In some ways the price is tied to the cost of electricity needed to mine a coin. Granted, the mining "price" is usually about two weeks behind the actual price, and the electricity required is variable based on the current sum of computational power being used by all the miners, so there's certainly some disconnect.
So if I shock a turd with a thousand dollars worth of electricity from my electric utility company, can I sell it for $1,000? Or add some non-intrinsic worth by calling it "art" and sell it for $2,000? Actually, make those figures $1,010 and $2,010 -- my turds also have intrinsic value.
no, because throwing electrons at turds doesn't generate currency. in contrast, throwing electrons at a chip does generate bitcoins. that's the relationship being alluded to: there's the possibility of arbitrage between electricity (compute cycles) and currency.
You explained exactly what the intrinsic value of the currency is: the usefulness of the currency itself. BTCs have value over turds for use as a currency for many obvious reasons. The amount of electricity it takes to create that currency can perhaps be seen as a price floor, which is perhaps corollary to the intrinsic value, but is not the intrinsic value itself.
So if something improbable or drastic happened tomorrow that made the currency not useful (e.g. governments outlawing it, a bug in the code) then the price would fall well below what it costs in electricity to mine it and the currency would become mostly defunct, i.e. it's intrinsic value plummeted because it's usefulness did.
tl;dr the intrinsic value is the usefulness of the currency not how many electrons you pump into it (though there is likely some corollary between them)
> The amount of electricity it takes to create that currency can perhaps be seen as a price floor, which is perhaps corollary to the intrinsic value, but is not the intrinsic value itself.
Cost of production should be a price ceiling, not floor: if I can make it for $X, why would I buy it for $Y >> $X?
Edited: To hopefully head off further misunderstandings, by "should" here I mean "it makes the most sense to expect" - not any ethical imperative - and I'm speaking in broad terms, in the long run.
There's also the cost of setting it all up, the time in learning the tech involved or hiring those who do. If it cost you $X to produce, why would you sell it to me for less than $X? You'd be losing money on the production side.
The lower bound ought to be at least the cost to the miner that produced the new bitcoin (when they try and sell it or use it in the market).
The upper bound is essentially nonexistent. If I have $3000 to invest in bitcoin, what is the possibility of me getting a decent return on $3000 worth of mining hardware? Vs (based on the recent explosive growth) spend $3000 on BTC directly at $200 a piece and you have 15BTC. If it continues to generally rise in value against the dollar a portion of that can be turned back into USD later and spent on a more worthwhile rig, or just used in the BTC economy itself (to the extent that it exists).
> If it cost you $X to produce, why would you sell it to me for less than $X? You'd be losing money on the production side.
"Cost of production", in an economic sense, includes opportunity cost - that is, the amount of money I could be making if I did something else with the time instead, which can be more or less taken to mean a reasonable accounting "profit".
Edit: Also, I may sell it to you at a loss because I can't do anything better with it, if the price fell since I produced it.
> The lower bound ought to be at least the cost to the miner that produced the new bitcoin (when they try and sell it or use it in the market).
Yes, if the price of bitcoins falls below the cost of producing them, more won't be produced, but that won't actually prevent the price from falling further.
We may have misunderstood each other. I didn't mean to say that there was a strict lower bound on the price of bitcoins. It absolutely could zero out in a worst case scenario (for some people at least). I suppose what I was intending to refer to was a (somewhat) healthy bitcoin economy. Inefficient miners will be driven out of the market as the cost to participate exceeds their returns.
There isn't any ought to be for the lower bound. (In a successful bitcoin world) There is eventually going to be a clear relationship between the cost of mining and the reward available, but if some miner switches to mining his own variety of digital money, we don't suddenly owe him something for the effort.
If we end up with a very competitive market for using cryptography to clear digital transactions, miners might well face a situation where it is barely worth it to burn electricity.
I meant to say that was the per miner cost. A more efficient miner would see a lower production cost for their bitcoins. They'd then be able to either take advantage of their position (sell with a significant margin) or drive the other miners out of business (sell at a small margin that puts bitcoins at an uncompetitively low value). In either case they'd be able to expand their mining operation (or accounting operation once mining itself has low returns) to improve their odds and yield.
Because not everyone is able to hit the same Cost of Production, or wants to put down the upfront investment in equipment, or has the technical know how, etc. If the cost of production was the price ceiling why would anyone start producing? They'd just break even at best.
Besides people buy things for $Y >> $X everyday simply for convenience. You could go buy ingredients and make a sandwich for $X dollars, but instead you go to the food truck and buy one for $Y dollars because it's convenient. It's not like food truck guy is selling his product at cost.
You read me as being more precise than I'd meant it. But it's basic economics that competition drives the cost down toward the cost of production (including labor cost and opportunity cost), and there's nothing in bitcoins that's preventing people from competing.
And regardless, there's absolutely no conceptual reason cost of production would represent any kind of floor.
>And regardless, there's absolutely no conceptual reason cost of production would represent any kind of floor.
Well no sane/rational entity would want to sell for less than cost of production because that would entail a loss (let's keep this simple and say there aren't any ulterior reasons one would receive gains/benefits from selling at below cost).
Since competition drives the price towards the cost of production it's reasonable to consider it or a price just above it as the floor.
Edit: I guess I should state, I'm not trying to say there is a 'hard' floor in which the price can't possibly drop below. I'm more saying it's a relative benchmark for where the lowest price would tend to settle given a healthy bitcoin market/environment.
A rational entity would absolutely sell at a loss. They would not acquire with the goal of selling at a loss, but once they already have the thing what they paid to get it is a sunk cost, which a sane or rational agent ignores in making future decisions.
If bitcoins were overproduced, say during a bubble, they could well remain low long-term - there is no particular pressure driving them up.
>If bitcoins were overproduced, say during a bubble, they could well remain low long-term - there is no particular pressure driving them up.
Well if the cost to produce them was higher than the price, people would simply stop mining. Perhaps my understanding of bitcoins isn't correct, but I thought that if there were no miners then transactions would stop being processed and the currency would basically stop working and die.
I know right now bitcoins are still being created/produced by miners, but at some point in the future that will stop happening and miners will be compensated through transaction fees as a percentage of each transaction. At that point if price of bitcoins falls below the cost to mine we likely will see people stop mining and transactions ceasing until the price rises enough for it to be worthwhile.
Of course bitcoin is a bit special in that there are a lot of fans of it that will likely be completely willing to accept a loss to keep the currency going. As we all know humans don't act as perfect economic-minded rationalists.
But I still think the cost of production is a good bottom metric to keep an eye on. If the price falls below that we will know that the currency is in rather dire straits and being artificially propped up by those with an interest in keeping it going.
It's the other way around. The cost of electricity needed to mine a coin will tend towards the price that coin can be sold for. If the bitcoin price drops significantly, then the least efficient miners will become unprofitable and drop out, and the difficulty will reduce.
