Quote from: thefiniteidea on February 05, 2013, 02:48:22 AM

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

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.

As mentioned in the original post, a large part of Bitcoin's positive value (which increases the exchange rate of BTC) is the DEMAND for Bitcoin, via the physical manifestation of that ideological value through trade (in this case, BUYING BTC). However, this is not the end of the story, and you bring up this great philosophical question which I am delighted to dive into! So now we must travel deeper into this rabbit hole, as we ask, what creates this demand!? Why do people find Bitcoin valuable enough to trade anything for it?!

Here is my response to this question in a related discussion at What is bitcoin backed by? My favorite answers

Quote from: thefiniteidea on February 01, 2013, 03:38:25 PM

"What is Bitcoin backed by?"

It is backed by value.
Value is created by people, it is not intrinsic to anything except ideas (opinions).
Certain resources (gold, dollars, real estate, stocks, etc) have great monetary value in our society because we look for, or create, certain properties in them when following a particular - the most popular - economic theory at the time.
As an example, if we all started to adopt the theory of resource-based economics, widely promoted by Peter Joseph who created the Zeitgeist movie-series, we would value resources very differently.
So what makes Bitcoin valuable to people (adopters) in a capitalistic economy?
It can be a multitude of reasons:

Deflation is better than inflation
It is better to have a decentralized power
Transactions in Bitcoin are cheaper, easier in a digital world
The Blockchain: a PUBLIC record of every transaction
I hate Ben Bernanke or the Federal Reserve System
The security of Bitcoin's cryptography
Irreversible transactions
A new economy to start a bushiness in
Anonymity (if done properly)
Dude, I can buy drugs like I buy shit on Amazon... awesome
I don't know, my friend uses it and I just follow whatever they does cause I think they're cool (majority of people)
I like code
I like turtle
Miner: "Free money man!"
we can win a major battle in the arms race and gain a new territory of freedom for several years
Etc...

Therefore, we can certainly add to our list that "Mining increases the value of each BTC because it reinforces 'the way BTC works'" and its "secure storage of value coupled with convenient exchange of value." Personally, I agree with you on both accounts and believe those to be some of the more important and valuable aspects of Bitcoin.

As for the comment regarding Market Capitalization: after this post, I think you have a better understanding of where I was coming from when I posted it, so certainly not arguing with you there! Wink

I am actually working on creating an inflation-adjusted BTC/USD chart at the moment, just to have a solid visual of that here. Though, honestly, you could just look at a Bitcoin chart priced in gold and you would have another somewhat-similar visual. Like the Market Cap chart, this is just another representation of Bitcoin's value, yes, but I do think they are important when attempting to predict market trends, as you know.

A chart of that can be found at a fellow Bitcoin users blog: http://pricedingold.com/

http://pricedingold.com/charts/BTC-2010.png

It's a cool blog. He charts pretty much everything in terms of gold. Lots of great data!!

I may be looking at it wrong, but I am very curious about what inflation does to the value of bitcoin - and I am deep in this rabbit hole. Lets say everyone in the world would accept bitcoin, and You wanted to buy 1 tonn of aluminium from me. We would both look at the value of bitcoin in for example dollars... yes? At this point in the future the price of 1 bitcoin would be 1M$, and that is what 1 tonn of aluminium would be worth at that time. So we trade 1 tonn aluminium for 1 bitcoin. Next year the government would have printed so much money so the market price of 1 tonn aluminium now would cost 1,5M$... For this example lets just say that 1 bitcoin would still be worth 1M$. Then I would want 1.5 bitcoin for the same amount of aluminium, therefore bitcoin has lost its value even when the price is the same.

Am I overthinking this? Is it so easy that if I would accept aluminum in bitcoin, then the price of aluminium would be in bitcoin instead of dollars? Or would it be better to have something else that would give a value of a product or service like for example energy?

Will we see an example of what will happen in real life soon if the BRICS start trading oil with other currency then the dollar?