Warning :- Read this at your own discretion. I am neither an economist nor trying to project as one. This is an article written purely to share with fellow bitcoin enthusiasts. Don't expect to be enlightened or ridiculed. A general rambling from a fellow enthusiast.
Today, I have a few bitcoins, what do I do ?
i) I store it hoping that it will rise in value and then I will cash it out and make a huge profit
Flaw :- It will rise in value when it is compared to any other instrument be it a commodity or service or a currency but that is not what a bitcoin is. It is supposed to be currency, not just any currency but a digital currency. A currency does not have real value , it only has a perceived value. One bitcoin should not fetch me 1 square meal today and 10 square meals sometime in the distant future. It should fetch me 1 square meal today or tomorrow or anytime in the foreseeable future. Only then it will be the mark of a true currency….no inflation or deflation in prices.
ii) or I sell it to somebody who is willing to exchange it for fiat --- This somebody is going to be i) or ii) only. So it goes back to the same flaw.
What is currency, A currency is a medium of exchange. For example , I produce 8 hammers per day. For exchange of 8 hammers , I would like a satchel of rice and pulses , an hour of entertainment , a bottle of whisky and a nice bed to sleep. All across the world , there are other people who can provide me these but they will not require hammers but something else. Instead of going for a barter, all of us decide to use a stone and fix our prices with respect to the stone. Since carrying and exchanging a stone is much easier than anything else everybody readily accepts it. Just because everybody accepts this does not mean that a value of stone has increased, it is still a perceived value as nobody has any use for stone except for using it as a medium of exchange. In our current example, we will now replace stone with a Bitcoin.
From today, I use an ingenious method to produce 16 hammers per day instead of the previous 8. If previously one hammer was valued at one bitcoin, at the same rate 16 hammers should give me 16 Bitcoins. As Bitcoins are fixed in number, theoretically the value of 16 hammers should still give me 8 bitcoins to maintain the balance in the world as it is still me and my full day which is producing the hammers. Now I am adding an extra layer to the concept of price. The layer is the time spent by me in producing the goods and not the number of goods produced by me.
Adding a further complication. My neighbour also produces 8 hammers every day. Till yesterday he was also getting 8 bitcoins but from today since I am making 16 hammers now and since we have already decided that the value of my hammer is not dependent on the hammer but the time spent by me in producing that good, If I get 8 bitcoins for my 16 hammers, my neighbour will start getting only 4 bitcoins for his 8 hammers from today. Now, when we look at this scenario, do we say that the value of hammer has gone down or the value of bitcoin has gone up ?
The answer is the first one. Although technology has reduced the time required to produce a hammer it has not increased the utility value of a hammer. I will now introduce a formula to define the value of a hammer.
Uh * n = k
where
Uh = Utility value of a single hammer
n = Number of hammers produced in the world
k = some constant value
Coming back to the value of a single hammer, it will be now (k/ (Uh*n))
This formula is applicable only when the currency or the medium of exchange is fixed in number like Bitcoin.
In our current world where currency is not fixed in quantity, as I will be selling the hammer at the same price but receiving double my daily amount, there will be a scarcity of medium of exchange and our government or the Federal Bank will respond to this scarcity by printing more currency. Again, as I have already told you, as the utility value of hammer has not changed, this increase in currency will slowly lead to increase in value of other goods with respect to hammer. This is nothing but inflation.
Now, if you notice in the Bitcoin world, usage of technology in hammer production is leading to price change only in hammer whereas in the current world, usage of technology in hammer production is leading to price change in all goods except hammer. Which is favourable ?
Going back to Bitcoin world, my neighbour has in one day become poorer by half which is ok because together we are not creating any extra utility value for the rest of the world, the same utility value of the hammers has to be shared between both of us in the ratio which we produce.
The example I have used is a very simplified version of a basic economy. Now that we have established that a price of bitcoin should not change with respect to the value contributed by a person, let us try to value Bitcoin in the current world.
21 million Bitcoins in 2140 should be equal to the total utility value of all the product/services produced by the world in 2140. As per UN estimates by 2150 world population should be 21 Billion
Assuming everybody in the world is equally efficient ( unlike me and my neighbour ) 21M Bitcoins should be equally distributed between 21B population for their utility value.
i.e 0.001 Bitcoin for each person, this is not a per day, per month or per year value. Consider this as an instantaneous utility value of each person expressed in medium of exchange which is Bitcoins.
How do we express this 0.001 BTC in fiat value. The formula should be
21B BTC = ( USD + EURO + AUD + JPY + INR + rest of the world currencies ) The value of all these currencies expressed in a single currency existing at year 2140.
It is nothing but a simple replacement of a multiple medium of exchanges with a single medium of exchange.
You might be asking the question, all of this mumbo-jumbo has still not addressed the question, what is the value of bitcoin ?
That is what I am trying to address, there is no value to Bitcoin today and there will be no value to Bitcoin in the future.
For Bitcoin to truly succeed, for it to become the world’s medium of exchange, We all have to stop measuring Bitcoin in terms of other currencies, we have to start expressing our utility values in Bitcoins.
What is the utility value of my production to this world ? How much does it come to when my utility value is expressed in Bitcoins ? In an ideal world in 2140, my utility value expressed in BTC is 0.001, if I regress it to 2013 how much should it come to ?
Start expressing yourselves in bitcoins. Value your contribution in Bitcoins.
Today, I am valuing this article written at 0.00000001 BTC. With increase in Bitcoin awareness and passage of time the utility value of this article the value will be 0 BTC.
Just in case you are wondering, the usage of hammer in the example instead of anything else. For a man with a hammer everything else looks like a nail. For a man with a bitcoin everything else looks like value.
Topic: Value of a Bitcoin ? (Read 4568 times)
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