Topic: Is energy/computer hardware the "gold standard" for Bitcoin? Critique my analogy (Read 2622 times)

I will guess everyone knew about how much time it took to find a shell. ( Yes, I am making a reference to finding a block in bitcoin. ) 

The utility of the shells was their use as a medium of exchange.

When Africans used  shells for money in the past, they all had an agreement what they were
worth.


https://en.wikipedia.org/wiki/Shell_money

There was no cost of production, unless you count the energy needed to find them. But then I guess that is like bitcoin. What utility did the shells have?

That's not true. The value of anything depends on the utility it has, not in the cost of production. The two may be correlated but the causation direction is the opposite of what is being suggested here. That is, because of a high utility value, people are competing to produce the good in question, which drives production costs up. If utility value drops, it doesn't matter what it costs to produce it, the end price will drop as well (which means that people will not compete to produce it, which may decrease production costs, which may bring us back to step 1).

In the example of gold you gave, production costs are $1300 when gold is at $1600 (hypothetical figures but in the ballpark). When gold was at $800, production costs were at $600. What happened inbetween? All available gold with easy access/cheap mining costs was mined, and after the value went up to $1600, it became economical to mine gold with production costs of $1300. If gold goes to $3000, it will be economical to mine gold in more difficult to mine locations with costs of say $2500. If then gold were to fall back to $1000, it would not be economical to mine gold at either $1300 or $2500, so you would see production costs quoted at <$1000 (most likely mining would decrease substantially in that scenario, as presumably all gold with sub-$1000 production cost would have been mined when gold was higher). So, in that scenario, all gold would be worth $1000, no matter what the production costs were. Even those mined at $2500 (when it was profitable to do so), it would still be worth $1000, as that would be the current price, as decided in the market, and determined by the actual end utility (for either consumption or investment purposes, it doesn't matter).

Let me give you another example: imagine you want to build a house. Estimated building cost is $200k. In scenario A, estimated cost turns out to be the actual one. In scenario B you encounter a huge rock where you dig for the foundations, and to remove it it costs an extra $100k. Total cost for building is $300k. The end result in either scenario is the exact same house. Would you say that its value is different in the two scenarios? Absolutely not. Its value is decided by the market, according to its utility value (roughly equal to Net Present Value of all future rents minus maintenance costs and taxes). This is completely unaffected by whether it cost $200k or $300k to build it.

And one more example in the BTC world. If I produce 1 BTC using a super efficient ASIC miner run on solar panels and wind turbines at a marginal cost of production of exactly zero, versus using an inefficient GPU running on grid electricity at a marginal cost of production of $150, do these bitcoins worth their respective costs? No, they are worth whatever the current value of BTC is, let's say $70. And if tomorrow 1BTC=$200, they will both be worth $200, irrespective of their production costs. Likewise, if bitcoin fails to gain further traction, and a new and better alternative replaces it, so BTC's utility value drops and its price goes to $0.05, both of these bitcoins will be worth exactly $0.05, not whatever amount of energy was used to produce them, as that energy is what in economics is called a sunk cost.

lol to all those saying the value is based purelyon speculation only. ok i think the OP is mainly correct TRUE VALUE is based on production costs. but please be aware TRUE VALUE and the final SPOT / Sell price are 2 different things.

heres how gold works
TRUE VALUE = production costs from the gold miners
ADDED VALUE = price of  shipped and remoulded bars ready for "retail" resale.
Speculated PROFIT is then added ontop based on greed and future predictions of value due to future scarecity.

this is why you can buy unprocessed gold cheaper then gold bars as it skips the ADDED VALUE addition. but still includes a bit of speculated profiting by the seller in question

so lets say golds TRUE VALUE was $1000 and ADDED VALUE was $300. speculated value added on another $200 to bring it to the spot price of $1500. You would see price swings above $1300 and going upwards with $1300 being hard to go below as only a dummy would sell at a loss.

the way to notice a gold or bitcoin bubble is to know the profitability of bars/coins over a long period and if the profitability sky rockets then its a ramp.. if the profitability nose dives then its a dump.

bitcoin and gold SPOT prices are not based purely on EITHER speculation or cost. it is a mix. take into consideration the cost price as a initial guide to then notice if the speculated profit on top is too greedy or not.

Well, this is an interesting concept.

I don't think the resources expended while mining BTC offer it any more value than it has. Instead, the value comes from the consumer confidence that BTC is worth something. Either through purchasing power, or potential gains from investments/trading. That is why the bitcoin is fragile in its current state, the system is still in its infancy and something could go wrong.

If the BTC was backed by energy and hardware resources, there would be a floor to BTC's value. From what I've learned, there is no such thing presently. BTC has the potential to be worthless, so spent resources offer nothing IMO.

Thanks, you said it better than I could.

Plus, at the moment, you can actually get more electrical energy out of a bitcoin, since their value went up. In other words, the bitcoin is now an energy investment if someday a miner wants to revert it back to electricity.

I would take another approach and not try to sell bitcoin as an investment. Here are some selling points for Bitcoin that avoid the whole "bitcoin is a ponzi scheme not backed by anything" myth:

1. Bitcoin sales are cheaper. Prices are higher when paying with a credit card because the merchant has to pay the credit company a substantial fee. Bitcoin fees are extremely low.
2. Bitcoin is safer. Using a credit card exposes you to the danger of credit card fraud or identity theft.
3. Bitcoin is inflation-proof. If you are waiting to buy something, its price will only go down in terms of BTC.

I would like to argue that OP is correct, that indeed the value of Bitcoin DOES in fact relate to the value of energy (more specifically, useful free energy) that was used to create it.

In thermodynamics, the kind of energy that is important, for purposes of doing work, is not total energy but "free energy" - the energy that is available to do work.  For example, a world consisting of a uniform hot bath of gas at thermal equilibrium could contain a lot of energy (heat energy), but none of this would be free energy - it cannot be used to do work.  However, in a scenario where the exact same hot bath was coupled to a cold reservoir through a heat engine, part of the energy of the hot gas *would* be free energy and could be used to do work (the exact amount depends on the temperature and capacity of the cold reservoir).

This example illustrates that free energy (which really, is the only kind of energy that matters) does not inhere in a thing itself, it inheres in a *configuration* of things; most generally it could depend on the configuration of everything around it that might affect how much of the system's total energy can be usefully extracted as work.

In the modern world, a large part of what determines how much our environment can be extracted as useful work is the entire industrial economy, including the financial system.  For example, if there were no mining machines, or no banks to fund the capital investment in mining machines, then (say) shale oil deep under the ocean would be inaccessible and would not constitute free energy for practical purposes.  But, because our technologies and capital investment systems do exist, they can be used to extract that oil and use it to do useful work.

Thus, I would argue that money (like other elements of the infrastructure of modern civilization) indeed embodies (free) energy - since it enables the harnessing of energy - so its configuration in relation to other elements of our world is one that contains free energy, and likewise, free energy must be invested to produce any form of money that has value.  Because, if a form of money can be produced without investing much energy in its production, then it will be overproduced, have a low market value, and be unable to cause much useful work to be done.  The sad fact about the US dollar is that the only reason it still requires some amount of free energy (real effort) to produce is due to Fed policies (which aren't allowing it to be overproduced at Zimbabwe levels yet); granted that is not a very reliable reason for it to maintain market value, but it is the reason why it does, nonetheless.

The great advantage of Bitcoin is that its architecture provides a much more reliable guarantee why energy is required to produce it, due to its proof-of-work protocol.  Granted, the exact amount of energy needed to produce each new batch of Bitcoin fluctuates over time, depending on a number of factors such as difficulty, technology available, etc., but nonetheless, it is critical that free energy (in some form) *is* required, since if no energy whatsoever were required, then there would be nothing to prevent new Bitcoins from simply popping into existence out of thin air.  Anything in this universe (Bitcoins included) requires some amount of energy to produce and it would be impossible for Bitcoin (or any kind of information processing system at all) to exist if there were no energy.

If you claim that the energy that goes into producing Bitcoin is inconsequential or unrelated to its value, then I have a challenge for you:  Try to create a cryptocurrency that has all the same properties as Bitcoin (distributed, secure, etc.), but that does NOT require some similar proof-of-work function for its production.  I hypothesize that this is impossible.  ANY currency that does NOT require energy to produce, by definition, can be effortlessly produced in unlimited quantities and therefore has no value.  The fact that energy is required to create Bitcoin is not simply a side-effect of its market value, but in fact is essential to it.  

To see this, consider a thought experiment:  Suppose that the Bitcoin protocol did not automatically increase difficulty with hash rate.  Then, new blocks would be created constantly, the block chain would instead be a very bushy tree, and there would be no consistent ledger, and no double-spend resistance.  It simply would not work; it would not have value as money.

Thus, Bitcoin does indeed embody the energy that was used to create it.  The exchange rate between Bitcoins and kW-hrs varies over time and from place to place, 'tis true, but that is only an example of the general rule that the free energy content of a system depends on the means that happen to be available to harness its energy as useful work - just like the free energy of a heat bath depends on what kinds of large, cold reservoirs are available nearby for a heat engine to dump its entropy into.

Far from being a mere "technical detail," the fact that producing Bitcoins requires a large amount of energy is in fact essential to its value as money.

Some related thoughts here:  http://minetopics.blogspot.com/2013/01/grand-unification-of-physics-and.html

Your first point is wrong, as has been mentioned already above. If I use valuable machine work and electricity to create something that nobody needs or wants, this does not mean that that something has a value equal (or in fact anywhere near) the value of the electricity/labour that went into it. If nobody wants it, it's worth exactly zero, or perhaps the salvageable value of its materials.

You point about reversing the process is also wrong. This is not reversing the process. You don't get back the energy used in the creation of the bitcoin. You are just exchanging it for something else, which can only happen if another assumption is true, which is that other people are assigning it some value and are willing to exchange their generators (or fiat currency that can be used to buy generators) for it.

Your last point is correct. If enough people believe that there is value to it, then it has value. The longer this is the case (and ideally the more stable that perceived value is), the more it becomes a self-fulfilled prophecy. 

It comes down to what a person believes. Money is just a means of exchange. In other countries in history, they used sea shells as money. Whatever a group decides is money, is money.


For me, the fact that huge companies use machines to make cars, like Toyota, Nissan, and Volkswagen ( they have really nice machinery there ) is proof that the work of machines has value. Again, for me, when an AMD processor, ASIC processor or whatever processor, works to figure out an equation ( as in bitcoin ) that work is just as valid as making a car in the Volkswagen factory. It has value. Those who use that "value" have an agreement between themselves.


You said:




Actually, the bitcoins can be used to "revert" back to electricity. I can buy a generator with bitcoin and make electricity with the generator.


Even if all the above is wrong, bitcoin will have value with those who use it because they all have agreed that it has value. We could trade horses, we could trade dollars, we could trade cigarette butts, ..... If we have agreed to do so for a fixed value -  we are free to do so.

The part in bold is exactly the point. Because the US government has a taxation monopoly in economic activity within the US border (plus of worldwide income of its citizens living abroad) AND these taxes have to be paid in US$, the US$ has a certain minimum value. As long as these conditions hold, i.e. there is significant economic activity in the US and the US government maintains its power to tax it, the US$ will never go to zero (no matter what the delusional hyperinflationists may tell you), as when tax season comes, these taxes will have to be paid in US$. Bitcoin doesn't have that luxury. Nobody needs specifically BTC for a particular purpose so its value could very well drop to zero at some point (if, say, a better alternative is found and gains more traction etc.).

As for what you say in the first paragraph, printing money away can only work if the conditions I already mentioned exist (i.e. significant real economic activity and ability to tax it), otherwise nothing backs this printing and you end up like Zimbabwe, the printed currency is not worth the paper it's printed on.

No. energy/computer hardware for BTC is like the paper needed to make the USD

I've often wondered about that.... how real is this effect?  I agree that if the taxing authority doesn't have the ability to create more currency then taxation power is clearly important.   But if they can just print more anyway, then all taxation power gives them is the ability to target subsets of the population for confiscation rather than relying on inflation to take equally from everybody. 


Looked at another way, why should a government's taxation ability (which is a statement about its ability selectively to extract wealth from its population) allow us to say anything about the value of a particular currency?  The only link that I can see is that the government may demand that the value is transferred through the medium of their chosen currency, which would create demand for it at certain times.

Either way, I'm not sure the "taxation" argument is as strong as people seem to think.

Emphatically, no.

Not sure if you were being playful (since this seems to have been discussed a lot in the past)... but just in case....

You're committing the Labour Theory of Value fallacy.  The amount of effort that it took to produce something has no determination whatsoever on the value of the output.    To see why this is:  imagine a building site... you need a hole dug to lay some foundations.

One man says he could dig it in a week, using a shovel.  Another says he can bring in a team who will do it in a month using teaspoons.   Which has more value to you?  At best, they're equal.  More realistically, the quicker hole is more valuable.  Either way, the amount of effort used to dig that hole has no bearing.   

The same applies here.... would a bitcoin mined using expensive energy be worth more than one mined using electricity from a cheaper source?!

Where things get interesting is when you run the logic the *other way*.

If you believe something will have a certain value, then there is every reason to spend just less than that amount of effort in creating it.   So, yes.... the cost of the energy and the hardware used by Bitcoin miners may well be quite close to the value of the coins they mine... but that's because it makes sense to spend just that much effort and no more in that endeavour.

i.e. causality runs in the opposite direction to those who equate "effort" and "value" seem to think.

Exactly. The fact that useful and valuable energy was consumed for the "creation" of a bitcoin has nothing to do with the value of said bitcoin. That electricity is a sunk cost. Imagine for example that I spend an equal amount of energy playing a video game. I haven't created any value.

This doesn't make any sense at all. It isn't storing the value because it can't be reversed into its previous and actually useful form. It is consuming actually worthwhile things and its value comes purely from your thinking it has value. Nothing else.

If you are talking about the work of machines, in this case video cards and the upcoming ASICS, as an investment, it agrees with me. If the work of humans has value, why not the work of machines? This fact is what gave value to bitcoin in the first place, right?


The machines do the work with the mining software, using the electricity, which has (and had) value. The bitcoin is therefore a store of value either with the cost of the electricity used to make them or the work of the processors. Maybe both.

Their value comes completely from the speculation that one day they will be worth so much more. There isn't enough demand for the supply being limited to really even be affecting things and them being useful is debatable for all but a couple of examples. Bitcoin is a penny stock more than anything.

These currencies are backed by the taxation power of the respective issuing government.  You don't have that with bitcoin.