Quote from: sounds on February 05, 2013, 12:11:32 AM

Pulling in some quotes that got the discussion started (each has a link to the original):

Quote from: sounds on February 02, 2013, 01:31:28 PM

robocoin, you sound a lot like DoomDumas:

Quote from: DoomDumas on February 02, 2013, 07:34:24 AM

Inflation ? actual CPI calculated of inflation in terms of the 1980's CPI calculation ? (it so different !!!)

Sure, the CPI is unusable as a baseline inflation measure for the USD. Even M1, M2, etc. are obviously off.

Bitcoin mining is the opposite of fiat inflation. Looking at a "market cap" can give a first-order approximation of the total amount of fiat currency that has been converted to Bitcoin. If my theory holds, the market cap isn't the cause of any trading, it's an effect, but it does tend to prove that bitcoin mining increases the value of each bitcoin – that wouldn't happen if mining were the same as fiat inflation.

Quote from: notme on February 02, 2013, 04:42:15 PM

Increased mining does increase the value of each bitcoin since it makes it more expensive to attack the network. Sure, it's still supply and demand, but this effects the supply(willingness to hold from more security decreases supply) and demand(willingness to hold increases demand). The fact that the mining process automatically adjusts to keep the generation rate constant keeps the added security from increasing the supply other than the very short term.

Quote from: thoughtfan on February 02, 2013, 05:00:20 PM

Although I didn't specifically name increased security I believe I covered that indirect, network-supporting aspect of mining.

Quote from: thoughtfan on February 02, 2013, 03:38:53 PM

I fear you are ascribing causality here where there is none. I have seen nothing to suggest mining (i.e creating new currency) 'increases the value of each bitcoin'. Indirectly of course the process of mining; the fact there is a mining network is what gives bitcoin value therefore it is fair to say without the process of mining the existing bitcoin would be of no value but that is not the same. The usd value of bitcoin is determined by the balance of supply and demand. Nothing else. If it's going up it's because demand is outstripping supply. Increasing coin production by more mining (if that were not restricted by the process) would increase supply and usd value would decrease.

It was my reading of what sounds was saying that he was referring to the creation of coins aspect of mining. I may have been mistaken. sounds?

thoughtfan, we're both talking about supply and demand.

I ascribe the increase in demand to both exchanges and mining.

If mining 25 BTC was solely an increase in supply, the value of BTC would go down. (This is what I understood your argument to be.)

I feel that mining increases the value of each BTC because it reinforces "the way BTC works":

There will come a point when mining isn't profitable and the network could be vulnerable to attack. At that point, we should have this discussion again. Right now, miners get paid to invest in BTC: they're investing hardware, time, and electricity but the effect is still an increase in the demand for BTC. Right now, mining resembles interest payments: leave your resources in the BTC network and you get rewarded, doubly so when BTC appreciates against other currencies.

notme pointed out that mining must be strong enough to convincingly guarantee against attack.

I'm taking it one step further and saying that (for the time being) mining is a lower-risk way to get BTC, exchanging hardware, time, and electricity for BTC. The reward for mining has been high enough that more effort is spent mining than speculating.

Specifically a miner must put their money in hardware, the risk being that the hardware will lose some or all of its value before the miner stops mining. A miner must also take the time to set up, troubleshoot, and maintain their mining equipment, losing the opportunity cost of their time. I hope this explanation makes sense: the miner is investing – operating equipment instead of exchanging USD (or some other currency) for BTC.

Miners want BTC, so they make the investment to get it. Some miners may be solely looking to dump their BTC back into fiat for a (fiat) profit, but that seems to be the exception, not the rule. This is not just because of the trending value of BTC, or the network hash rate would be more closely correlated to the value of BTC. If BTC crashed low enough things might change, but at present miners do it for the BTC.

That's how I think mining increases BTC's value – "the way BTC works for the time being."

- - -

I believe mining is lower risk than exchanging because the rewards are predictable. It's still possible to be stupid and do something like CPU mining, which gets you practically 0 reward and costs you a lot in terms of electricity etc. But assuming miners are rational and capable of evaluating the cost/benefit, and assuming the ASIC vendors get their act together so that supply and demand for ASIC mining hardware evens out, then mining is lower risk because of the fixed startup costs and predictable exponentially decreasing returns. It's possible to lose money on mining, but the variables (difficulty, block reward, network hash rate, mining pool fees, PPS vs PPLNS vs DGM vs POT etc.) are all in the open. The variables that affect you when you speculate on the exchanges are mostly hidden.

The ASIC vendors right now are creating huge pent-up demand which may even be pushing the price of BTC up as some sort of bubble. Ordinarily a rational actor would see this much demand and respond by cashing in on it and selling ASICs until the demand drops back down. Apparently, successfully shipping an ASIC is so hard that there's a sort of speed bump happening right now.

Finally, back to the original discussion, market cap may be an indicator which we can study to understand supply and demand. However, it is not a primary cause of supply and demand or BTC value. If market cap measured in USD was a primary cause of BTC value, then we should all view BTC as a bank to temporarily deposit USD and maybe collect some interest (making BTC a ponzi scheme).

The appeal of having some BTC is not at all the market cap measured in USD. Without speaking for everyone, I believe BTC's appeal and inherent value is secure storage of value coupled with convenient exchange of value. Looking at the market cap is still informative though.

The value of a USD $1 will decrease because USD suffers continuous inflation. The value of 1 BTC will increase for the time being because demand for BTC is increasing faster than supply. And after most of the BTC have been mined, the value of 1 BTC will increase because of the deflationary nature of BTC. But we should definitely have this discussion again at that point, to see what it means for the miners.

🫶Going through this was great