Quote from: johnyj on November 15, 2014, 05:53:17 PM

Quote from: dinofelis on November 15, 2014, 01:11:38 PM

In a steady-state system, the price of a monetary asset is given by the "quantity theory of money", which states that:

P x Q = M x V, where P is the price of the goods - so the price of the monetary asset is its inverse: B = 1 / P

B = 1/P = Q / (M x V)

Q is the amount of goods bought by the monetary asset, M is the amount of monetary asset in circulation, and V is the average velocity (the number of times per year that a given bitcoin is used to buy something).

V is the inverse of T, the (harmonic) average holding time of a bitcoin: the number of years a bitcoin is held as store of value.

So the "end value" in steady state of a bitcoin will ultimately depend on two things:
how much stuff is bought using bitcoin, and how long one holds one's bitcoins.

This theory is too simplified, and has many flaws, thus not used by bitcoin community Cheesy

1. The formula only works when there is only one currency
If there are multiple currencies in circulation, that will become PQ=m1v1+m2v2+m3v3+... Because bitcoin is only one small currency in circulation, you can not use the formula to calculate its price since you don't know how much goods are exclusively sold for bitcoin (maybe none)

As I said elsewhere, this formula does work, for every monetary asset. But you have to be consistent.

After all, what does that formula say ? It counts a flux of monetary asset over the counter, on both sides. How much is spend (the M x V side), and how much was received (the P x Q side). That is twice the same flux.
On the left and the right side, you have to take into account of course the same events of payment, all concerning the monetary asset under consideration (here bitcoin).

P x Q is ALL the events you care to consider where bitcoins paid it (if you want, including fiat), and exactly the same events should be included in M x V to calculate V.

In P x Q is not included all those transactios where goods were not exchanged for bitcoin.

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2. Not all the money has the same circulation speed
For a given amount of dollar, the V for each dollar is different, impossible to use this model to calculate anything. For example, FED has created 6x more money since 2008, but majority of those money has a velocity of 0 (hold at FED as reserve), thus removed from circulation

V is the average, as taken over M. With fiat money, you have the option of including or not, some kinds of money. Money that "doesn't move" can be included in M, but you should then take the average V lower. Or you can remove the money that doesn't move from M (making its smaller) but then V will be larger.
As long as you work with a consistent set, this formula works (it has to, it is trivial bookkeeping).

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3. The P in the formula usually don't include capital goods (for example MBS or bitcoin), which consists of majority of today's money flow. When capital goods enter the formula, the calculation will be totally changed and the price level of daily goods will become irrelevant

You have to include it, if you included those exchange events in your bookkeeping.

Again, consistent sets of P, Q M and V.

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For bitcoin, there is one simple method to calculate its value: The mining cost. Mining cost is the lowest possible cost to get bitcoin, it is the baseline for its valuation

No, that would be ridiculous. It is not BECAUSE miners are spending more money, that other people are going to put money into it ! Miners will simply go broke if the bitcoin market price falls under the mining cost. That will diminish hashing rate, diminish difficulty, and lower mining costs until mining cost falls below the market price again.

The day that the bitcoin market price is half a cent, the whole bitcoin network will become 5 PC's running a mining software :-)