it. As I said before, you've got it backwards. You can buy stuff with bitcoin because people value it. Not the other way around. People have to value a currency, and desire it, before you can buy things with it, or else, they wouldn't offer to sell things for it. It's common sense.
Jump to: